There’s nothing like an unsolicited takeover bid to shake up one’s summer, but when you head up the legal team at Canada’s most iconic fast-food brands it brings with it more than the usual set of merger and acquisition-related challenges.
“It does turn the world upside down,” says Jill Sutton, executive vice president, general counsel, and corporate secretary with Tim Hortons from her office at the company’s corporate headquarters in Oakville. She is having her photo taken at the company’s museum but her life for the last year has been all about the future of the coffee and donut chain. While many general counsel may hand off such a deal to external M&A teams and take more of a back seat, Sutton led the deal for Tims, drawing on her own team as well as background and previous experience with such transactions.
“We’re pretty lean at Tims. My entire legal team is 60 people across Canada and the U.S. So it becomes basically another job. Another intense time consuming job on top of your day job,” she says.
In the team of over 60, just five were tapped to work on the mega deal that had Canadians beyond Bay Street wondering what would happen to the profile of the coffee giant in the shadow of Burger King. In August, Tim Hortons agreed to be purchased by 3G Capital — an investment company that owns Burger King — for $12.5 billion — a deal that has made it the world’s third largest fast-food chain. It has also significantly bumped the Tims share price to all time highs before the closing, approaching $97 per share at the time of this article going to press, expanding the reach of double doubles and maple dipped donuts into entirely new markets.
Burger King operates in 98 countries and territories worldwide, including 300 restaurants in Canada.
Tim Hortons is one of the largest publicly-traded restaurant chains in North America, and the largest in Canada. As of June 29, 2014, Tim Hortons had 4,546 systemwide restaurants — the majority — 3,645 — in Canada.
Despite the enormity of the deal, Sutton was confident she and her team could steer the deal with the help of trusted
“I have a really strong team,” says Sutton. “The folks we have working in our securities group and corporate practice group came from large law firms and all had done transaction-based work in the past. I have that in my background as well — we created a great team and they hit the ground running when I was finally able to bring them into the loop and really get them involved.”
Sutton initially kept the deal very close to her vest. “That was one thing my CEO wanted. For this transaction the first proposal letter came at the end of March — this was going on for months,” she says.
Sutton didn’t bring in the legal team until early August. Up until then it was primarily being stickhandled by the CEO, CFO, and Sutton followed later by the company’s investor relations officer. “We did the deal with external counsel and our board to a very large extent until we were ramping up due diligence and we started working on the arrangement agreement and plan of arrangement itself. So once we started working on those massive documents and getting our own due diligence posted and then reviewing the Burger King due diligence I was able to bring in my team and really roll up the sleeves and get going.”
The transaction was intense but Sutton is no stranger to the fast food wars. She joined Tim Hortons when it was part of rival burger company Wendy’s and based in Columbus, Ohio. She has been with Tims since it was spun off from Wendy’s eight years ago and then led the legal team for the repatriation of Tim Hortons as a Canadian public company in 2009.
The overtures from Burger King arrived on Sutton’s door after an intense year in 2013 dealing with activist investors. Certain activists had been putting pressure on Tims to boost returns through debt-funded share buybacks and to scale back in the U.S. Meanwhile, another had also issued a report recommending Tims pull out of the U.S., stop spending money, and borrow as much as they could and leverage the company. Despite efforts for years now to expand in the U.S., Tims has been very geographically localized in Michigan and western New York — locations not far from the border as well as its other large market in Columbus, Ohio.
“We had resolved those issues substantially with additional leverage we took on and expanded share re-purchase programs,” says Sutton. “Given the activist activity, we were used to getting fairly aggressive letters and requests.”
The letter from Burger King was clearly different. “When you first get it you know they are serious but you’re not always sure how far it’s going to go and what route it’s going to take. There’s a bit of realization that OK, you’re on a path now that someone else is going to direct to a certain degree because at the end of the day every public company is for sale. So it’s a bit of a grounding moment.”
Sutton says there was a “sobering” realization that kicked in that life was going to be different for a while.
“With the potential to create a global powerhouse in the quick service restaurant industry, combining two iconic and strong, independent brands, it was also not hard to get excited about the transaction and the expected benefits for all of the various stakeholders of Tim Hortons,” Sutton remarked.
The combined company is expected to generate $23 billion in system sales, with over 18,000 restaurants in 100 countries and be the third largest quick service restaurant company in the world. “We realized that, through the transaction, Tim Hortons would have the opportunity to accelerate its growth internationally, while at the same time maintaining the brand’s core values, employee, and franchisee relationships, community support and, of course, our signature Always Fresh coffee.”
