Canadian M&A transaction volumes remained quite low in 2009, not only relative to the robust levels of M&A activity prior to the recession in 2005 to 2007, but also relative to activity levels in 2008. However, activity levels showed gradual and continual improvement after a dismal Q1 2009 as market fundamentals began to improve, financing became increasingly available and buyers began to look seriously at M&A activity again. The Canadian capital markets have also been relatively open as of late, which has permitted many potential acquirors to strengthen their balance sheets, potentially positioning them for M&A activity.
According to publicly available market data, there were approximately $129.6 billion CAD ($127.9 billion) of deals in 2009, up a modest 13% over the approximately $114.8 billion of deals in 2008. However, there were only 840 transactions in 2009, down almost 43% from the 1467 M&A transactions in 2008. There were also only 21 transactions over $1 billion in 2009, the same number as in 2008 but down from 60 deals over $1 billion in 2007.
Shareholder approval of dilutive M&A transactions
In early 2009, a decision of the Toronto Stock Exchange (TSX) to refuse to exercise its discretionary authority to impose a shareholder vote on HudBay Minerals in its highly dilutive stock-for-stock acquisition of Lundin Mining was successfully appealed to the Ontario Securities Commission (OSC), which has regulatory oversight over the TSX. The OSC ordered that the transaction could not proceed without a HudBay shareholder vote.
In coming to its conclusion, the OSC Panel emphasised the level of dilution involved in the transaction, noting that because the transaction was essentially a merger of equals it raised the question as to why Lundin shareholders were entitled to a vote but HudBay shareholders were not. Perhaps more interestingly, the OSC Panel also questioned the appropriateness of HudBay's governance practices.
In particular, the OSC Panel was critical of the fact that the HudBay board picked a date for a requisitioned meeting of shareholders to remove the HudBay board which was well after the date of the Lundin meeting of shareholders. That decision, coupled with the opposition of a large number of HudBay shareholders, ultimately led to the termination of the proposed transaction and the HudBay board was subsequently ousted at the requisitioned meeting.
Following the decision, the TSX amended its approach (effective in late 2009) to require Canadian public companies to obtain shareholder approval in connection with any public company M&A transaction that would result in the issuance of 25% or more of their outstanding share capital (on a non-diluted basis). Prior to this change, the TSX rules did not require shareholder approval irrespective of the level of dilution involved in the acquisition of a widely-held public company, although it retained the discretion to do so.
With the change, the TSX has aligned its rules with those of other international exchanges. The change in approach was lauded by shareholder advocate groups seeking a greater say in approving dilutive M&A transactions, but others have expressed concern that the rule change might negatively impact the volume of M&A activity generally or the ability of smaller issuers to use their paper to compete against larger bidders, particularly in certain sectors such as Canada's robust resource sector.
In addition, a recurring question in Canadian M&A circles post HudBay and some of the other decisions discussed below is the extent to which Canadian securities regulators should be delving into matters of corporate governance, which has historically been the exclusive domain of the courts.
Share issuances in the context of M&A transactions
Another interesting aspect of HudBay was the fact that as part of the transaction, Lundin issued common shares (representing 19.9% of Lundin's outstanding common shares) to HudBay by way of a private placement, which HudBay agreed to vote in favour of the transaction. The OSC Panel noted (in obiter) that since the shares were acquired as a part of a private placement in anticipation of the merger transaction, HudBay should not, as a matter of principle, be permitted to vote the shares in favour of the transaction. In the OSC Panel's view, the acquiror in a merger transaction should not have the ability to affect or influence the outcome of the target shareholder vote on the transaction.
A similar issue was subsequently put before the Alberta Securities Commission (ASC) in connection with the takeover bid of Profound Energy by Paramount Energy Trust. As part of that transaction, Profound issued special warrants to Paramount on a private placement basis, which were convertible into shares of Profound (representing 19.9% of Profound's outstanding common shares). It was only after Paramount could not meet the minimum tender condition under the takeover bid that it exercised the special warrants and then purported to vote the private placement shares it acquired in favour of a second step squeeze-out transaction.
