In this presentation, FMC's Catherine Wade discusses "Special Committees", more specifically she covers: -A historical perspective -When to put in place -Membership -Mandate/fees -Duties -Choosing Expert -Process -Deliberations/Recommendation

1. What’s Special About “Special
Committees?”
Presented by: Catherine Wade
January 22, 2013
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2. Overview
• Historical Perspective
• When to put in place
• Membership
• Mandate/Fees
• Duties
• Choosing Experts
• Process
• Deliberations/Recommendation
• Closing Remarks
• Questions & Answers
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3. Historical Perspective
Corporate Law
Directors’ Responsibilities
• Manage/supervise management of the corporation
– Choose/approve/monitor senior management
– Strategic planning/direction
Duties
• Fiduciary duty
– To act honestly and in good faith with a view to the best interest of the corporation
• Duty of care
– To exercise the care, diligence and skill that a reasonably prudent person would exercise
in comparable circumstances
Conflicts
• The Board must act in a manner that leaves it free of conflicts
– Disclosure/declaration of interest in a material matter
– Amount of input on decision making relating to the matter under conflict
– Voting
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4. Historical Perspective continued…
Securities/Regulations
• OSC Policy 9.1 – early days securities regulatory involvement
• Quebec Policy Q-27
• Ontario Rule 61-501 Insider Bids, Issuer Bids, Business Combinations and
Related Party Transactions - May 1, 2000
• Multinational Instrument 61-101 Protection of Minority Security Holders in
Special Transactions - February 2005
• National Instrument 58-101 Disclosure of Corporate Governance – June
2005
Common Law Foundations
• The director’s role as overseer and having responsibility for management
and oversight , as set out in the corporate statutes, was inherent in the role
of the Board body at common law
• The fundamental basis of fiduciary duty and duty of care under corporate
law is founded in the common law
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5. When to Put in Place
• Unusual Circumstances
– Related party transactions
– Sale of the enterprise
– Take-over bid (hostile)
– Internal investigations
• MI 61-101 independent/special committees
– On an insider bid to determine the valuation and supervise the valuation
preparation for an “insider bid”
– Required disclosure of any deliberations, considerations, recommendations,
etc.
• Companion Policy to MI 61-101
– Determination of “fairness” of a transaction – normally should include
whether the transaction has been reviewed and approved by a special
committee
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6. When to Put in Place continued…
– To safeguard against the potential for an unfair advantage for an interested
party. It is “good practice” that a special committee conduct or review and
recommend action on the negotiation of a transaction with an interested party
– Generally take the view that it is appropriate for every material transaction to
which MI 61-101 applies a special committee should be put in place
• Better safe than sorry – a special committee oversight and
recommendation provides additional “fairness” in the process.
• Securities regulations guidance in Companion Policy to MI 61-101
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7. Membership
• Independence
• MI 61-101
– General Rule
• independence is a question of fact
– Specifically not independent
• “interested party”*
• employee, insider, associated entity of interested party (current or within 12
months)
• adviser of interested party in connection with the proposed transaction or employer
(current or within 12 months)
• has material financial interest in an interested party
• would reasonably be expected to receive a benefit from the transaction not
available pro rata to other security holders (could be broader than holders of
common shares) and particularly – opportunity to offer a financial interest in
– an interested party or an affiliate
– the issuer
– successor to the issuer
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8. Membership continued…
*“interested party” - basically anyone having an interest in the proposed
transaction that is different from the general security holder base and
persons who have an interest/relationship with the interested party
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9. Mandate/Fees
MANDATE
Basis
• Established by the Board
• Must report to the Board
Typical for M & A
• Usually provided authority to hire independent advisors (investment
bankers, valuators, legal counsel, pension experts)
• Consider alternatives presented or available to the corporation
• Engage in a market canvass
• Review proposals
• Negotiate/supervise the negotiation of proposals
• Recommend course of action to the Board
• Oversee implementation
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10. Mandate continued…
Typical for “internal investigation”
• Usually provided authority to hire independent advisors (investment
bankers, valuators, legal counsel, pension experts, forensic professionals)
• Authority to obtain all necessary information and documentation of the
corporation related to the matter
• Direct management to assist in the investigation on a confidential basis
• Report to the Board
• Recommend a course of action
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11. Fees
• Established/ratified by the Board
• Impact on corporation and its ability to complete a transaction
• Perceived conflicts created by structure
• Best practice
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12. Duties
• As per statutory and common law duties discussed earlier
• New “duties”:
– Review their and other members’ status as independent
– Engage in a process that is under the committee’s control and direction
– Consider use of independent advisors and solicit advice as appropriate
– Consider disclosure issues related to the mandate
– Prepare a complete and accurate review of deliberations – how detailed?
– Consider all affected parties (i.e. employees, debt holders, other security
holders)
– Undertake the mandate in a comprehensive and complete manner exercising
independent judgment
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13. Choosing Experts
• Independence
• Expertise
– Subject matter
– Industry sector
• Free of conflicts
• Cost
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14. Process
• Mandate
– Clearly articulated mandate
• Meetings
– As often as necessary – can be a very compressed time frame
– “In person” preferred to conference calls
– “In camera”
– Invitees where necessary to obtain information
– Confidentiality of information and deliberations pending recommendation
– Attendance of experts
– Minutes
– Notes
– Materials
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15. Deliberations/Recommendation
• Review materials
• Consider alternatives/options
• Seek and consider advice of experts
• Consider views of all members
• Consider all stakeholders and impact on the corporation
• Discuss with Board
• Consider input of the Board
• Recommend a course of action
*Deliberations and recommendation of special committee must be set out in
the disclosure to shareholders and must include dissenting views within the
committee
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16. Closing Remarks
What is special?
• Independence of the entire committee
• Process is subject much more to scrutiny
• Documentation of process and deliberations expected to be more detailed
so as to provide full disclosure
• Provides a level of comfort to the full Board on the “fairness” of a
transaction with an interested party
• Securities regulators believe special committees play an important
procedural role protecting minority shareholders from unfair treatment in
a transaction with an interested party
• Market participants hold the process and role as important
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17. Questions?
Catherine Wade
catherine.wade@fmc-law.com
604.691.6431
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18. The preceding presentation contains examples of the kinds of issues companies
dealing with Preliminary Economic Assessments could face. If you are faced with one
of these issues, please retain professional assistance as each situation is unique.
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