From a high of $1.35 in early January to just $0.135 today, EXRO Technologies’ share price has seen a dramatic fall over the course of the year. This precipitous decline has been a source of concern for many long-term shareholders, who purchased shares at significantly higher valuations. Amid this challenging landscape, understanding the mechanics of buyouts and takeovers has become increasingly important. As EXRO navigates these market conditions, shareholders must be equipped with the knowledge to make informed decisions about their investments. This article will explore how buyouts and takeovers occur, the rules governing them in Canada, and the roles retail shareholders play. It will also highlight EXRO-specific shareholder dynamics, including voting shares, preferred shares, and warrants.
Understanding Takeovers and Buyouts
A buyout, also known as an acquisition, involves one entity purchasing a significant portion or all of a company’s shares to gain control. These transactions may be categorized as:
- Friendly Takeovers: Negotiated agreements between the acquiring entity and the target company’s board of directors, often resulting in mutual benefits.
- Hostile Takeovers: Unsolicited attempts where the acquiring entity bypasses the board and appeals directly to shareholders.
In either scenario, retail shareholders play a key role since their voting power can influence the outcome of the acquisition process.
Canadian Rules Governing Takeovers
Although EXRO operates with business activities in the United States and its shares trade over-the-counter (OTC) in U.S. markets, it remains a Canadian-domiciled company. This means that EXRO is primarily governed by Canadian securities laws, not U.S. regulations. The company’s incorporation in Canada subjects it to the rules set forth by Canadian Securities Administrators (CSA), which oversee takeover bid regulations, disclosure requirements, and shareholder protections. This jurisdictional governance ensures that EXRO shareholders benefit from the transparency and fairness mandated by Canadian rules, regardless of where its business activities or stock trading platforms are located.
Key Canadian Regulations
- Early Warning Disclosure: Any individual or entity acquiring 10% or more of a company’s voting shares must publicly disclose their holdings. This requirement alerts the market to potential significant changes in the company’s ownership. Learn more about this rule here.
- Takeover Bid Rules: Under CSA regulations, acquiring 20% or more of a company’s voting shares triggers a formal takeover bid. This bid must:
- Be extended to all shareholders equally.
- Provide shareholders a minimum of 105 days to consider the offer.
- Offer fair value, often at a premium above the current market price. Read about these rules here.
- Hostile Takeover Protections: Companies can employ defensive measures such as “poison pills” (shareholder rights plans) to deter unsolicited bids. These plans allow existing shareholders to purchase additional shares at a discount, diluting the acquiring entity’s holdings. Further details are available here.
It is worth noting that EXRO’s current base shelf prospectus, dated January 15, 2024, does not outline any active shareholder rights plans or poison pill strategies. This suggests that while EXRO has the option to adopt such measures in the future, no such defenses are presently in place. Shareholders should remain vigilant about any governance updates that could include these or other anti-takeover provisions.
*[2025-01-13] subsequent analysis brings us to the 2021-07-09 Management information circular where the resolution to create a class of preferred shares specifically states:
“The Company does not intend to use the Preferred Shares as part of any “anti-takeover” strategy and the Company is not advancing it as the result of any known effort by any party to accumulate additional Shares or to obtaining voting control of the Company. ” Page 14 of the Management Information Circular
While not specifically ruling out a scenario where the preferred shares could be used as a poison pill, it does indicate that the board did not view them in such a manner and so it should not be assumed that they would be used that way in a takeover situation.
The Role of Share Price in a Buyout Scenario
During a takeover, share price often becomes a focal point. Acquiring entities usually offer a premium over the current market price to incentivize shareholders to sell. However, the current share price does not represent a “fire sale” with unlimited inventory. Shares are finite, and their value reflects demand, supply, and the company’s underlying fundamentals.
For EXRO Technologies, the current number of voting shares stands at 503,362,723, with an additional 94,991,855 non-voting preferred shares outstanding. These numbers underscore the scarcity of shares trading on the open market (relative to the whole) at current prices and the potential influence of each investor.
Many long-term shareholders of EXRO purchased shares at significantly higher prices, often 10, 20, 50, or more times the current valuation. This creates substantial concerns among these investors about the potential for a takeover at today’s reduced price levels. For these shareholders, any buyout at the current market price would represent a significant loss, giving them a strong incentive to oppose such bids. These long-term shareholders will likely have a big say in any takeover bid, making it critical for acquiring entities to offer a meaningful premium.