In this case, the ASC determined not to exercise its public interest jurisdiction to prevent Paramount from voting its private placement shares in favour of the transaction. In coming to this conclusion, the ASC noted that despite the fact that the private placement was a tactical tool designed to assist Paramount in acquiring all of Profound, it also provided a new source of attractively priced financing to a company that was in difficult financial circumstances and was not linked to the successful completion of the bid. In addition, the private placement was effected at a premium to the then market price of the shares and Paramount could have been required in certain circumstances to tender the shares to a superior competing bid.
Whether targets will be permitted to issue shares to an acquiror on a private placement basis in anticipation of a merger transaction will depend on the specific circumstances at hand, but both acquirors and targets should expect that any such share issuance will be subject to regulatory scrutiny and potential intervention. In our view, it is also possible that the Toronto Stock Exchange may decide to impose restrictions on the voting of private placement shares in the context of an M&A transaction as a condition of their approval to issue such shares.
Shareholder rights plans
A hot topic of discussion in 2009 and early 2010 has been the applicable Canadian securities regulatory position regarding shareholder rights plans.
The historical position of Canadian securities regulators to defensive tactics in the context of a hostile takeover bid has been that such tactics cannot result in shareholders being deprived of the ability to respond to a bid. For this reason, Canadian rights plans have not been permitted to remain in place for a prolonged period of time, but have generally been 'cease traded' by a securities regulatory authority after a period of time deemed reasonable for a target company to generate any legitimate superior alternative to the unsolicited bid if not voluntarily withdrawn prior to then.
In recent years, certain limited exceptions to this general approach have begun to emerge, which caused some to wonder whether the regulatory approach to rights plans was slowly beginning to change, particularly after the strong endorsement of the business judgment rule in the BCE decision.
In May of 2009, the OSC denied an application to cease trade a tactical rights plan implemented by Neo Materials Technologies in response to a hostile partial bid made by Pala Investments Holdings. Quite significantly, prior to the expiry of the bid and the OSC hearing, the rights plan was overwhelmingly approved by approximately 81% of the votes cast by Neo's shareholders (excluding Pala) at a meeting called to consider the continued operation of the rights plan.
In its reasons for the decision, the OSC Panel placed significant emphasis on the recent approval of the rights plan by Neo's shareholders, thereby endorsing a decision of the ASC in Pulse Data, which stated that "as a general matter, recent and informed shareholder ratification of a rights plan, erected in the face of [a] hostile takeover bid is suggestive of a finding that the continuation of the shareholder rights plan is in the bona fide interests of a target's shareholders".
The OSC Panel further noted that shareholder approval of a rights plan will not be determinative where it is not informed and provided freely and fairly, in the absence of coercion or undue pressure. In the circumstances, the OSC found that Neo's shareholders were sufficiently informed, that there was no evidence of coercion or undue pressure imposed upon shareholders to ratify the rights plan and that there was no evidence to suggest that the board's process in evaluating and responding to the bid, including the decision to implement a rights plan, was not carried out in the best interest of the corporation (the relevant Canadian fiduciary duty standard) and the target's shareholders.
In determining whether the Neo board had discharged its fiduciary duties, the OSC Panel noted that it must give effect to the business judgment rule and stated that using a rights plan to provide sufficient time to run an auction or seek alternative bidders is not the only legitimate purpose for a rights plan, but that rights plans may be adopted for the broader purpose of protecting the long-term interests of the shareholders, where, in the directors' reasonable business judgment, the implementation of a rights plan would be in the best interests of the corporation.
Post the Pulse Data and Neo decisions, and in light of the Supreme Court of Canada decision in BCE, there was some debate amongst members of the Canadian M&A bar as to whether compliance by a board with its fiduciary duties should be determinative of whether the OSC will allow a rights plan to remain in place. In our view, this stretches the intent of the OSC Panel too far, and the decision really reflects the willingness of the OSC Panel to defer to the overwhelming will of Neo's shareholders to keep the rights plan in place (which has always been a key factor examined by Canadian securities regulators in making a decision on such matters) in the particular circumstances of the case.
