TOP TRENDS IN CANADIAN M&A 2014
ONE | INBOUND M&A ACTIVITY MAY SEE AN UPTICK
Some of the factors that have contributed to a weaker global M&A environment, including low commodity prices, slower growth in China, and economic and political challenges in Europe, will undoubtedly extend into 2014. There are, however, some positive signs that inbound deal activity will rise, including a strengthening U.S. recovery, a rebound in U.S. housing activity and a weakening Canadian dollar, which as of January 2014 fell to approximately C$0.93 against the U.S. dollar, a 7.5 per cent decline from a year earlier.
As confidence in the economy grows, risk-averse companies that hoarded cash through the downturn may feel new pressure to grow earnings through acquisitions. Continuing consolidation in many sectors of the Canadian economy also means that inbound investors need to move quickly and decisively to seize remaining opportunities of scale. Supported by liquid capital markets and willing lenders both in Canada and the U.S., financial buyers are also once again ramping up activity in Canada and providing meaningful competition to strategic buyers.
TWO | RETAIL, REAL ESTATE AND RESOURCES
TWO | RETAIL, REAL ESTATE AND RESOURCES
The retail sector was a bright light in 2013, with a number of high-profile transactions announced. In addition to the Hudson’s Bay acquisition of Saks, last year saw Loblaw’s proposed C$12.4-billion acquisition of Shoppers Drug Mart, the C$5.8-billion Canada Safeway acquisition by Sobey’s parent Empire, and a consortium led by Canada Pension Plan Investment Board (CPPIB) acquire a majority interest in Neiman Marcus. While 2013 may have been a high water mark for retail, we expect sector activity will remain strong as confidence in consumer spending grows and retailers adjust to marketplace consolidation.
REITs were also active in 2013, with deals that included H&R REIT’s C$4.6-billion acquisition of Primaris REIT and Dexus Property Group and CPPIB’s A$3-billion cash-and- stock offer for Commonwealth Property Office Fund. REIT- sector M&A activity may slow in 2014, notwithstanding investor appetite for yield and the perceived safety of Canadian real estate, reflecting a recent slowdown in REIT financing activity.
While resource-sector activity softened in 2013, transactions in this sector continued to dominate public M&A in Canada. Our sixth annual Blakes Canadian Public M&A Deal Study found that 68 per cent of announced friendly transactions occurred in the oil and gas and mining industries over the
12-month period reviewed. 2013’s headline transactions included the proposed C$1.5-billion acquisition of certain of Talisman Energy Inc.’s Montney natural-gas interests in
British Columbia by Progress Energy (a Petronas subsidiary), Russian nuclear corporation Rosatom’s acquisition of Uranium One, and Pacific Rubiales’ proposed C$1.6-billion acquisition of Petrominerales. In the mining sector, we expect more distressed acquisitions and roll-up strategies
in 2014 in response to the struggles and capital constraints faced by many junior mining issuers.
ThREE | POISON PILL HEARINGS MAY BE REPLACED BY PROXY CONTESTS
The Canadian Securities Administrators (CSA) are reviewing comments on draft National Instrument
62-105 – Security Holder Rights Plans (NI 62-105) and the alternative competing proposal from Quebec’s Autorité des marchés financiers (AMF). These proposals offer divergent approaches to the treatment of shareholder rights plans (poison pills) in unsolicited take-over bids. The CSA proposal focuses exclusively on shareholder rights plans, while
the AMF proposal goes further and addresses the use of defensive tactics generally.
Both proposals would improve a target board’s ability to defend against an unsolicited offer, and both should reduce the frequency with which securities regulators will be called upon to intervene. However, adoption of either proposal
will likely result in more frequent proxy contests, either at a target meeting to approve a shareholder rights plan or in an attempt to replace the target board and dismantle a defensive measure.
FOUR | AMENDED EARLY WARNING REGIME WILL IMPACT BIDDER DISCLOSURE AND TOEHOLD INVESTMENTS
The CSA has proposed changes to the existing “early warning” disclosure regime designed to improve transparency of investor interests and voting rights in public companies. The changes, not yet scheduled for
implementation, would, among other things, reduce the early warning disclosure threshold from 10 per cent to five per cent, aligning it with the U.S. and other jurisdictions.
