35
The Mergers & Acquisitions Review Law Business Research Ninth Edition Editor Mark Zerdin
857
Appendix 1
ABOUT THE AUTHORS
THOMAS SACHERAshurst LLPThomas Sacher is a partner at Ashurst LLP since 1 July 2015. From 1986 through June 2015 Thomas Sacher was a member and, from 1992 through June 2015, partner of another German law firm. He studied law at the universities of Munich and Regensburg and received admission to the Bar in 1986. In 1990 he received a PhD (Dr jur) from the University of Regensburg.
Dr Sacher specialises in the areas of M&A, private equity and venture capital. He advises his national and international clients in a variety of corporate law matters related to domestic and cross-border transactions and provides legal advice on transformations, mergers, formation of joint ventures, stock option plans and other corporate transactions.
ASHURST LLPLudwigstraße 880539 MunichGermanyTel: +49 89 24 44 21 100Fax: +49 89 24 44 21 [email protected]
The Mergers & Acquisitions
Review
Law Business Research
Ninth Edition
Editor
Mark Zerdin
The Mergers & Acquisitions Review
The Mergers & Acquisitions ReviewReproduced with permission from Law Business Research Ltd.
This article was first published in The Mergers & Acquisitions Review - Edition 9(published in August 2015 – editor Mark Zerdin)
For further information please [email protected]
The Mergers & Acquisitions
Review
Ninth Edition
EditorMark Zerdin
Law Business Research Ltd
PUBLISHER Gideon Roberton
BUSINESS DEVELOPMENT MANAGER Nick Barette
SENIOR ACCOUNT MANAGERS Katherine Jablonowska, Thomas Lee, Felicity Bown
ACCOUNT MANAGER Joel Woods
PUBLISHING MANAGER Lucy Brewer
MARKETING ASSISTANT Rebecca Mogridge
EDITORIAL COORDINATOR Shani Bans
HEAD OF PRODUCTION Adam Myers
PRODUCTION EDITOR Anna Andreoli
SUBEDITOR Hilary Scott
MANAGING DIRECTOR Richard Davey
Published in the United Kingdom by Law Business Research Ltd, London
87 Lancaster Road, London, W11 1QQ, UK© 2015 Law Business Research Ltd
www.TheLawReviews.co.uk No photocopying: copyright licences do not apply.
The information provided in this publication is general and may not apply in a specific situation, nor does it necessarily represent the views of authors’ firms or their clients.
Legal advice should always be sought before taking any legal action based on the information provided. The publishers accept no responsibility for any acts or omissions contained herein. Although the information provided is accurate as of August 2015, be
advised that this is a developing area.Enquiries concerning reproduction should be sent to Law Business Research, at the
address above. Enquiries concerning editorial content should be directed to the Publisher – [email protected]
ISBN 978-1-909830-62-2
Printed in Great Britain by Encompass Print Solutions, Derbyshire
Tel: 0844 2480 112
THE MERGERS AND ACQUISITIONS REVIEW
THE RESTRUCTURING REVIEW
THE PRIVATE COMPETITION ENFORCEMENT REVIEW
THE DISPUTE RESOLUTION REVIEW
THE EMPLOYMENT LAW REVIEW
THE PUBLIC COMPETITION ENFORCEMENT REVIEW
THE BANKING REGULATION REVIEW
THE INTERNATIONAL ARBITRATION REVIEW
THE MERGER CONTROL REVIEW
THE TECHNOLOGY, MEDIA AND TELECOMMUNICATIONS REVIEW
THE INWARD INVESTMENT AND INTERNATIONAL TAXATION REVIEW
THE CORPORATE GOVERNANCE REVIEW
THE CORPORATE IMMIGRATION REVIEW
THE INTERNATIONAL INVESTIGATIONS REVIEW
THE PROJECTS AND CONSTRUCTION REVIEW
THE INTERNATIONAL CAPITAL MARKETS REVIEW
THE REAL ESTATE LAW REVIEW
THE PRIVATE EQUITY REVIEW
THE ENERGY REGULATION AND MARKETS REVIEW
THE INTELLECTUAL PROPERTY REVIEW
THE ASSET MANAGEMENT REVIEW
THE LAW REVIEWS
www.TheLawReviews.co.uk
THE PRIVATE WEALTH AND PRIVATE CLIENT REVIEW
THE MINING LAW REVIEW
THE EXECUTIVE REMUNERATION REVIEW
THE ANTI-BRIBERY AND ANTI-CORRUPTION REVIEW
THE CARTELS AND LENIENCY REVIEW
THE TAX DISPUTES AND LITIGATION REVIEW
THE LIFE SCIENCES LAW REVIEW
THE INSURANCE AND REINSURANCE LAW REVIEW
THE GOVERNMENT PROCUREMENT REVIEW
THE DOMINANCE AND MONOPOLIES REVIEW
THE AVIATION LAW REVIEW
THE FOREIGN INVESTMENT REGULATION REVIEW
THE ASSET TRACING AND RECOVERY REVIEW
THE INTERNATIONAL INSOLVENCY REVIEW
THE OIL AND GAS LAW REVIEW
THE FRANCHISE LAW REVIEW
THE PRODUCT REGULATION AND LIABILITY REVIEW
THE SHIPPING LAW REVIEW
THE ACQUISITION AND LEVERAGED FINANCE REVIEW
THE PRIVACY, DATA PROTECTION AND CYBERSECURITY LAW REVIEW
THE PUBLIC-PRIVATE PARTNERSHIP LAW REVIEW
THE TRANSPORT FINANCE LAW REVIEW
THE SECURITIES LITIGATION REVIEW
THE LENDING AND SECURED FINANCE REVIEW
i
The publisher acknowledges and thanks the following law firms for their learned assistance throughout the preparation of this book:
ACKNOWLEDGEMENTS
AABØ-EVENSEN & CO ADVOKATFIRMA
ÆLEX
AGUILAR CASTILLO LOVE
AKD NV
ALLEN & GLEDHILL LLP
ANDERSON MŌRI & TOMOTSUNE
ARIAS, FÁBREGA & FÁBREGA
ASHURST LLP
AZMI & ASSOCIATES
BHARUCHA & PARTNERS
BOWMAN GILFILLAN
BREDIN PRAT
BRIGARD & URRUTIA
CLEARY GOTTLIEB STEEN & HAMILTON
CORRS CHAMBERS WESTGARTH
COULSON HARNEY
CRAVATH, SWAINE & MOORE LLP
Acknowledgements
ii
DELFINO E ASSOCIATI WILLKIE FARR & GALLAGHER LLP
DITTMAR & INDRENIUS
DRYLLERAKIS & ASSOCIATES
ELLEX
FENXUN PARTNERS
HARNEYS
HENGELER MUELLER
HEUKING KÜHN LÜER WOJTEK
ISOLAS
KBH KAANUUN
KEMPHOOGSTAD, S.R.O.