Interestingly, at the time of writing this article, the British Columbia Securities Commission (BCSC) has just released a summary decision (with final reasons to follow) cease trading a rights plan adopted by the board of directors of Lions Gate Entertainment in response to a hostile bid launched by affiliated entities of Carl Icahn.
Upon the adoption of the rights plan, Lions Gate sent notice of a shareholders meeting to consider the continued operation of the rights plan to be held on May 4 2010. Icahn subsequently amended the bid and set the expiry date at April 30 2010. Lions Gate urged the BCSC to delay the hearing until after the shareholders meeting and presented evidence that a significant number of Lions Gate's shareholders were supportive of the continued operation of the plan. However, the BCSC refused to do so and issued an order cease trading the plan on the basis that the failure to do so might deprive Lions Gate shareholders of the right to decide whether or not to tender to the Icahn bid and dispose of their shares as they wish.
In so deciding, the BCSC thereby adopted a strict interpretation of the Canadian securities regulators' views of the public interest as it relates to the adoption of a rights plan by a target company as a defensive tactic, as reflected in NP 62-202, and reverted to the line of reasoning generally adopted before Pulse Data and Neo.
In fact, the BCSC noted (citing a previous OSC decision) that although shareholder approval is a relevant factor to be determined in considering whether to cease trade a rights plan, shareholder approval of itself will not establish that a plan is in the best interest of shareholders. The BCSC then went on to say that the Pulse Data and Neo decisions were distinguishable on the facts, and that they have reservations about such decisions based upon their apparent departure from the Canadian securities regulators' view of the public interest as it related to rights plans prior to such decisions.
Lions Gate appealed the BCSC decision to the British Columbia Court of Appeal, but the appeal was dismissed. As a result of these decisions, there is uncertainty and inconsistency amongst Canadian jurisdictions as to the approach securities regulators will adopt in examining rights plans.
Competition and anti-trust regulations
The Competition Act (Canada) is administered and enforced by the Commissioner of Competition, who is the head of the Competition Bureau.
Notification requirements
The Competition Act establishes a regime for compulsory pre-merger notification of certain acquisitions and business combinations that exceed specified monetary and shareholding thresholds (where applicable). Pre-merger notification triggers a mandatory waiting period which must expire, or be terminated or waived before closing may occur.
The pre-merger notification provisions of the Competition Act apply to several types of transactions, namely acquisitions of assets or shares, business combinations and the formation of, or acquisition of interests in, unincorporated business combinations. A pre-condition to notification, however, is that the target of the acquisition must own or control an operating business in Canada. Certain exemptions also apply.
Determination of whether a transaction exceeds the thresholds for pre-merger notification under the Act depends on the specific structure of a given transaction. Generally, however, a proposed transaction is notifiable if it exceeds:
- the size-of-parties threshold: the book value of assets in Canada or gross revenues in, from or into Canada of all of the parties, together with their affiliates, of greater than $400 million;
- the size-of-transaction threshold: generally $70 million, indexed annually, based on the book value of the assets in Canada being acquired or the Canadian assets of the entity the shares of which are being acquired, or gross revenues from sales in or from Canada generated by those assets; and
- in the case of share acquisitions, an additional shareholding threshold must be exceeded. As a result of the transaction, the purchaser and its affiliates must hold over 20% of the voting securities of a public corporation or over 35% of the voting securities of a private corporation. If these ownership levels are already exceeded, the purchaser is required to file if its ownership of voting securities of a public or private corporation exceeds 50% as a result of the transaction.
It is noteworthy that even where a transaction does not trigger a mandatory pre-merger notification filing, it remains subject to the substantive merger review provisions of the Competition Act for a period of one year following closing.