The changes would require investors to make enhanced disclosure once they cross the five per cent ownership or control threshold. While the majority of public issuers who commented on the proposal expressed support, many investors commented that the increased reporting obligations could dampen investment in Canada.
In our most recent Blakes Canadian Public M&A Deal Study, we found that 18 per cent of transactions reviewed involved a buyer that owned securities of the target before execution of the transaction agreement, up from 12 per cent in our prior version of the study. Of these purchasers, 22 per cent held less than 10 per cent of the target:
Ownership of Target Securities
In 18% of transactions, compared to 12% in the prior year, Buyer owned Target securities prior to execution of the transaction agreement. In those transactions, what was Buyer’s ownership level in Target prior to the acquisition transaction?
(22%) 0% to 10%
FIVE | SHAREHOLDER ACTIVISM WILL CONTINUE
Activist shareholders continue to agitate and wage proxy contests to effect changes in public companies, exerting substantial influence over board composition, corporate management, strategy and operations. In 2013, JANA Partners lost its bid to elect five directors to the Agrium board following a lengthy and well-publicized proxy contest, while Talisman Energy and shareholder Carl Icahn reached an agreement whereby two of Icahn’s representatives were appointed to the Talisman board.
Dissidents have a number of tools at their disposal that can raise serious challenges for public companies, regardless of size. Investors continue to leverage Canada’s relatively liberal corporate laws, which permit shareholders holding five per cent of the votes to call special meetings and seek to replace directors. Despite a mixed track record, we expect activist investors to continue to see Canadian issuers as potential targets for governance improvements and value maximization. The proposed reduction of the early warning disclosure threshold and associated enhanced disclosure requirements should provide issuers with better insight into when an activist has acquired an influential stake and its intentions for the company.
40% to 50%
30% to 40%
20% to 30%
10% to 20%
FREQUENTLY ASKED QUESTIONS ABOUT CANADIAN PUBLIC M&A
Who regulates trading in securities in Canada?
Trading in securities, including in M&A transactions, is regulated in Canada by securities laws enacted by each of the provinces and territories of Canada. Each provincial or territorial securities act creates and empowers a provincial or territorial securities commission to enforce such laws. Canada’s provincial and territorial securities commissions have enacted
a number of multilateral and national rules to try to harmonize the application of securities laws across the country. A multilateral rule governing take-over bids has been adopted by all provinces and territories except Ontario. Ontario’s Securities Act is harmonized with the multilateral rule.
We’re considering investing in a Canadian public issuer. At what stage would we have to publicly disclose our investment?
There are two regimes that require the public disclosure of a holding in a Canadian public issuer: insider reporting and early warning reporting. Upon acquiring or obtaining control or direction over
10 per cent or more of the voting securities of a Canadian public issuer, the acquirer becomes an “insider” of that issuer and any trading in securities of that issuer while above the 10 per cent threshold must be disclosed using Canada’s sedi.ca website.
Under the early warning regime, the acquisition of, or ability to exercise control or direction over, 10 per cent or more of the voting or equity securities of a Canadian public issuer must be promptly disclosed via press release and regulatory filing. Subsequent acquisitions or dispositions while above the 10 per cent threshold of
two per cent or more of voting or equity securities must also be disclosed.
Canada’s securities commissions have proposed changes to the early warning regime, not yet scheduled for implementation, that would, among other things, reduce the early warning disclosure threshold from 10 per cent to five per cent, aligning it with the U.S. and other jurisdictions.
We’re considering increasing our stake in a Canadian public issuer. At what stage would we have to make a public take-over bid for all of the issuer’s securities?
Subject to reliance on an available exemption, any acquisition of, or obtaining control or direction over, voting or equity securities that would result in the acquirer holding 20 per cent or more of the voting or equity securities of any class of a Canadian public issuer will constitute a take-over bid and require that an offer be made to all securityholders of the class on the same terms and conditions.
What can we do to avoid triggering the take-over bid requirements?
