The Lexpert Guides to the Leading US/Canada Cross-Border Corporate and Litigation Lawyers in Canada profiles leading business lawyers and features articles for attorneys and in-house counsel in the US about business law issues in Canada.
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30 | LEXPERT • June 2015 | www.lexpert.ca/usguide-corporate/ « CANADIAN REITS by a board of trustees and subject to the principles of common law and trust law. A declaration of trust will contain provisions that are similar to those in Canadian corporate statutes and, among other things, establishes the duties of trustees (to act honestly, in good faith and in the best interests of the REIT, and to exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances). A REIT's declaration of trust will also contain provisions govern- ing the REIT's formation, the election, appointment and removal of trustees, dealing with confl icts of interest, establishing the process for calling and holding unitholder meetings and the process for amending the declaration of trust. Although declarations of trust tend to be fairly consistent from REIT to REIT, each declaration of trust has unique features and must be carefully reviewed in planning an M&A transaction. EXTERNAL MANAGEMENT AND OTHER ARRANGEMENTS A number of Canadian REITs are externally managed and do not have their own employees. For these REITS, an external management company performs the REIT's key management functions, typically providing strategic, asset management, administrative and other services. In these situations, the terms of the management agreement between the REIT and the external manager can be an important consideration in structuring an M&A transaction. Any acquirer of the REIT will have to be prepared to either assume those functions (if the management agreement is to terminate) or make arrangements with the manager to continue in some capacity a er the transaction closes. Some external management agreements provide for termination rights upon a change of control of the REIT and include provisions requiring payment of a fee to the manager if the agreement is terminated. In addition to external management agreements, some REITs have ongoing arrangements with their sponsors that may include development agreements, head lease agreements, property manage- ment agreements, rights of fi rst off er or refusal or governance rights (such as board appointment or nomination rights or approval rights for fundamental transactions). e impact of these agreements and rights will have to be considered in planning for an M&A transaction. EXCHANGEABLE SECURITIES Many Canadian REITs have issued exchangeable securities of a subsidiary entity (typically a limited partnership) to their sponsors or third parties. ese structures are implemented to permit properties to be sold to a REIT on a tax-deferred basis. Exchangeable securities are designed to be the economic equivalents of REIT units, receiving distributions equivalent to distributions made to holders of REIT units and exchangeable at the holder's option into REIT units. Exchange- able securities are o en issued with special voting units of the REIT, providing a holder with voting rights on REIT matters. Exchangeable securities may also have rights that are triggered by a change-of-control transaction, including drag-along and tag-along rights or pre-emptive rights that will need to be considered in an M&A transaction. CONVERTIBLE DEBENTURES Many Canadian REITs have issued publicly listed debentures that pay a fi xed rate of interest over their term and are convertible at the holder's option into REIT units at a price per unit that is fi xed at the time the debentures are issued. Convertible debentures are typically unsecured instruments with limited restrictive covenants (normally without fi nancial covenants) and have terms of fi ve to seven years. Convertible debentures may contain provisions allowing a succes- sor entity of the REIT to assume the REIT's obligations under the debentures and provide the debenture holder with a "put right" on a change of control of the REIT. e "put right" entitles the holder to require the REIT to purchase the debentures at par or, in some cases, a slight premium to par. As this "put right" may be triggered in an M&A transaction, an acquirer may need to account for the possible payout of any outstanding debentures in planning for a transaction. In cases where an exchange of securities is contemplated, the succes- sor issuer provisions of the debentures may allow the acquirer to assume any debentures, with the debentures becoming convertible into securities of the acquirer a er the transaction closes. In all-cash transactions, debentures may be defeased by the acquirer or the acquirer may seek to amend the debenture terms to redeem them at or following closing of the transaction. Canadian REIT M&A Structures Unlike the United States, Canada has no federal securities commis- sion. Securities activities are regulated at the provincial level and each of Canada's 10 provinces has its own securities regulator. Despite this provincial regulatory regime, for the most part the laws relating to public mergers and acquisitions are harmonized across Canada. Two common transaction structures that are used to complete a merger or acquisition involving a Canadian REIT are a plan of arrangement and a take-over bid. In addition to these two transaction structures, some REIT M&A transactions have been structured as "acquisition and redemption" transactions, which involve the acquisition of the REIT's assets by the acquirer in exchange for cash and/or securities of the acquirer followed by the redemption of the units of the REIT for the acqui- sition consideration. In cases where the acquisition consideration consists of securities of another Canadian REIT, this structure has been used to provide a tax deferral to the target unitholders. e following is an overview of plan of arrangement and take-over bid transaction structures. PLANS OF ARRANGEMENT In Canada, take-overs or mergers of public entities can be completed under a process known as a plan of arrangement. is is a "one-step" transaction governed by Canadian corporate statutes that, if desired, will result in the purchaser acquiring 100 percent of an entity. A plan of arrangement is a court-supervised process requiring approval of a Canadian court and the target's shareholders (typically by two-thirds of the shares voted at a shareholders' meeting). Once approved by the court and the shareholders, a plan of arrangement binds all securi- tyholders of the company. Plans of arrangement are usually only conducted with the cooperation of the target entity's board on a friendly basis, given the target's signifi cant involvement in obtaining the requisite approvals. Plans of arrangement can be completed within "Because of the often complex structuring of REITs and the steps that are therefore required to effi ciently complete an acquisition, plans of arrangement are effective tools for acquirers looking at a transaction in Canada."