Recent competition policy developments
In March of 2009, the federal government enacted sweeping amendments to Canada's competition and foreign investment law regimes. With respect to the merger review process under the Competition Act, the amendments have created a US-style merger review process, whereby an initial 30-day suspensory waiting period applies upon the notification of a transaction, within which the Commissioner of Competition may issue a request for additional information, extending the waiting period until 30 days after compliance with the request for additional information has occurred.
It is generally believed that this change has resulted, in 2009 and 2010, in longer, more detailed reviews of acquisitions raising competition concerns, and has enhanced the leverage of the Commissioner of Competition in obtaining remedies. By way of illustration, in the year following the amendments, the Commissioner obtained Canadian remedies (for example the sale of assets or business divisions) in the form of binding consent agreements from parties in several high-profile transactions, including Suncor/Petro Canada, Ticketmaster/Live Nation, Pfizer/Wyeth, Merck/Schering Plough and Agrium/CF Industries.
In previous years, the Commissioner has not been able to obtain remedies in nearly so many transactions. Transactions that do not raise significant competition concerns, however, have been largely unaffected by the amendments, and parties to such transactions are often able to avoid making formal notification filings and efficiently obtain a clearance by requesting and obtaining an advance-ruling certificate following the submission of a brief explaining the competitive impact of the transaction.
The Investment Canada Act
Regime Summary
The Investment Canada Act (ICA) applies to any acquisition of control by a non-Canadian (so by a purchaser the ultimate control of which resides outside of Canada) of a Canadian business (a business carried on in Canada that has a place of business in Canada, an individual or individuals in Canada who are employed or self-employed in connection with the business and assets in Canada used in carrying on the business). Where these criteria are met, a proposed transaction triggers an obligation to file either a notification or an application for review regardless of whether the Canada-based business is Canadian-controlled.
A notification is essentially an administrative formality, constituting notice of the investment (with certain required information in respect of the investment) to be filed within 30 days of closing. A review application, on the other hand, is more onerous and generally constitutes a bar to closing until receipt of requisite approval under the ICA. Investments are only reviewable, however, where certain thresholds are met.
Assuming a purchaser is a WTO Investor (ultimately controlled by WTO nationals) within the meaning of the ICA, a review application is required for direct acquisitions if the value of the assets (as set out in the financial statements for the most recently completed fiscal year) of the Canadian business, and all other entities in Canada the control of which is being acquired, equals or exceeds $299 million (it is expected that this threshold will be amended upwards in 2010).
Indirect acquisitions (the acquisition of a Canadian business by consequence of the acquisition of a corporation outside Canada that controls an entity in Canada carrying on the Canadian business) are typically exempt from review if either the purchaser or the vendor is WTO-controlled.
In respect of investments in Canadian cultural businesses, it should be noted that the $299 million threshold in respect of direct acquisitions is reduced to only $5 million, and indirect acquisitions are reviewable where the value of the assets (as set out in the financial statements for the most recently completed fiscal year) of the Canadian businesses, and all other entities in Canada the control of which is being acquired, equals or exceeds $50 million.
In recent years, the ICA process has been gaining greater attention as there has been an increasing concern, in certain circles, regarding the alleged hollowing out of corporate Canada. This has led to more extensive, rigorous and sometimes lengthier binding undertakings being demanded as a condition to clearing a transaction under the ICA process.
In 2008, ATK's proposed acquisition of MDA was rejected under the ICA by the Minister of Industry, likely due to some unique issues it raised related to the extensive government funding of MDA and MDA's ownership of space technology including Radarsat 2. This was the first time a non-cultural business transaction had ever been formally rejected under the ICA.
Recent developments
The ICA was amended very significantly in March 2009, although the practical impact of such amendments has largely yet to be determined. The most notable of the amendments creates a national security review process to screen investments that are potentially "injurious to national security". The salient elements of the national security review process are:
- There is no definition of national security and no illustrative list of the types of transactions that would be caught. Thus, there is some uncertainty about the potential scope of a national security review.