Exemption from the take-over bid rules is available in certain circumstances. One of the most commonly used exemptions is the “private agreement” exemption, under which purchases may be made by way of private agreements with five or fewer vendors without complying with the take-over bid rules
(which would otherwise require an offer be made to all securityholders of the class). Canadian laws exempt such purchases only if the purchase price (including brokerage fees and commissions) does not exceed 115 per cent of the market price of the securities.
If we approach a Canadian public issuer about a possible M&A transaction, what type of public disclosure obligations would the issuer have?
Canadian public issuers are required to promptly disclose any “material changes” in their affairs, being any changes in their business, operations or capital that would reasonably be expected to have a significant effect on the market price or value of any of their securities. This includes a decision by the board to implement a change or by senior management if they believe that approval of the board is probable. Preliminary discussions and conditional proposals where material terms have not been agreed are not generally viewed as disclosable. However, any determination of the existence of a material change
is highly fact specific and needs to be carefully considered in the context of a specific transaction.
Should we expect the target board to insist on an auction?
There is no requirement under Canadian law for a board of a target company to hold an auction before entering into an agreement for the sale of the company, and it
is common for a target to enter into such agreements without an auction. In other cases, a target board will determine that an auction or more limited market check before entering into an M&A transaction is in the best interests of the corporation and will proceed on that basis.
how are Canadian public issuers typically acquired?
A public M&A transaction in Canada is typically effected by way of a take-over bid or plan of arrangement.
Take-over bids may be made with or without the agreement of the target and may be completed in as few as 35 days following the mailing of a take-over bid circular to target shareholders. A plan of arrangement generally requires the agreement of the target company and approval at a meeting of the target’s shareholders, which will typically be held 45 to 90 days after an acquisition agreement is entered into.
What type of securities regulatory oversight is involved in a Canadian take-over bid?
Canadian securities legislation contains detailed procedural and substantive requirements applicable to take-over bids. These include a requirement for an offeror to mail a take-over bid circular setting out the terms and conditions of the offer to the target and its board, auditors and subject securityholders. The
take-over bid circular must also be filed with the securities commissions but is not subject to any pre-clearance review.
What kind of disclosure must be made in a Canadian take-over bid circular?
The circular must set out prescribed information about the offer and the parties, including securityholdings and past dealings by the bidder and related parties
in securities of the target. If the target company has Quebec securityholders, which will often be the case, then unless a de minimis exemption applies, the circular must also be prepared in French and mailed to Quebec holders.
The consideration offered may be either cash or securities (or a combination of cash and securities). Where the purchase price consists of securities of the offeror, the circular must contain extensive disclosure regarding the offeror’s business and financial results.
The directors of the target issuer must deliver their own circular to securityholders in response to the bid. The target board will typically obtain a fairness opinion from a financial adviser and disclose that opinion in its directors’ circular.
We acquired a large block of securities just before we decided to make a take-over bid for the remaining securities. What issues should we be aware of?
Offerors must be wary of Canadian “pre-bid integration rules,”designed to ensure that all of the target’s securityholders are treated equally in the context of a take-over bid. The rules“integrate” pre-bid purchases (other than those made over a stock exchange) by requiring that consideration offered under the formal bid be at least equal in form and amount to the consideration paid in any such purchases made within the previous 90 days.
What conditions are permitted in a Canadian take-over bid?
Other than a financing condition, which is not permitted, Canadian take-over bids can be highly conditional. Bids are commonly subject to a number of conditions, including attaining a minimum level of acceptance, frequently 66-2/3 per cent of securities of the class subject to the offer (the threshold for approval of certain fundamental corporate transactions in most jurisdictions) or 90 per cent (the level that generally gives the purchaser the right to acquire the balance of the securities of the class outstanding); receipt of regulatory approvals; and there having been no material adverse change in the business of the target.
Can we be assured of acquiring the public minority following a take-over bid?
In the corporate context, an offeror that acquires
90 per cent of the shares of a class, excluding shares held by the offeror at the time of the bid, has a right of compulsory acquisition to purchase the remaining shares of the class at the offer price or, if the
shareholder objects, at a court-determined “fair value.” Similar provisions typically exist in the declarations of trust governing Canadian income trusts.