KIM & CHANG
KINSTELLAR, S.R.O., ADVOKÁTNÍ KANCELÁŘ
KLART SZABÓ LEGAL LAW FIRM
LEGAL ATTORNEYS & COUNSELORS
LETT LAW FIRM P/S
MAKES & PARTNERS LAW FIRM
MATTOS FILHO, VEIGA FILHO, MARREY JR E QUIROGA ADVOGADOS
MNKS
MORAVČEVIĆ VOJNOVIĆ I PARTNERI IN COOPERATION WITH SCHÖNHERR
MOTIEKA & AUDZEVIČIUS
NISHIMURA & ASAHI
OSLER, HOSKIN & HARCOURT LLP
Acknowledgements
iii
PÉREZ BUSTAMANTE & PONCE
POPOVICI NIȚU & ASOCIAȚII
ROJS, PELJHAN, PRELESNIK & PARTNERS
RUBIO LEGUÍA NORMAND
RUSSIN, VECCHI & HEREDIA BONETTI
S HOROWITZ & CO
SCHELLENBERG WITTMER LTD
SCHINDLER RECHTSANWÄLTE GMBH
SELVAM & PARTNERS
SEYFARTH SHAW LLP
SLAUGHTER AND MAY
STRELIA
SYCIP SALAZAR HERNANDEZ & GATMAITAN
TORRES, PLAZ & ARAUJO
URÍA MENÉNDEZ
UTEEM CHAMBERS
VON WOBESER Y SIERRA, SC
WEERAWONG, CHINNAVAT & PEANGPANOR LTD
WH PARTNERS
WILSON SONSINI GOODRICH & ROSATI
v
Editor’s Preface .................................................................................................xiii Mark Zerdin
Chapter 1 EU OVERVIEW .........................................................................1 Mark Zerdin
Chapter 2 EU COMPETITION OVERVIEW ..........................................11 Götz Drauz and Michael Rosenthal
Chapter 3 EUROPEAN PRIVATE EQUITY .............................................19 Thomas Sacher
Chapter 4 US ANTITRUST ......................................................................32Scott A Sher, Christopher A Williams and Bradley T Tennis
Chapter 5 CROSS-BORDER EMPLOYMENT ASPECTS OF INTERNATIONAL M&A .......................................................53
Marjorie Culver, Darren Gardner, Ming Henderson, Dominic Hodson and Peter Talibart
Chapter 6 M&A LITIGATION .................................................................67Mitchell A Lowenthal, Roger A Cooper and Matthew Gurgel
Chapter 7 AUSTRALIA .............................................................................74Braddon Jolley, Sandy Mak and Jaclyn Riley-Smith
Chapter 8 AUSTRIA ..................................................................................87Clemens Philipp Schindler
Chapter 9 BAHRAIN ................................................................................97Haifa Khunji and Natalia Kumar
CONTENTS
vi
Contents
Chapter 10 BELGIUM ..............................................................................110Olivier Clevenbergh, Gisèle Rosselle and Carl-Philip de Villegas
Chapter 11 BRAZIL...................................................................................122Moacir Zilbovicius and Rodrigo Ferreira Figueiredo
Chapter 12 BRITISH VIRGIN ISLANDS ................................................132Jacqueline Daley-Aspinall and Sarah Lou Rockhead
Chapter 13 CANADA ................................................................................143Robert Yalden, Emmanuel Pressman and Jeremy Fraiberg
Chapter 14 CAYMAN ISLANDS ..............................................................158Marco Martins
Chapter 15 CHINA ...................................................................................173Lu Yurui and Ling Qian
Chapter 16 COLOMBIA ...........................................................................187Sergio Michelsen Jaramillo
Chapter 17 COSTA RICA .........................................................................203John Aguilar Jr and Alvaro Quesada
Chapter 18 CYPRUS .................................................................................211Nancy Ch Erotocritou
Chapter 19 CZECH REPUBLIC ...............................................................218Lukáš Ševčík, Jitka Logesová and Bohdana Pražská
Chapter 20 DENMARK ............................................................................225Sebastian Ingversen and Nicholas Lerche-Gredal
Chapter 21 DOMINICAN REPUBLIC ....................................................236María Esther Fernández A de Pou, Mónica Villafaña Aquino and Laura Fernández-Peix Perez
vii
Contents
Chapter 22 ECUADOR .............................................................................246Diego Pérez-Ordóñez
Chapter 23 ESTONIA ...............................................................................257Sven Papp and Sven Böttcher
Chapter 24 FINLAND...............................................................................269Jan Ollila, Wilhelm Eklund and Jasper Kuhlefelt
Chapter 25 FRANCE .................................................................................281Didier Martin and Hubert Zhang
Chapter 26 GERMANY .............................................................................296Heinrich Knepper
Chapter 27 GIBRALTAR ...........................................................................309Steven Caetano
Chapter 28 GREECE .................................................................................321Cleomenis G Yannikas, Sophia K Grigoriadou and Vassilis S Constantinidis
Chapter 29 HONG KONG .......................................................................334Jason Webber
Chapter 30 HUNGARY .............................................................................344Levente Szabó and Klaudia Ruppl
Chapter 31 ICELAND ...............................................................................360Hans Henning Hoff
Chapter 32 INDIA .....................................................................................368Justin Bharucha
Chapter 33 INDONESIA ..........................................................................386Yozua Makes
Contents
viii
Chapter 34 ISRAEL ...................................................................................400Clifford Davis and Keith Shaw
Chapter 35 ITALY ......................................................................................410Maurizio Delfino
Chapter 36 JAPAN .....................................................................................422Hiroki Kodate and Masami Murano
Chapter 37 KENYA ...................................................................................431Joyce Karanja-Ng’ang’a, Wathingira Muthang’ato and Felicia Solomon Nyale
Chapter 38 KOREA ...................................................................................442Jong Koo Park, Bo Yong Ahn, Sung Uk Park and Young Min Lee
Chapter 39 LITHUANIA ..........................................................................457Giedrius Kolesnikovas and Michail Parchimovič
Chapter 40 LUXEMBOURG ....................................................................465Marie-Béatrice Noble, Raquel Guevara, Stéphanie Antoine
Chapter 41 MALAYSIA .............................................................................479Rosinah Mohd Salleh and Norhisham Abd Bahrin
Chapter 42 MALTA ...................................................................................491James Scicluna