Additionally, EXRO’s management is unlikely to solicit a takeover bid at current prices. If a takeover were to occur, it would most likely take the form of a hostile bid, given the current market dynamics and EXRO’s stated commitment to long-term value creation.
How Voting and Approval Work in a Takeover Scenario
In a takeover, shareholder approval is a critical step. The process typically involves:
- Proposal of the Bid: The acquiring entity submits a formal offer to the company and its shareholders.
- Review by the Board: The board of directors evaluates the offer and makes a recommendation to shareholders.
- Shareholder Voting: For a takeover to proceed, a majority of voting shareholders must approve the offer. In most cases, this requires a simple majority (50% +1) of shares represented and voted at a special meeting convened for this purpose. Importantly, shares already owned by the acquiring entity are excluded from the vote.
- Threshold for Success: In some scenarios, such as squeeze-outs (where a majority shareholder forces the purchase of remaining shares), higher thresholds may apply, often requiring approval from 66.67% of shares voted by minority shareholders, excluding the acquirer’s holdings.
This voting process underscores the importance of retail and institutional shareholders, especially those with large holdings, in determining the outcome of a takeover bid.
How Retail Shareholders Get Involved
Retail shareholders have a crucial voice in the buyout process. Key points include:
- Voting Power: Shareholders vote on takeover offers, often requiring a majority approval for the transaction to proceed.
- Premium Opportunities: Retail investors may benefit from the premium offered during buyouts, potentially realizing gains above the market value.
Rights of Warrant Holders
Warrant holders have the right to purchase shares at a pre-determined price within a specific timeframe. If a takeover occurs, warrants may become valuable if the offer price exceeds the strike price, providing additional upside potential for holders.
Institutional Dynamics: Vestcor’s Role
Institutional shareholders often shape the dynamics of potential takeovers. For EXRO Technologies, Vestcor Investment Management Corporation is one such example. As of their latest disclosed holdings on July 31, 2024, Vestcor exercised control over 33,742,712 common shares, representing 9.69% of the 348,178,019 issued and outstanding shares reported in EXRO’s Q1 MD&A prepared as of May 15, 2024. If all securities convertible into common shares held by Vestcor were converted, they would hold 67,461,940 common shares, representing 17.67% of the class.
Since that time, additional financing and transactions have increased EXRO’s total common shares to 503,362,723, which likely reduced Vestcor’s percentage ownership despite an increase in their total share count. This makes Vestcor a significant, but not majority, potential shareholder.
Being such a large shareholder, and holding shares at significantly higher prices, any takeover bid would likely need to meet Vestcor’s approval. For a bid to gain their support, it would likely need to offer terms that make Vestcor “whole,” compensating them for their higher purchase prices. Without such an offer, Vestcor may be inclined to vote against a takeover bid, making their support a key factor in any potential acquisition scenario.
About Vestcor
Vestcor is a New Brunswick-based organization comprising over 150 service professionals who provide investment management, pension, and employee benefits administration solutions. Serving more than 111,000 pension plan members, 42,000 benefit program members, and 150 employer groups, Vestcor operates as a private, not-for-profit corporation under the Vestcor Act of the New Brunswick Legislature. Their ownership is jointly held by the New Brunswick Public Service Pension Plan and the New Brunswick Teachers Pension Plan.
Given their mandate and focus on diversified, cost-effective investment management, it is unlikely that Vestcor would pursue a full takeover of EXRO themselves. They would likely aim to avoid any scenario triggering a mandatory offer, emphasizing long-term value alignment with their investment objectives.
Empowering Shareholders for 2025 and Beyond
For EXRO shareholders, understanding the mechanics of buyouts and takeovers is essential to navigating potential future scenarios. Canadian regulations provide a fair and transparent framework, empowering retail investors to make informed decisions. By participating in governance and staying informed, shareholders can maximize the value of their investments and contribute to the company’s long-term success.
Stay tuned to EXRO Infohub in 2025 for the latest updates, insights, and resources to support your journey as an EXRO shareholder.