There are other ways minority securityholders can be bought out following a take-over bid, such as an amalgamation, arrangement or consolidation, which results in minority shareholders receiving cash for their target securities. Canadian securities and corporate laws provide protection for minority securityholders in these circumstances, but if an offeror acquires 66-2/3 per cent of the securities under a bid, it will generally be able to acquire the minority’s securities of the same class pursuant to such a “second step” transaction.
What is a plan of arrangement?
Friendly acquisitions are often effected in Canada by way of “plan of arrangement” rather than take-over bid. An arrangement is a court-approved transaction governed by corporation legislation and requiring target shareholder approval. The parties enter into an “arrangement agreement” setting out the basis for the combination, following which an application is made to court for approval of the process. The court order will require the calling of a shareholders’ meeting and specify the approval thresholds (which are typically two-thirds of the votes cast) and dissent rights. A detailed meeting circular will then be sent to shareholders, which provides broadly equivalent disclosure to that which would be provided by a
take-over bid circular.
Arrangements have a number of advantages over take-over bids. In particular, they can facilitate dealing with multiple classes of securities (particularly convertible instruments), provide for acquisition of 100 per cent of the target without the need for exercise of compulsory acquisition rights or a second- stage transaction and, if securities of the purchaser are to be offered to U.S. shareholders of the target, provide an exemption under U.S. securities laws from the requirement to register the securities.
In our sixth annual Blakes Canadian Public M&A Deal Study, we found that 74 per cent of the target-
supported transactions we reviewed were completed by way of a plan of arrangement, while 18 per cent
of such deals were completed by way of a take-over bid and eight per cent were completed by way of another shareholder-approved structure, such as an amalgamation.
W concerned that a significant ityholder may not tender to our bid or
agr o vote in favour of our acquisition by way of plan of arrangement. Can we enter into a separate agreement with the securityholder or offer any inducements to tender or vote?
It is common for purchasers to enter into lock-up agreements with significant securityholders or target management and directors whereby such securityholders agree to tender to the purchaser’s take-over bid or vote in favour of a plan of arrangement. In our most recent Blakes Canadian Public M&A Deal Study, we found that lock-up agreements were entered into in 90 per cent of the target-supported transactions we reviewed.
In considering lock-up agreements, however, it is important to note that Canadian securities laws provide that all holders of a target’s securities must be offered identical consideration in a take-over bid and prohibit an offeror from entering into a separate agreement that has the effect of providing to one securityholder greater consideration for its securities
than that offered to the other securityholders. Offering non-identical consideration is also problematic in the context of a plan of arrangement.
Does Canada’s antitrust law apply to mergers?
Canada’s antitrust law is set out in the Competition Act (Canada), which is federal legislation of general application. The Competition Act is administered and enforced by the Commissioner of Competition, who is supported by the Competition Bureau.
There are two parts of the Competition Act that apply to M&A transactions: the pre-merger notification provisions in Part IX and the substantive merger review provisions in Part VIII. All transactions are subject to the latter, while only those transactions that exceed certain thresholds are subject to the former. It is a criminal offence to complete a transaction that is subject to pre- merger notification unless either the initial statutory 30- day waiting period has expired or has been waived or terminated early or the transaction has been exempted from the obligation to file a notification. Substantial penalties also may be imposed if a transaction is closed before the parties comply with a supplementary information request (SIR), a process that will apply only to the most complex transactions.
Only those transactions that exceed the following three threshold tests are subject to pre-merger notification:
Size of the parties test: The parties to the transaction, together with their affiliates, must have aggregate assets in Canada with a book value, or aggregate gross revenues from sales in, from or into Canada, that exceed C$400-million.
Size of the transaction test: The aggregate value of the assets in Canada, or aggregate gross revenues from sales in or from Canada generated from the assets in Canada, of the target and its subsidiaries (or, in the case of an asset transaction, from the assets being acquired) must exceed C$82-million (this threshold applies to transactions in 2014 and may be increased annually). Please note that a separate test applies to amalgamations (which includes a Delaware merger).
Equity interest test (where applicable): The acquisition of more than 20 per cent of the voting shares of a public corporation or 35 per cent of the voting shares of a private corporation or voting interests of a non-corporate entity and, where this 20/35 per cent threshold has been exceeded but
the acquirer holds less than a majority of the voting shares or voting interests of a corporate or non- corporate entity, the acquisition of more than
50 per cent of the voting shares or voting interests.