Sutton’s group worked hard and she had strong principles about the way they wanted things done and the way they wanted the company represented, says Clay Horner, partner with Osler Hoskin & Harcourt LLP and vice chairman of the firm. A team from Osler, along with a team from Wachtell Lipton Rosen & Katz in New York represented Tim Hortons as outside counsel on the deal. “The triumvirate approach to things was really part of the special aspect of the whole process.”
In choosing the deal team Sutton says she went by a formula she knows works: “You look for people who have been involved in the same types of situations in the past for these bear hug letters where you are asked to consider a complete purchase of the company in the first letter. In something like this you have to go and find the best of the best and in Canada we felt that was Clay and the Osler team. Through other sources and conversations we figured out he was someone we needed working with us,” says Sutton.
In the U.S., Tims had secured the services of Wachtell with the activist campaign and so it was just a natural extension to use them for this too, she adds. “That firm is very well known in the M&A world and they provided great service to us. They were a natural to extend this work to as well,” she says.
Many headlines touted the tax inversion aspect of the deal since Burger King would be moving its global head office to Canada, but Wachtell partner Adam Emmerich says that was a “red herring.” Canada’s basic corporate tax rate is about 26 per cent while Burger King’s current effective tax rate is in the mid to high 20s percentage range. “On the one hand, of course you recognize the resulting company will be Canadian, but it’s hardly as if Canada is an offshore tax haven, and Tims and Burger King have very similar market caps at the deal value,” he says.
In fact when the transaction was first announced Joe Oliver, minister of finance told The Globe and Mail the takeover was “not a tax dodge.” And on Oct. 28 the Competition Bureau announced it was issuing a “No Action Letter” with respect to Burger King’s acquisition of Tim Hortons, noting “the Bureau concluded that this transaction is unlikely to result in a substantial lessening or preventing of competition due to, among other things, the existence of a large number of competitors and the low barriers to entry in the fast food industry.”
For Emmerich, whose wife is from Montreal and has three kids all with Canadian passports — the impact of the deal from the Canadian context was understood from the get-go. “I like to think I’m not entirely insensitive to the context,” he says with a laugh. “I would say there are a lot of people in the U.S., who may have never heard of Tims. In fact there is a Tims two blocks from our office on 7th Avenue and W 50th Street. When we signed the deal I got everybody some donuts.”
The cross border nuances that run through the entire transaction and touch virtually every element of it meant there was much exchange between the two firms and Sutton. Sutton is qualified to practise law in both Canada and the U.S. and leveraged that experience and her team collaboration with Osler and Wachtell to deal with myriad of complex issues that arose through the course of the transaction.
Once the offer was accepted the deal happened quickly, says Horner. “One of the things that has changed is how much more quickly deals happen than they used to.”
It used to be a strategic transaction would be months in negotiating the transaction and then there would be the documentation of it. Today, Horner says a combination of factors has contributed to a faster deal process. This has evolved partly as a result of technology and partly as a desire to avoid the risk of leaks into the market and the ability to do due diligence more efficiently. Also, because public companies have more extensive public disclosure available for parties to look at — all of those things can contribute to deals being done faster.
Burger King first approached Tim Hortons in the spring and over the course of the spring and summer made four different offers. The first was offered at $73/share, the second at $77/share, and the third at $82.50/share. After the first two offers the Tims board, with the benefit of Sutton’s advice and that of outside counsel and investment bankers, considered the offer and told Burger King: “We’re not interested.”
However, Horner says to the third offer at $82.50 Tims said to Burger King: “We’re not interested at $82.50 however we’re prepared to engage in a process with you to see if we might get to a point that would allow us to agree to a transaction. Make no doubt about it, it’s not going to be at $82.50.”
The agreed deal price was $88.50 but since the stock portion has risen in value since announcement of the deal Tims
shareholders are in line to receive a mixture of cash and stock valued at over $97 as of late November.”
The increase in the value of the offer above $88.50 represents an additional $1.2 billion for Tim Hortons shareholders or seven billion Timbits (based on $8.49 for a box of 50).
The transaction also took an interesting twist when the Tims board said even if they reached an acceptable price it would have some core principles they would want to see made part of the agreement and the ongoing enforceable obligation against Burger King in terms of how Tim Hortons would be operated for a period of time. The board’s strong belief was that success of the company is related to specific factors in terms of the way it is operated with important stakeholders — in addition to the shareholders — who have a lot invested in the success of the company.
Horner points to BCE Inc. v. 1976 Debentureholders, where the Supreme Court said in 2008 that Canadian fiduciary duties in a change of control situation are different from what is found in the U.S., where the board’s duties are to the shareholders. In Canada, the fiduciary duty is owed to the corporation but that means a series of stakeholders: “[i]n considering what is in the best interests of the corporation, directors may look to the interests of, inter alia, shareholders, employees, creditors, consumers, governments and the environment to inform their decisions.”