Chapter 43 MAURITIUS ..........................................................................503Muhammad Reza Cassam Uteem and Basheema Farreedun
Chapter 44 MEXICO ................................................................................513Luis Burgueño and Andrés Nieto
Chapter 45 MONTENEGRO ...................................................................523Slaven Moravčević and Dijana Grujić
Contents
ix
Chapter 46 MYANMAR ............................................................................533Krishna Ramachandra and Benjamin Kheng
Chapter 47 NETHERLANDS ...................................................................544Carlos Pita Cao and François Koppenol
Chapter 48 NIGERIA ................................................................................557Lawrence Fubara Anga
Chapter 49 NORWAY ...............................................................................562Ole K Aabø-Evensen
Chapter 50 PANAMA ................................................................................600Andrés N Rubinoff
Chapter 51 PERU ......................................................................................611Emil Ruppert
Chapter 52 PHILIPPINES .........................................................................621Rafael A Morales, Philbert E Varona, Hiyasmin H Lapitan and Patricia A Madarang
Chapter 53 PORTUGAL ...........................................................................630Francisco Brito e Abreu and Joana Torres Ereio
Chapter 54 ROMANIA .............................................................................643Andreea Hulub, Ana-Maria Mihai and Vlad Ambrozie
Chapter 55 RUSSIA ...................................................................................657Scott Senecal, Yulia Solomakhina, Polina Tulupova, Yury Babichev and Alexander Mandzhiev
Chapter 56 SERBIA ...................................................................................675Matija Vojnović and Luka Lopičić
Chapter 57 SINGAPORE ..........................................................................685Lim Mei and Lee Kee Yeng
Contents
x
Chapter 58 SLOVENIA .............................................................................694David Premelč, Bojan Šporar and Mateja Ščuka
Chapter 59 SOUTH AFRICA ...................................................................705Ezra Davids and Ashleigh Hale
Chapter 60 SPAIN .....................................................................................716Christian Hoedl and Javier Ruiz-Cámara
Chapter 61 SWITZERLAND ....................................................................732Lorenzo Olgiati, Martin Weber, Jean Jacques Ah Choon, Harun Can and David Mamane
Chapter 62 THAILAND ...........................................................................745Pakdee Paknara and Pattraporn Poovasathien
Chapter 63 TURKEY .................................................................................753Emre Akın Sait
Chapter 64 UNITED ARAB EMIRATES..................................................762DK Singh and Stincy Mary Joseph
Chapter 65 UNITED KINGDOM ...........................................................774Mark Zerdin
Chapter 66 UNITED STATES ..................................................................793Richard Hall and Mark Greene
Chapter 67 VENEZUELA .........................................................................834Guillermo de la Rosa, Juan D Alfonzo, Nelson Borjas E, Pedro Durán A and Maritza Quintero M
Chapter 68 VIETNAM ..............................................................................847Hikaru Oguchi, Taro Hirosawa, Ha Hoang Loc
Contents
xi
Appendix 1 ABOUT THE AUTHORS .....................................................857
Appendix 2 CONTRIBUTING LAW FIRMS’ CONTACT DETAILS .....905
xiii
EDITOR’S PREFACE
By a number of measures, it could be argued that it has been some time since the outlook for the M&A market looked healthier. The past year has seen a boom in deal making, with many markets seeing post-crisis peaks and some recording all-time highs. Looking behind the headline figures, however, a number of factors suggest deal making may not continue to grow as rapidly as it has done recently.
One key driver affecting global figures is the widely expected rise of US interest rates. Cheap debt has played a significant part in the surge of US deal making in the first few months of 2015, and the prospects of a rate rise may have some dampening effects. However, the most recent indications from the Federal Reserve have suggested that any rise will be gradual and some market participants have pushed back predictions for the first rate rise to December 2015. Meanwhile, eurozone and UK interest rates look likely to remain low for some time further.
The eurozone returned to the headlines in June as the prospect of a Greek exit looked increasingly real. Even assuming Greece remains in the euro (as now seems likely), the crisis has severely damaged the relationship between Greece and its creditors. The brinksmanship exhibited by all parties means that meaningful progress cannot occur except at the conclusion of a crisis: the idea that reform will benefit Greece has been lost and each measure extracted by creditors is couched as a concession. However, while the political debate has become ever more fractious, the market’s response to the crisis has been relatively sanguine. This is largely a result of the fact that the volume of Greek debt is no longer in the market, but in the hands of institutions. But it is also a sign of the general market recovery and expectations that major economies will continue to grow.
Perhaps one of the more interesting emerging trends in the last year is the interplay between growth and productivity. Some commentators have suggested that the recent rise in deal making is a symptom of a climate in which businesses remain reluctant to invest in capital and productivity. Pessimistic about the opportunities for organic growth, companies instead seek to grow profits through cost savings on mergers. It is difficult to generalise about such matters: inevitably, deal drivers will vary from industry to industry, from market to market. However, if synergies have been the principal motivation in
Editor’s Preface
xiv
much of the year’s deal making (it certainly has been in a number of large-cap deals) then it may be that the market is a little farther from sustainable growth than some would like to think.
I would like to thank the contributors for their support in producing the ninth edition of The Mergers & Acquisitions Review. I hope that the commentary in the following chapters will provide a richer understanding of the shape of the global markets, together with the challenges and opportunities facing market participants.
