Protecting the Deal: Recent Trends in Canadian Public M&A Lock-Up Agreements

Take-private transactions have continued to outpace initial public offerings in Canada since the beginning of 2023. As discussed in our prior bulletin, M&A Take-Privates on a Roll, a significant portion of these take-private transactions, particularly those led by private equity sponsors, have included an equity rollover component. The prevalence of these transactions has led to an emerging trend in voting support agreements (or “lock-up” agreements) and definitive transaction agreements whereby rolling securityholders and target companies are insisting on the contractual flexibility for such parties to meaningfully engage with alternative acquisition proposals.

What Are Lock-Up Agreements?

Lock-up agreements are common arrangements in Canadian public M&A transactions and are used to increase deal certainty by committing locked-up securityholders, subject to certain conditions, to vote their securities in support of a take-private transaction. Lock-up agreements are typically entered into concurrently with the signing of the definitive transaction agreement and immediately prior to the announcement of a transaction and are usually entered into with directors and officers of the target; often, these are also entered into with significant securityholders of the target.

Recent deal data shows:

• 96% of deals included lock-up agreements*
• 50% of deals had lock-up arrangements with securityholders other than the target’s directors and management**
• On average, 25% of the target’s securities were subject to lock-up agreements, with 11% of transactions having 50% or more of such securities locked up*

It is a well-established principle under Canadian securities law that a securityholder and the purchaser are not deemed to be acting “jointly or in concert” solely because they have entered into a lock-up agreement. As a result, locked-up securityholders are generally permitted to vote in any “majority of the minority” securityholder approvals that may be required under Canadian securities laws, assuming there are no additional arrangements, such as a securityholder that is a related party receiving different consideration (e.g., an equity rollover component) or a “collateral benefit.”

In addition, lock-up agreements typically restrict dispositions of securities by the securityholder and include non-solicit or “no shop” provisions, which preclude the securityholder from soliciting or participating in any discussions or taking any actions related to or otherwise supporting any competing transaction.

“Hard” vs. “Soft” Lock-Ups

Lock-up agreements typically range from variations of “hard” to “soft.”

Under a true “hard” or irrevocable lock-up agreement, the securityholder agrees to vote in favour of the transaction (or tender their securities to the bid) and against any other transaction, for a specified period of time, even if a superior proposal is made and the definitive transaction agreement is terminated. Under a “soft” lock-up, by contrast, the lock-up agreement automatically terminates, at a minimum, if the definitive transaction agreement is terminated, with the securityholder then free to vote in favour of (or tender their securities to) a superior proposal. In some cases, the securityholder is also entitled to terminate the lock-up agreement if it determines an alternative transaction is superior.

True “hard” lock-ups are rare in the Canadian public M&A market and, even where the lock-up agreement does not automatically terminate when the definitive transaction agreement terminates, the securityholder subject to a hard lock-up would still be permitted to terminate the agreement in specified circumstances, such as where there is a purchaser default or misrepresentation, a decrease in the consideration or a failure to consummate the transaction prior to the outside date under the definitive transaction agreement (which termination rights are also often included in “soft” lock-ups).

Recent Trends in Lock-Ups for “Rolling” Securityholders

While lock-up agreements typically include non-solicit or “no shop” provisions that are similar to the restrictions placed on target boards in definitive transaction agreements, unlike target boards who generally have the benefit of the “fiduciary out” provisions in such agreements, locked-up securityholders, including those subject to “soft” lock-ups, are largely precluded, in their capacities as securityholders, from engaging with alternative acquisition proposals that could result in a “superior proposal.” As such, these contractual restrictions can serve to discourage competing bids and diminish the practical effectiveness of the “fiduciary out” provisions typically included in the definitive transaction agreement.

This is particularly the case in the context of rollover transactions, since a competing bidder, as part of its proposal, is unable to engage with, and confirm the support of, such securityholder(s), including with respect to potential rollover terms. Without input from the rolling securityholder(s) on whether they would support the alternative transaction, the special committee may be unwilling to support an alternative proposal that may otherwise constitute a “superior proposal” due to the potential for increased deal uncertainty if the rolling securityholder(s) do not support the transaction, including, if applicable, any rollover terms to be offered.

The recent uptick in take-private transactions with an equity rollover component in Canada has placed renewed emphasis on these dynamics. In response, target companies and rolling securityholders have increasingly sought the contractual flexibility to engage with the special committee in respect of these matters. In particular, several recent soft lock-up agreements entered into with rolling securityholders contain provisions permitting the rolling securityholder, in situations where the special committee has determined that an alternative proposal constitutes or could reasonably be expected to constitute or lead to a superior proposal to request additional specified information in respect of such alternative proposal and, where applicable, engage and participate in discussions with the special committee of the target in respect of the alternative proposal, including with respect to rollover terms. In these recent transactions, the definitive transaction agreements have included corresponding provisions permitting the target company to engage in discussions or negotiations with, and provide information to, the rolling securityholders in respect of an alternative proposal.

This development serves as a reminder that although there may be an initial instinct to look at lock-ups solely through the lens of the interests of the subject securityholder(s) and the purchaser, a target’s directors and its legal and financial advisors must carefully assess the broader potential implications of the specific terms of proposed lock-ups for the ability of directors to exercise appropriate fiduciary duties and seeking the appropriate deal protection balances.

For more information, please contact the authors or any other member of our Public M&A group.

*These statistics are featured in the ABA’s 2024 Canada Public Target M&A Deal Points Study.

**These statistics are featured in the Blakes Public M&A Deal Study. To request a copy of our M&A deal study, please contact us by email.