- The federal Cabinet is empowered to prohibit closing of the investment, to authorise the investment on certain conditions or undertakings by the non-Canadian or require the divestiture of the Canadian business.
- There is no minimum review threshold with the result that transactions involving very small targets are potentially reviewable. As such, national security may apply to transactions with relatively tenuous connections to Canada.
- Similarly, national security screening applies whether or not control has been acquired.
- There is no formal requirement to notify the Government pre-closing if ministerial approval is not otherwise required pre-closing. In such an instance, the investor may only learn that the transaction is subject to national security review following closing upon receipt of notice from the Minister.
- In late 2009, regulations implementing certain aspects of the national security review process came into force, setting out different timelines for reviews, depending on numerous factors specific to the transaction.
Although minimal information regarding the federal government's use of its national security review powers is publicly known, it is generally believed that such powers have been used very sparingly. Several high-profile transactions occurred in 2009 for which it was thought possible that national security reviews may be ordered (for example the sale of Nortel's businesses to various foreign buyers) but ultimately were not ordered. The precedential value of such transactions is highly uncertain given that, under the ICA, national security reviews are essentially a matter of political discretion.
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About the author
William Braithwaite is a senior partner in the Toronto office of Stikeman Elliott, and member of the firm's Partnership Board and Executive Committee. He practises M&A and corporate finance, and has represented a wide range of corporations, boards of directors, dealers and institutional shareholders, governments and regulatory authorities on policy, and other initiatives.
Braithwaite is recognised in the 2010 Lexpert/American Lawyer's Guide to the Leading 500 Lawyers in Canada for Corporate Commercial, Corporate Finance and M&A, the 2010 Chambers Global's Guide to the World's Leading Lawyers for Business for Corporate/M&A, IFLR1000's Guide to the World's Leading Financial Law Firms 2010 in M&A, Legal Media Group's Guide to the World's Leading Lawyers – Best of the Best 2010 as one of the world's top 25 pre-eminent Corporate Governance lawyers in the world, and The Canadian Legal Lexpert Directory 2009 for Corporate Commercial Law, Corporate Finance & Securities and M&A. He was appointed as counsel to the IDA Task Force to examine the modernisation of Canada's securities legislation, is a member of the Senior Securities Legal Advisory Group to the OSC, and special lecturer in Osgoode Hall Law School's part-time LLM program. He has participated in numerous panels and conferences on corporate and securities law. |
Contact information
William Braithwaite Stikeman Elliott
5300 Commerce Court West 199 Bay Street Toronto, Ontario M5L 1B9 Canada
Tel: +1 416 869 5654
Fax: +1416 947 0866
E-mail: wbraithwaite@stikeman.com www.stikeman.com |
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About the author
John Ciardullo is a partner in the Toronto office of Stikeman Elliott. He practises corporate and securities law, with a particular emphasis on public M&A and corporate finance transactions. He also has significant experience with proxy contests and contested shareholder meetings.
Ciardullo has been involved in many of Canada's leading M&A and corporate finance transactions and has been recognised in Chambers Global's Guide to the World's Leading Lawyers for Business in Corporate and M&A, the Lexpert Guide to the Leading US/Canada Cross-border Corporate Lawyers in Canada and in The Canadian Legal Lexpert Directory as one of Canada's top lawyers under the age of 40 in 2007.
He has authored many articles and publications on corporate and securities law, particularly on the topic of mergers and acquisitions and is a member of the Securities Advisory Committee to the Ontario Securities Commission, a body that provides advice to the Commission and its staff on a variety of matters including policy initiatives, capital markets trends and legal, regulatory and market implications of Commission rules, policies, operations and administration. |
Contact information
John Ciardullo Stikeman Elliott
5300 Commerce Court West 199 Bay Street Toronto, Ontario M5L 1B9 Canada
Tel: +1 416 869 5235
Fax: +1 416 947 0866
E-mail: jciardullo@stikeman.com www.stikeman.com |