Mark ZerdinSlaughter and MayLondonAugust 2015
143
Chapter 13
CANADA
Robert Yalden, Emmanuel Pressman and Jeremy Fraiberg1
I OVERVIEW OF M&A ACTIVITY
The Canadian M&A market had a strong year in 2014, recovering significantly from a decline in activity levels in the prior two years. Some 2,869 deals were announced in 2014, up 13 per cent from 2013 and back on par with activity levels in 2010 and 2011. The total value of announced transactions also grew compared to 2013, surging to C$238 billion, a 23 per cent year-on-year increase and its highest level in the past five years. In general terms, 2014 was notable for the resurgence of mega-deals (over C$1 billion), but also for strong and sustained levels of mid-market activity. For a third year in a row, the most active sector by deal count was real estate, with 465 transactions announced. However, the most active sector by deal value was the consumer discretionary sector. Driven by several noteworthy mega-deals, such as the acquisition of Tim Hortons by Brazilian private equity group 3G Capital for C$14.6B in a transaction that combined Tim Hortons with Burger King, a 3G portfolio company, to form NYSE-listed Restaurant Brands International, and the acquisition by TSX-listed online gaming company Amaya Inc of UK-based Rational Group for C$5.8 billion, the consumer discretionary sector generated some 280 transactions worth C$59 billion. The energy sector remained another strong source of M&A activity in 2014 and spawned the year’s largest transaction – the acquisition of Talisman Energy Inc by Spanish energy giant Repsol, SA for C$15.7 billion.
1 Robert Yalden, Emmanuel Pressman and Jeremy Fraiberg are corporate law partners at Osler, Hoskin & Harcourt LLP. The authors would like to thank their partners, Patrick Marley, Kimberley Wharram and Shuli Rodal, as well as Chris Greenaway (an associate in Osler’s Montreal office), for their valuable assistance with the preparation of this chapter. Data on M&A activity cited in this article is sourced from Financial Post Crosbie: Mergers & Acquisitions in Canada.
Canada
144
Mid-market transactions continued to be essential to the Canadian M&A market: in 2014, transaction volume for deals under C$250 million represented 90 per cent of all the transactions with disclosed values. But this spike in overall deal value was driven by very large deals, as some 42 transactions (with an aggregate value of C$153 billion) came in over C$1 billion (in contrast with 29 mega-deals in 2013). Cross-border transactions also helped to make 2014 a particularly strong year for Canadian M&A. Not only did 38 per cent of all transactions in 2014 involve a foreign target or buyer (with Canadian outbound acquisitions outnumbering foreign acquisitions of Canadian businesses by a ratio of 1.8:1), but all of the 10 largest transactions in 2014 were also cross-border deals. In that regard, 2014 continued to reflect a trend observed in recent years whereby Canadian companies seek growth opportunities through acquisitions outside of Canada. It will be interesting to see whether the weakening Canadian dollar will have any impact on that trend in 2015. Finally, it is worth noting that private equity and pension funds were once again active in deploying their significant cash reserves: for example, the Caisse de dépôt et placement du Québec teamed up with BC Partners as part of a consortium to take US retailer PetSmart, Inc private for C$10.3 billion.
After rebounding strongly in 2014, Canadian M&A activity experienced a modest decline in the first quarter of 2015, as deal announcements dropped 7 per cent from the previous quarter. The value of announced transactions also declined to its lowest level since the first quarter of 2014 (falling 46 per cent from the previous quarter). While the decreased activity was relatively widespread – affecting over half of all industry sectors – it is not abnormal for Canadian M&A activity to start the year with a decline relative to the fourth quarter of the previous year, only to regain momentum thereafter. The cash-rich corporate balance sheets, low financing costs and a strong US economy that led to M&A growth in 2014 continue to be positive market forces, giving M&A practitioners reasons to remain confident about there being a steady pipeline of deal activity in 2015, although low commodity prices may act as a counterweight.
II GENERAL INTRODUCTION TO THE LEGAL FRAMEWORK FOR M&A
Although M&A activity in 2014 and early 2015 involved a range of public and private company transactions, M&A regulatory developments were most prevalent in the public company context. In contrast, private M&A is predominantly the result of negotiated acquisitions governed by the terms of individual contracts. While contracts will necessarily vary with the circumstances of every transaction, in general, the overall framework of a negotiated acquisition agreement is consistent with that seen in other jurisdictions such as the United States; accordingly, they will be familiar to many non-Canadian M&A practitioners.
While several different methods to acquire control of a Canadian public company exist, typically Canadian M&A transactions are consummated by way of a takeover bid or a plan of arrangement.
Canada
145
i Takeover bid
A takeover bid is a transaction by which the acquirer makes an offer directly to the target company’s shareholders to acquire their shares. Although the board of directors of the target company has a duty to consider the offer and an obligation to make recommendations to its shareholders as to the adequacy of the offer, the takeover is ultimately accepted (or rejected) by the shareholders. Since the support of the board of directors is not legally required to effect a takeover bid, as a practical matter, a bid is the only structure available to effect an unsolicited or hostile takeover. The conduct and timing of a takeover bid, and the delivery and disclosure requirements of offer documents, are regulated by provincial securities laws.
A takeover is the substantive equivalent to a tender offer under US securities laws. There are, however, several key differences between the takeover bid and tender offer regimes. Among them, the determination of whether a takeover bid has been made is based on an objective, bright line test: unless exempted from the takeover bid rules, a formal takeover bid is required to be made to all shareholders when a person offers to acquire 20 per cent or more of the outstanding voting or equity securities of the target company. Moreover, where a bid is made for cash consideration or has a cash component, the bidder must make adequate arrangements prior to launching the bid to ensure that the required funds are available to make full payment for the target company’s shares. This means that financing conditions are not included in takeover bids in Canada.
ii Plan of arrangement
A plan of arrangement is a voting transaction because, unlike a bid, a meeting of the target company’s shareholders is called by the board of directors and held to vote on the proposed acquisition. An arrangement is governed by the corporation laws of the target company’s jurisdiction of incorporation and requires the approval of the target’s board of directors and shareholders. It is the substantive equivalent to a scheme of arrangement under English law. Notably, unlike any other transaction structure, an arrangement is a court-supervised process and must be judicially determined to be ‘fair and reasonable’ to be approved by a court.
