The Canadian government released draft regulations this month, creating a broader threshold for WTO-member buy-side foreign companies. Industry experts balked at a similar proposal in 2009 but these latest amendments look set to be accepted.
The draft amendments to the Investment Canada Act introduce a more workable methodology for the calculation of enterprise value, which would replace net asset value as the review threshold.
The review threshold would change from C$330 million in net asset value to C$600 million in enterprise value if and when the new guidelines are passed. The C$600 million threshold would be in force for two years before the enterprise value is raised to C$800 million for another two years. The enterprise value threshold would be C$1 billion four years after the effective date of the new guidelines.
Enterprise value is defined in the draft guidelines as market capitalisation of the target company plus total liabilities. The new methodology for calculating enterprise value clarifies when merging companies will have to file with the government.
Norton Rose partner Kevin Ackhurst said there had been an odd trigger for the time period to calculate enterprise value in 2009. “It didn’t line up with how the business world sees enterprise value,” he said.
Ackhurst mentioned a scenario possible under the 2009 guidelines in which a company below enterprise value announces an acquisition that causes an increase in share price, meaning the transaction undergoes the net benefit to Canada test.
“The current draft fixes a lot of these problems,” Ackhurst said. “They’ve added a mechanism so you can submit your filing and that kind of locks in the enterprise value. But I think there are still some little quirks.”
One of those peculiarities could create a disincentive for subsequent bidders, making it difficult for the board of a target company to fulfill its fiduciary duty to maximize shareholder value.
Ackhurst said it would be possible for a potential acquirer to be under the enterprise value threshold and determine a filing is not necessary, but if the share price increases, a subsequent competing bid could be over the threshold and subject to review.
The 30-day public consultation period on the proposed regulations will end July 2.