“It doesn’t mean the shareholders are necessarily paramount in that regard,” says Horner.
The agreement with Burger King includes a series of arrangements that pertain to franchisees and the economic arrangements they have around personnel and the commitment of Tims to support the franchisees in the same way it has. A similar series of commitments were made to the charities Tims supports and to Canada in terms of the new company that will own both Tims and Burger King being a Canadian company in the presence of Canadian executives and shared services in Canada. The promises to those stakeholders was built into the deal by obliging Burger King to make those commitments part of the undertaking they provided to Investment Canada in order to get approval of the transaction.
Investment Canada undertakings generally run for three years and so most of the commitments run for that period, but the commitment that stipulates 3G won’t change the economic deal with franchisees runs for five years with a commitment that there are no current expectations to do so after the conclusion of the five year period.
“It is certainly the most extensive discussion and consideration of a board of interests other than the shareholders and negotiation of protections for those other stakeholders,” says Horner.
As Sutton points out, the success of Tim Hortons is “absolutely dependent” on the success of the franchisees. “Their profitability and our relationship with them is paramount to both our success,” she says. “We are also very mindful of the culture we have created at Tims — the iconic brand — and our employees which we think bring this wonderful brand to life. This deal, at the end of the day, needed to provide a net benefit to Canada overall as well. We believe the structure of the transaction addressed the full array of stakeholder interests. After closing, each brand will continue to be managed independently and maintain its respective headquarters, while benefitting from global scale and sharing best practices that will come with common ownership by the new public company,” says Sutton.
Since the announcement of the transaction, the management of Tim Hortons and Burger King have spent a lot of time meeting with the franchisees and explaining it to them. Tims will be run as an independent company with its own management, values, and practices. They recognize what Tims does is different from what Burger King does and don’t want to tamper with a successful formula.
“From Burger King’s point of view they say the real opportunity is to do something with Tims they have been able to do with Burger King which is to expand it dramatically internationally,” says Horner.
Canada is seen to be fairly saturated when it comes to expansion opportunities for Tim Hortons, but opportunity exists not only in the U.S., but internationally to markets such as Russia and China.
“Tims makes coffee and donuts — it’s not something to do with Canada’s presence in scientific leadership — but it was really important to Tims and to the deal team and we impressed upon Burger King that for Tims to announce a sale given that it is an important retail brand it had to be very confident the transaction would close,” says Horner.
In a move that Horner says is “unprecedented,” Tims said to Burger King that if the deal didn’t pass regulatory hurdles, it would pay Tims a reverse breakup fee of $500 million. To demonstrate just how significant that issue was in the context of this transaction the highest reverse breakup fee ever agreed in a Canadian transaction before the Tims transaction for Investment Canada approval was $50 million (the Viterra sale to Glencore). “So it was 10 times that in this case,” says Horner.
Horner said the partnership between Wachtell, Osler, and Tims was the best three-way partnership he has experienced in more than 25 years of doing this kind of work. “It was partly because the Osler and Wachtell folks had great respect for each other, but also because Jill involved everybody on a basis of ‘I want to get the best advice and ideas.’”
“Sometimes you get outside firms jockeying with each other for greater visibility with counsel because they have the benefit of having more knowledge about regulatory or legal issues that is of significance,” he says. “Jill set the tone and said, ‘We’re all equal in this and we’re going to work co-operatively and be entitled to express our opinion and we’re all going to be available whenever we need to move the ball ahead.’”
Horner says one of Sutton’s strengths is her “healthy understanding of and respect for the U.S. securities regime.”
“As Jill needed to call on various members of her team one of the things that was really impressive was that her folks really pulled together as a team and worked incredibly hard. In the last three days they were trying to get it done and essentially everyone worked for 48 hours straight and her team worked for 48 hours straight as well,” he says.
In the final days of the transaction, Horner says a new draft would go around every couple of hours and Sutton would make sure she read the relevant parts of each draft and every couple of drafts, read it from top to bottom.
In a situation like that it doesn’t matter, says Horner, how good the outside counsel is — it’s that knowledge about what’s going on and the issues and their approach to the issues that is most beneficial. “When you have a general counsel who is really involved in the company, who just finds things and can ask questions that as an outside counsel you just wouldn’t think about, that’s terrific,” he says.
In the final meeting with the board Sutton took the lead and walked the directors through the agreement and regulatory conditions. While she looked to Osler and Wachtell to describe some of the particular provisions, she was the point person presenting the facts of the transaction. “Quite frankly, that is rare in the context of a big deal,” he says.