Arrangements are often a preferred transaction structure due to their substantial flexibility. In particular, arrangements are not circumscribed by the takeover bid rules or the structural parameters set by other forms of corporate transactions (e.g., amalgamations and capital reorganisations) and, importantly, arrangements facilitate structuring, strategic and tax-planning objectives by enabling an acquirer (and a target) to set out the precise series of steps that must occur prior to, and at the effective time of, an arrangement.
iii Other transaction structures
The other common forms of M&A transaction structure are a statutory amalgamation and a capital reorganisation (also governed by the corporation laws of the target’s jurisdiction of incorporation). An amalgamation is a close equivalent to a ‘merger’ under the state corporation laws in the United States. There is, however, no legal concept of a merger under Canadian corporate law (whereby one corporation merges into another, with the former disappearing and ceasing to have any legal identity, and the latter surviving
Canada
146
and continuing in existence). Rather, under Canadian corporate law, the amalgamating corporations effectively combine to form a single corporation. The rights, assets and liabilities of each amalgamating corporation continue as the rights, assets and liabilities of the amalgamated corporation. A capital reorganisation involves an amendment to the share capital of the charter documents of a target company that results in a mandatory transfer of the target company’s shares to the acquirer in exchange for cash or shares of the acquirer.
iv Protection of minority shareholders in conflict of interest transactions
In Canada, there are a significant number of public companies with controlling shareholders and corporate groups with multiple public company members. Transactions with controlling shareholders, directors or senior management, or involving members of the same corporate group, often raise conflict of interest concerns that require consideration where a related party has an informational advantage over other security holders. In response to this distinct feature of the Canadian corporate economy, securities regulators have established special rules applicable to insider bids, self-tender transactions and certain types of related-party transactions and business combinations.2 These rules are designed to protect minority shareholders by requiring enhanced disclosure, minority shareholder approval and formal valuations for such transactions in certain prescribed circumstances.
v Defensive tactics and shareholder rights plans
The most common defensive tactic available to Canadian companies is a shareholder rights plan or ‘poison pill’. Rights plans are well established in Canada and have many features in common with their US counterparts. Since they must be approved by shareholders within six months of adoption if they are to remain in place, institutional shareholders, proxy advisory firms and corporate governance advocates have had considerable influence over their terms, which have become fairly standardised in both form and substance. Although similar in form, Canadian pills are less effective and less durable than US pills, due in large measure to differences in the way disputes over their application have been litigated in the two countries.
In the United States, challenges to shareholder rights plans appear before the courts, which apply a directors’ duties analysis in determining whether a board can implement and maintain a plan. In Canada, the provincial securities regulators have typically exercised their jurisdiction to issue cease-trade orders to invalidate poison pills. The regulators weigh the interest of shareholders in not being deprived of the ability to decide whether to accept a bid. Ultimately, it has been a question of when, not if, the pill should be struck down.3 This means that in Canada there have only been isolated
2 These rules are set out in Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions.
3 National Policy 62-202 – Defensive Tactics of the Canadian securities regulators provides, in effect, that it is not permissible for the board of directors of a target company to engage in defensive measures that have the effect of denying the shareholders the ability to decide
Canada
147
occasions when a Canadian board of directors could ‘just say no’ for any significant length of time. Generally speaking, once a Canadian target company is put in play, a change of control transaction is very likely to be completed (either by the initial bidder or a white knight). As a consequence, the Canadian takeover bid landscape has historically been considered to be distinctly more ‘bidder-friendly’ than its US counterpart. However, as discussed below, the provincial securities regulators have proposed a number of potentially fundamental changes, which may have a significant impact on the use of poison pills.
vi Stock exchange requirements
Most Canadian public companies are listed for trading on the Toronto Stock Exchange (TSX), which has its own rules that govern listed companies. Among other things, in a share-for-share transaction in which share capital of the acquirer is proposed to be issued to target company shareholders as acquisition currency, it is necessary to consider whether buy-side shareholder approval is required (in addition to sell-side shareholder approval customarily required to be obtained in M&A transactions). Under the TSX rules, listed issuers are required to obtain buy-side shareholder approval for public company acquisitions that would result in the issuance of more than 25 per cent of the outstanding shares of the acquirer on a non-diluted basis. In calculating the number of shares issued in payment of the purchase price for an acquisition, any shares issuable upon a concurrent private placement of securities upon which the acquisition is contingent or otherwise linked must be included. Accordingly, the buy-side shareholder approval requirement is equally applicable in the context of a cash acquisition transaction where the cash is raised in a concurrent or linked private placement financing transaction.
III DEVELOPMENTS IN CORPORATE AND TAKEOVER LAW AND THEIR IMPACT
i Update on proposed changes to early warning reporting system
In the last edition of The Mergers & Acquisitions Review, we noted that the rise of shareholder activism, among other things, had led the Canadian Securities Administrators (CSA) to propose significant amendments to the early warning reporting requirements relating to the acquisition of securities of public companies. In 2014, the CSA provided an update on the proposed reforms, which were originally published for comment in March 2013. Most noteworthy is the CSA’s decision not to proceed at this time with their original proposal to reduce the early warning reporting threshold from 10 per cent to 5 per cent, which would have put Canada in line with the reporting threshold in the United States and most other countries. Activist shareholders and hostile bidders will therefore continue to be able to accumulate positions of up to 9.9 per cent without
for themselves whether to accept or reject a takeover bid, thus frustrating the takeover bid process. Accordingly, the securities regulatory response to a takeover bid is principally based on a shareholder primacy model, which does not typically defer to the business judgement of directors in considering whether certain defensive tactics are appropriate.
Canada
148
having to make public disclosure, maintaining an advantage these shareholders and bidders have in respect of their activities in Canada as compared to the United States. The CSA is also not proceeding with their original proposal to include ‘equity equivalent derivatives’ – equity derivative positions that are substantially equivalent in economic terms to conventional equity holdings – for the purposes of determining whether the early warning reporting threshold has been exceeded. The CSA’s original proposal sought to provide greater transparency as to potential ‘hidden ownership’ positions accumulated by sophisticated investors through the use of derivatives to achieve economic exposure to public companies while avoiding public disclosure.
The CSA based its decision on comments received from a number of market participants – mostly investors and advisers, as relatively few issuers submitted comments – which raised various concerns about the potential unintended consequences of the proposed reforms. Other concerns expressed and considered by the CSA included (1) the unique features of the Canadian market versus other markets, (2) the complexity of applying new early warning reporting triggers in respect of ‘equity equivalent derivatives’ and (3) the administrative and compliance burden associated with implementing additional reporting obligations. That said, the CSA intends to publish final amendments to the early warning regime in 2015 that are expected to implement certain technical amendments, such as requiring disclosure of 2 per cent decreases in ownership, requiring disclosure when a shareholder’s ownership interest falls below ten per cent, and making the alternative monthly reporting system (like the US 13G reporting regime) unavailable to eligible institutional investors that intend to engage in certain kinds of proxy solicitation. This last change will move the Canadian regime more in line with the United States.
ii Securities regulators propose amendments to takeover bid regime
In March 2015, the CSA published for comment significant amendments to the takeover bid regime in Canada. Collectively, they represent the most important proposed changes to the Canadian takeover bid regime since 2001. Under the proposed amendments, all non-exempt takeover bids (including partial bids) would be subject to three important new requirements.