Please note that, in a share transaction the target or one of its subsidiaries must carry out an operating business in Canada, while in an asset transaction, the vendor must carry out an operating business in Canada.
If a transaction is subject to notification under the Competition Act and it involves a federal transportation undertaking, there may also be a filing obligation required under the Canada Transportation Act.
The waiting period is 30 days following the day on which both parties filed their complete notification. If prior to the expiration of this period the Commissioner of Competition issues an SIR, which is equivalent to
a second request under the U.S. Hart-Scott-Rodino Antitrust Improvements Act, 1976, the parties cannot complete their transaction until 30 days after the day on which the parties have complied with the SIR. There is a special provision available for an unsolicited offer for a corporation that is designed to prevent a target from holding up the start of the waiting period. While the parties to a notifiable merger are generally free to complete their transaction following the termination
of the statutory waiting period, the Commissioner’s review can, and often does, take longer than the statutory waiting period. The Commissioner of Competition can challenge a merger transaction at any time before, or within one year following, its substantial completion.
If the transaction is subject to Competition Act review, what is the test for challenging the transaction?
The test applicable to a merger transaction is whether it will, or is likely to, substantially prevent or lessen competition. The analysis has historically taken place in the context of a relevant market, which is defined on the basis of product and geographic dimensions though market definition has been de-emphasized
to an extent in favour of closeness of competition between merging parties under the recently revised Merger Enforcement Guidelines. The Competition Act provides that the factors relevant to assessing the competitive impact of a merger include the extent
of foreign competition; whether the business being purchased has failed or is likely to fail; the extent to which acceptable substitutes are available; barriers to entry; whether effective competition would remain; whether a vigorous and effective competitor would be removed; the nature of change and innovation in
a relevant market; and any other factor relevant to competition. The Competition Act contains an express efficiency defence, which is unique to Canada.
Does Canada have rules restricting foreign investment?
The Investment Canada Act applies to every establishment of a new Canadian business or acquisition of control of a Canadian business by a non- Canadian. An acquisition of more than 50 per cent of the voting interests of a corporate or non-corporate entity is deemed to be an acquisition of control; the acquisition of between one-third and one-half of the voting shares of a corporation creates a rebuttable presumption that control has been acquired while, subject to certain exceptions, the acquisition of less than one third of the voting shares of a corporation
or less than a majority of the voting interests of a non-corporate entity is deemed not to constitute an
acquisition of control. Notwithstanding the above, the Investment Canada Act provides that the responsible minister under the act can determine that control in fact will be acquired, even below the previously noted thresholds, in the following circumstances: (1) the acquisition of a Canadian cultural business (as such term is defined), (2) the acquisition by a state-owned enterprise (SOE) (as such term is defined), and
(3) where the acquisition could be injurious to Canada’s national security.
A direct acquisition of control of a Canadian business that exceeds the applicable monetary threshold cannot be completed until the responsible minister under the Investment Canada Act has reviewed the investment and has declared, or is deemed to have declared,
that the investment is likely to be of net benefit to Canada. The monetary threshold is exceeded where the Canadian business has book value of assets of C$5-million and greater, and either the World Trade Organization (WTO) investor rule is not satisfied or the Canadian business qualifies as a cultural business. A higher monetary threshold applies where the Canadian business is not a cultural business and the WTO investor rule applies. In that case, the investment is subject to review only where the Canadian business, along with any businesses that it controls, has assets with a book value of C$354-million or greater (adjusted annually). Whether the Canadian business is being acquired indirectly (i.e., the shares of the Canadian business will be acquired indirectly through the
acquisition of the voting shares of a foreign corporation), and the WTO investor rule is met, or whether the
monetary threshold is not exceeded, the transaction is subject only to a post-closing notice requirement. The WTO investor threshold is met where the transaction is being carried out by an investor from a WTO member country or where the Canadian business is, immediately before the implementation of the investment, controlled by a WTO investor other than a Canadian.
