Question
Project University
Forward purchase contracts
1.BACKGROUND
1.1 A potential offeror (the "Offeror")intends to enter into one or more forward sales contracts (the"Forward") with one or more unaffiliated investment banks (the"Independent Banks") in relation to the voting shares of anunaffiliated overseas company (the "Issuer").
1.2 The Offeroris currently considering making an offer for the entire share capital of theIssuer.
2. STRUCTURE
2.1 The Forward would be structured such that theOfferor would bear the economic risk of any change in price of the shares ofthe Issuer over the term of the Forward.
2.1.1 The price specified in the Forward will equal the price of the shares ofthe Issuer at the commencement of the Forward as increased by commissionscharged by the Independent Bank and the cost of financing the holding of hedgeshares by the Independent Bank over the term of the Forward (if any). It islikely that the Offeror will provide cash collateral to the Independent Banksin respect of the Forward and that could be anything between 30% and 100% ofthe value of the underlying shares -to the extent the Offeror posts cashcollateral, it will not have to pay financing costs.
2.1.2 It is proposed that a master forward contract ("MasterForward") be entered into with each Independent Bank, setting out themaximum number of shares of the Issuer that bank could be asked to enter intoForwards in respect of, but without requiring or obliging either theIndependent Bank or the Offeror to enter into a Forward. By way of example, theMaster Forward might specify a 15% upper limit and pursuant to that MasterForward, Forwards in respect of 3% of Issuer shares might be entered into insequence over a number of days.
2.1.3 At commencement of the Forward, the value of the shares of the Issuerconditionally subject to delivery pursuant to the Forward will exceed $63.1million, but the number of shares held by anyone Independent Bank as a hedge willnot exceed 15% of the outstanding shares of the Issuer (although the number ofshares held by two or more Independent Banks, in aggregate, may exceed 15%).
2.1.4 The Forward will allow the Offeror to elect either to physically settlethe Forward (i.e. to take physical delivery) or to cash settle the transaction(i.e. to receive or to pay the change in value of the shares) on a specifieddate or at an earlier date elected by the Offeror.
2.1.5 If physical settlement is elected, the Independent Bank will be obliged todeliver the specified number of shares of the Issuer against payment by theOfferor of the price per share specified in the Forward. Any such physicalsettlement will be conditional upon the Offeror having made all filingsrequired under the Hart-Scot-Rodino Antitrust Improvements Act of 1976 asamended (the "HSR Act") and the waiting period under the HSR Acthaving expired or been terminated.
2.1.6 If cash settlement is elected by the Offeror or the waiting period underthe HSR Act has not expired or been terminated by a date (or time period)specified in the Forward, the Forward will be cash settled. If the price of theshares of the Issuer has increased, the Independent Bank will repay anycollateral provided by the Offeror and will pay the Offeror the amount of theincrease. If the price has decreased, the Independent Bank will repay anycollateral provided by the Offeror, less the amount of the decrease.
2.1.7 In order to hedge the risk of movement in the price of the shares in theIssuer, it is understood that the Independent Bank intends to acquire some orall of the shares of the Issuer required to satisfy its obligations werephysical delivery required pursuant to the Forward.
2.1.8 The Offeror will have no rights (other than a pure economic interest) inany shares of the Issuer acquired pursuant to the Forward until such shares aredelivered to the Offeror. The Offeror will have no right to direct the votingor disposition of such shares prior to any such delivery and the IndependentBank will not accept any such instruction from the Offeror.
2.1.9 The financial adviser to the Offeror will act as broker to theIndependent Banks in connection with any purchase of shares in the Issuer toensure compliance with the strict disclosure rules applicable to the Offeror'sproposed offer for the issuer.
3. TIMING
3.1 The Offeror is currently in the process ofconducting due diligence on the Issuer.
3.2 The Offeror is not in a position to announce aformal offer for the Issuer at this time and as due diligence is ongoing anddoes not propose to file under the HSR Act until such time as a formal offer ismade.