First, bids would be subject to a 50 per cent minimum tender requirement of the outstanding securities of the class of shares that are subject to the bid, excluding those beneficially owned, or over which control or direction is exercised, by the bidder and its joint actors.
Second, following the satisfaction of the 50 per cent minimum tender requirement and the satisfaction or waiver of all other terms and conditions, bids would be required to be extended for an additional ten-day period.
Finally, bids would be required to remain open for a minimum of 120 days, subject to the two following exceptions: (1) the target board of directors would be entitled to issue a ‘deposit period news release’ regarding either a proposed or commenced bid that would allow for an initial bid period of more than 35 days but less than 120 days, in which case all other subsequent or outstanding bids would also be entitled to the shorter minimum deposit period starting from the date on which the other bid is made; and (2) if the news release includes information regarding the target entering into an ‘alternative transaction’ such as a friendly arrangement, then the subsequent or outstanding bids
Canada
149
would be entitled to a minimum 35-day deposit period starting from the date on which the other bid is made.
If adopted, the proposed amendments would provide target directors more time to respond to an unsolicited takeover bid and consider alternatives to the bid. Currently, rights plans are generally cease-traded by securities regulators within 45 to 60 days of the commencement of the offer, although there have been variations in recent poison pill decisions. By contrast, under the proposed regime target directors would have at least 120 days to consider and respond to an unsolicited bid. One consequence of giving target issuers more time to respond to a takeover bid may be to increase the costs and risks for hostile bidders. Higher financing costs, for example, as well as the greater likelihood of an interloper, may add incremental cost and risk from a hostile bidder’s perspective.
Despite these potential increased costs and risks, however, a hostile bid would remain easier to complete in Canada than in the United States. Hostile bidders in Canada would be assured that their offer can be accepted by shareholders after 120 days, whereas rights plans in the United States can generally only be removed following a successful proxy contest to replace a majority of the directors of the target issuer board – a process that can take well over a year where a target issuer has a staggered board of directors.
A notable omission from the CSA’s proposed amendments is how rights plans will be treated both pending and following their adoption. This is of particular interest considering that the proposed amendments arose out of competing proposals from the CSA and Autorité des marchés financiers of Québec (AMF) on rights plans and defensive tactics more generally, which we discussed in the last two editions of The Mergers & Acquisitions Review. As we pointed out in prior years, the AMF and the balance of the CSA’s members have previously aired different perspectives on the most appropriate approach to the regulation of defensive tactics, which may account for the CSA’s silence on this issue in its latest round of proposed amendments. It is unclear whether and when the CSA will provide guidance to the market on this important issue.
IV FOREIGN INVOLVEMENT IN M&A TRANSACTIONS
Canada views itself as generally open to foreign investment. While this is generally true for the majority of foreign investments, Canada continues to review on a mandatory basis certain foreign investments to ensure they are of ‘net benefit’ to Canada. It is also increasingly apparent that a more restrictive approach applies in the case of proposed foreign investments that involve SOEs.
With respect to foreign investment review, approval is required under Canada’s foreign investment review legislation, the Investment Canada Act (ICA), for certain large transactions that confer control over Canadian businesses to non-Canadians to ensure they are likely to be of ‘net benefit’ to Canada.
Effective 24 April 2015, long-awaited new thresholds for determining whether net benefit review under the ICA is required took effect. Under the new rules, the threshold for review of WTO private sector direct investment in Canadian businesses outside of the cultural sector is C$600 million based on ‘enterprise value’ rather than C$369 million in asset book value as was previously the case. The threshold will increase to C$800 million in 2017, then to C$1 billion in 2019, after which it will be indexed annually. The net
Canada
150
benefit review threshold for non-WTO acquisitions, acquisitions involving state-owned enterprises (SOEs) and acquisitions of cultural businesses will continue to be based on asset book value without change to the applicable thresholds.
The change from an asset-based threshold to an enterprise value threshold will have a number of important implications for foreign investments in Canada, including increased complexity in determining whether a transaction is subject to ICA net benefit review and a greater potential for the ICA process to provide advantages to certain bidders over others for the same target.
Enterprise value in the case of an acquisition of a publicly traded entity is determined based on the target’s market capitalisation, plus its total liabilities excluding its operating liabilities, minus its cash and cash equivalents. Market capitalisation is to be calculated by using the average daily closing price of the target’s quoted equity securities on the entity’s principal market (i.e., where the greatest volume of trading occurred during the trading period) over the most recent 20 days of trading ending before the first day of the month that immediately precedes the month in which the application for review or notification is filed. In addition if there are unlisted equity securities, the fair market value of such securities, as determined by the board of directors or other person authorised to make that determination, is to be included.
There are numerous additional rules for private company acquisitions, partial acquisitions and asset acquisitions, each of which require considerable valuation analysis. As is currently the case, direct acquisitions of Canadian businesses where the thresholds are not met, and indirect WTO investments, including by SOEs, are subject to notification only and are not subject to review. Such transactions may still be subject to review on national security grounds (see below). Indirect investments by non-WTO investors in non-WTO controlled targets or indirect acquisitions of cultural businesses by any investor are subject to review post-closing where the book value of assets is C$50 million or more (or C$5 million in certain cases).
While investments by SOEs have for some time been subject to more vigorous review, the new rules for the first time subject SOE and private sector investment to different thresholds. As a result, for example, it is possible that a private sector investment may trigger a review as a result of the target’s enterprise value exceeding the C$600 million threshold, while that same investment by a foreign SOE would not trigger a review if the book value of the target’s assets is below the C$369 million asset value threshold (although the federal government could turn to the national security regime to review the investment if it had concerns), or vice versa.
The increase in the threshold for ICA review is consistent with Canada’s approach to welcoming foreign investment for private parties, although it is not clear that the burden on foreign investors will actually decrease immediately as a result of the changes as there will be some transactions that would not be subject to review based on the current threshold of C$369 million in book value of assets that will exceed the C$600 million enterprise value threshold.