Note that regulations have been proposed that would increase the WTO investor threshold for non-SOE investors initially to C$600-million in enterprise value and then to C$1-billion over a four-year period. The Canadian government has not provided any indication of when these regulations will be promulgated.
For those transactions that are reviewable, the investor is required to submit an application for net benefit review and the transaction will require the approval of the responsible minister. The initial waiting period is
up to 45 days, which can be extended unilaterally by a further 30 days and thereafter only with the consent of the minister and investor. In almost all cases, the responsible minister requires the parties to submit written undertakings in order to conclude that the proposed investment is likely to be of net benefit to Canada.
All investments involving a Canadian entity, whether or not the investment is direct or indirect and whether or not control will be acquired, are subject to possible review on grounds of whether an investment is
likely to be injurious to national security. Cabinet has broad powers under the national security provisions of the Investment Canada Act to direct parties not to implement an investment, or to implement it with conditions; where a review takes place after closing,
Cabinet’s powers include the right to require the divestiture of control or to impose terms and conditions on the investment.
In addition to the Investment Canada Act, other federal statutes regulate and restrict foreign investment
in specialized industries and sectors, such as transportation, telecommunications, broadcasting, newspapers and financial institutions.
Once a deal has been negotiated, what deal protection measures are commonly used in Canada?
Canadian deal protection provisions are very similar to those found in U.S. transactions and include the following:
No shop: Buyers typically negotiate a “no-shop” clause under which the target board is prohibited from soliciting or encouraging competing bids from other buyers. The no-shop clause will usually provide the board of the target with a “fiduciary out” that permits the board to respond to and accept a competing proposal if it constitutes a financially superior proposal.
Right to match: The buyer is frequently granted an
opportunity to match any superior proposal.
Break fees: Break fees in Canadian deals generally range between two to four per cent of target equity value. Reciprocal break fees, pursuant to which a buyer is obligated to pay a fee to the target if the transaction fails for specified reasons, have gained acceptance in Canada in limited circumstances, such as where unusual regulatory issues exist or in sponsor-backed deals. In our sixth annual Blakes Canadian Public M&A Deal Study, we found that 40 per cent of the target-supported transactions reviewed included reciprocal break fees, with the average fee being 3.3 per cent of the target’s undiluted equity value.
So-called “go-shop” provisions, pursuant to which a target board is granted a specified period of time in which to actively seek out alternative proposals, have been used in a few instances in Canada but generally have yet to gain acceptance.
What defences are available to Canadian public issuers confronted with unsolicited offers for their securities?
Canadian securities regulators have traditionally been of the view that unrestricted auctions produce the most desirable results in change of control contests, and they frown upon tactics that are likely to deny
or severely limit the ability of securityholders to decide for themselves whether to accept an offer. As a result, the securities regulators will generally not allow a securityholders’ rights plan (commonly known as a “poison pill”) to permanently block a bid. On application by the bidder, the regulators will typically “cease trade” the rights plan 45 to 75 days after a bid has been launched. Accordingly, the plan’s value has been to provide the target’s board time to seek out other bidders in an effort to maximize securityholder value.
In 2013, the Canadian Securities Administrators (CSA) and Quebec’s Autorité des marchés financiers (AMF) published alternative proposals to reform the regulation of defensive tactics in Canada. The CSA proposal focuses exclusively on shareholder rights
plans. To remain effective, a rights plan would require
shareholder approval within 90 days of its adoption or, if the rights plan is adopted after the date that a bid is announced, within 90 days from the earlier of the commencement of the bid and the date the plan is adopted. Absent such approval, or if the issuer fails to hold a meeting in time, the rights plan would terminate.
The AMF proposal goes further than that of the CSA, addressing not only shareholder rights plans but the use of defensive tactics generally. The AMF would replace the existing defensive tactics instrument with rules addressing the conflicts of interest faced by a target’s board of directors in an unsolicited transaction. Absent unusual circumstances, the AMF has suggested that regulators should limit their intervention in unsolicited situations. Both proposals are currently under review, and no timeframe has been established for changes to the existing regime.
While there is no prohibition against staggered boards in Canada, corporate statutes permit the removal of directors at any time upon a majority vote of shareholders. Accordingly, staggered boards are of limited utility.