In general, Canada has exercised restraint in disapproving foreign investment on net benefit grounds. Only two major transactions outside the cultural sector (the Alliant/MacDonald, Dettwiler case in 2008 and the BHP/Potash case in 2010) have been disapproved after failing to meet the net benefit test under the ICA since its enactment in 1985. In each case there were a number of specific and somewhat unique factors
Canada
151
that likely contributed to the outcome. However, both cases of disapproval were recent and have made clear that the ICA review process has become more high profile and politicised. Accordingly, it is important for foreign investors to carefully consider their strategies for communicating the benefits to Canada of proposed investments that are subject to the ICA.
With respect to proposed investments from SOEs, there have been clear indications from the government (in addition to the decision to preserve the lower review threshold) that a more restrictive approach will be taken, particularly in the case of proposed control investments by SOEs in the oil sands as well as in leading Canadian companies in other sectors.
In 2012, two significant acquisitions by non-Canadian SOEs were proposed, namely Progress Energy Resources Corp’s (Progress) C$6 billion acquisition by Malaysian government-controlled PETRONAS and Nexen Inc’s (Nexen) C$15.1 billion acquisition by China National Offshore Oil Corporation. Both transactions ultimately received ministerial approval under the ICA on 7 December 2012. However, Prime Minister Harper indicated that, going forward, the Minister will find the acquisition of control of a Canadian oil-sands business by a foreign SOE to be of net benefit, only in exceptional circumstances; control investments in leading Canadian companies in other industry sectors will generally not be permitted; and more rigorous guidelines to assess the ‘net benefit to Canada’ that would result from SOE investments will be applied.4
Furthermore, subsequent amendments to the ICA give the government greater discretion in determining whether a foreign investor has a sufficient connection to an SOE that it should be treated under the new SOE rules, and whether an investment will confer ‘control’ on an SOE based on indicia of ‘control in fact’.5 Accordingly, while there is still meaningful investment opportunity for SOEs in Canada (and particularly minority investments) the investment climate for SOEs in Canada is significantly more restrictive than for private investors.6
Although the pace of SOE investment slowed following the government of Canada’s December 2012 announcement, of a more restrictive approach to investment by SOEs in Canada. SOEs continue to make significant investments in Canada. For example, in March 2014, Talisman Energy sold Montney acreage to Progress Energy for C$1.5 billion. In April 2014, Thai SOE PTTEP secured approval from the Minister of Industry to acquire the remaining 60 per cent interest (that it did not already own) in the Thornbury, Hangingstone and South Leismer areas in the Alberta oil sands from Statoil, a Norwegian SOE. In October 2014, Chevron Corp announced that it had agreed to
4 ‘Statement by the Prime Minister of Canada on foreign investment’ (7 December 2012), online: Prime Minister of Canada www.pm.gc.ca/eng/media.asp?category=3&id=5195.
5 Industry Canada, Guidelines — Investment by state-owned enterprises — Net benefit assessment, online: Industry Canada www.ic.gc.ca/eic/site/ica-lic.nsf/eng/lk00064.html#p2.
6 For further information refer to: Michelle Lally et al, ‘New Rules for Foreign Investment by State-Owned Enterprises - Do They Strike the Right Balance?’ (9 December 2012), online: Osler www.osler.com/NewsResources/New-Rules-for-Foreign-Investment-by-State-Owned-Enterprises-Do-They-Strike-the-Right-Balance/.
Canada
152
sell 30 per cent of its interest in its Duvernay shale operations to a subsidiary of state-run Kuwait Petroleum Corp for US$1.5 billion.
In addition to the ICA regime for ‘net benefit’ review of certain foreign investments, the Canadian government also has the right to review on a discretionary basis, and prohibit or impose conditions on, a broad range of investments by non-Canadians on national security grounds. This regime, in effect since 2009, puts the ICA on a similar footing with equivalent statutory provisions in many other jurisdictions, including the United States. The scope of foreign investments that may be subject to review on national security grounds is much broader than that subject to a ‘net benefit’ review. The test applied is whether an investment is ‘injurious to national security’. To date, the government has not issued any guidelines to assist investors in understanding whether their investments may be ‘injurious to national security’ and the phrase itself is not defined in the ICA.
There is limited information on the number of transaction that are subject to review on national security grounds. It appears that, in mid-2009, the government took steps to prohibit George Forrest International Afrique from acquiring Forsys Metals Corp (a Canadian publicly traded company with uranium interests in Africa). In June 2013, Orascom Telecom Holding S.A.E. (Orascom), a subsidiary of Vimpelcom Ltd, announced that it was withdrawing its application under the ICA to acquire control of Globalive Wireless Management Corp and its subsidiary, Wind Mobile (Wind). Although Orascom gave no specific reasons for its withdrawal and the Minister did not issue a final decision under the ICA, media reports suggested that the proposed transaction had been abandoned because it had become subject to a national security review. Media reports also suggested that a contemplated sale of BlackBerry Ltd to Beijing-based computer manufacturer Lenovo Group Ltd in late 2013 did not formally proceed because the Canadian government informed the parties that it would disallow the transaction on national security grounds.
In October 2013, the Canadian government rejected Accelero Capital Holdings’ proposed acquisition of the Allstream division of Manitoba Telecom Services Inc, which represented the first transaction to be expressly disallowed on national security grounds since the creation of the national security regime in 2009.
V SIGNIFICANT TRANSACTIONS, KEY TRENDS AND HOT INDUSTRIES
i Strategic dealmaking
The resurgence in M&A activity in 2014 was driven in important respects by strategic deal making and investor receptivity to large scale strategic acquisitions. Significant strategic transactions in 2014 and early 2015 included deals in the consumer discretionary, energy and financial sectors, such as the acquisition of Tim Hortons by Brazilian private equity group 3G Capital for C$14.6 billion and the C$15.7 billion Talisman Energy deal also referred to at the beginning this article, as well as Encana’s C$7.8 billion purchase of Athlon Energy and Royal Bank of Canada’s acquisition of US-based City National Corporation for C$3.2 billion. Interestingly, as has also been the case in the United States, the buy-side stock price after announcement in a number of recent strategic transactions
Canada
153
in Canada increased on announcement of the transaction, evidencing investor appetite for strategic growth. Historically, sell-side stock prices have risen, while buy-side stock prices tended to dip due to factors such as dilution, hedging, deal risk and concerns about overpayment for a coveted asset.
ii Shareholder activism
Proxy contests and other forms of shareholder activism formed an important part of Canada’s M&A landscape in 2014. Activist initiatives continue to represent a cost-effective way in which to effect a change in corporate control as compared to committing the funds required to launch a hostile takeover bid. Activist initiatives can often be undertaken confidentially and thus the reputational risk of being associated with a failed deal can be potentially avoided. Further, higher (10 per cent) ‘early warning’ reporting requirements in Canada allow activists to engage in stealth accumulations and shield their investment intentions for a longer period of time than would be the case in the United States. Further, the absence of staggered boards in Canada gives activist shareholders the opportunity to achieve their objectives over a shorter period of time than is the case in jurisdictions where staggered boards are common. Not surprisingly, Canada has seen increasing levels of shareholder activism over the past couple of years by both domestic and US-based funds. Activists are also targeting larger companies, as evidenced by Carl Icahn’s investment in Talisman Energy, Jana Partners’ failed proxy battle for Agrium and, in 2014, Orange Capital’s investment in InnVest REIT, which resulted in activist nominees being placed on the board, and George Armoyan’s failed campaign against Sherritt International Corp.
VI FINANCING OF M&A: MAIN SOURCES AND DEVELOPMENTS
Canadian pension funds continue to represent very significant sources of capital and remained major players on the global investment landscape in 2014 and early 2015. US and Canadian private equity were also important players. All of these types of investors participated in many of the year’s most noteworthy transactions. For example, the Canada Pension Plan, together with the Canadian private equity group Onex Corporation, divested themselves of Dutch auto parts manufacturer Pinafore Holdings to the Blackstone Group for C$8.0 billion; the Caisse de dépôt et placement du Québec, as part of a consortium of capital groups that included BC Partners, took US retailer PetSmart private for C$10.3 billion; the Ontario Teachers’ Pension Plan and private equity firm Thoma Bravo jointly acquired Riverbed Technologies Inc for C$4.5 billion; and one of Canada’s largest pension investment managers, Public Sector Pension Investment Board, together with Brookfield Infrastructure Partners LP and others, acquired France’s TDF SAS for C$5 billion. Canadian pension funds also continued to focus on alternative asset allocation as an investment strategy. Pension funds have increased their direct investments in private equity, infrastructure and real estate as they continue to seek to align fund investment horizons with their long-term liability profile and reap the rewards of higher returns. In general, Canadian credit markets continued to be relatively robust due to low interest rates, with the result that acquisition financing
Canada
154
is generally readily available. Indeed, a significant number of strategic transactions in 2014 and early 2015 were financed exclusively with cash on hand and debt financing.
VII TAX LAW
Over the past year, there have been a number of developments in Canada relevant to M&A. In particular, proposed rules relating to international investment into Canada were reviewed, proposed rules related to spin-off transactions were introduced, and the long-standing position of the Canadian tax authorities related to certain foreign currency derivative transactions was challenged.
i Treaty shopping proposals
Canada continues to participate with the OECD and G20’s Action Plan on Base Erosion and Profit Shifting (the BEPS Plan) released in 2013 and aimed at curtailing perceived abuses of national tax systems by multinational enterprises. The BEPS Plan has included several discussion drafts on treaty shopping that focused on treaty-based solutions for setting out the circumstances in which tax treaty benefits should be allowed or denied.
The 2014 Canadian Federal Budget included a consultation on a proposed anti-treaty shopping rule. Unlike the BEPS Plan drafts, Canada’s 2014 proposal would have been enacted under Canadian domestic law and would have applied to Canada’s tax treaties generally where ‘one of the main purposes’ for undertaking a transaction was to obtain a benefit under a tax treaty with Canada. In August of 2014 Canada announced that after engaging in consultations on the proposed anti-treaty shopping measure, Canada will instead await further work by the OECD and G20 on the BEPS Plan.
The 2015 Canadian Federal Budget (2015 Budget) noted that Canada will proceed in this area in a manner that balances tax integrity and fairness with the competitiveness of Canada’s tax system. Specifically, the Government is committed to maintaining Canada’s advantage as an attractive destination for business investment.
ii Proposed changes to spin-off rules
The 2015 Budget included significant proposed changes to subsection 55(2) of the Income Tax Act (Canada), an anti-avoidance rule that taxes certain spin-off transactions as taxable gains rather than as intercorporate dividends that are effectively received tax-free. Very generally, subsection 55(2) applies if one of the purposes of the dividend was to effect a significant reduction in a capital gain on shares (except for the portion of such capital gain that is reasonably attributable to so-called ‘safe income’). Current subsection 55(2) does not apply to dividends that produce or increase a capital loss on shares. The proposed amendments to subsection 55(2) were intended to apply to circumstances where the payment of a dividend results in an unrealised capital loss on a share which is then used to shelter accrued gains on a different property. (This could be achieved, for example, by transferring, on a tax-deferred basis, a property on which there is an accrued gain to the corporation with the accrued loss on its shares and then selling the shares of such corporation.) The proposed amendments to subsection 55(2) also include provisions relating to stock dividends that are intended to allow subsection
Canada
155
55(2) to apply where a stock dividend has been used to shift value from one class of shares to another.
However, the proposed amendments are far broader than is necessary to address the limited circumstances described above. If the proposed amendments are enacted in their current form, subsection 55(2) would apply to any dividend if one of the purposes of the payment or receipt of the dividend is to effect either a significant reduction in the fair market value of any share or a significant increase in the cost of property held by the dividend recipient. Given the breadth of this test (including, in particular, the ‘one of the purposes’ standard), there is some concern that subsection 55(2) could apply to many dividends that are otherwise eligible for the inter-corporate dividend received deduction and that are not paid out of ‘safe income’. Submissions have been made by a number of taxpayers and their representatives on the overly broad wording of the proposed amendments to subsection 55(2), which the Department of Finance is taking under consideration. It is therefore possible that such proposed amendments will be narrowed prior to their enactment.
iii Gains and losses on derivative contracts
The Canadian Tax Court has recently released two significant decisions relating to the realization of gains and losses on foreign exchange derivative contracts. The cases are significant because, to date, there has been relatively little case law dealing with the tax treatment of gains and losses realised with respect to derivative contracts and the cases challenge some of the key administrative positions adopted by the Canadian tax authorities with respect to the tax treatment of derivative contracts.
In George Weston Limited v. The Queen, 2015 TCC 42 (‘Weston’), the court considered the circumstances under which the proceeds from the termination of a currency derivative may be treated as a capital gain (rather than ordinary income). (Only 50 per cent of capital gains are included in income.) The court rejected the CRA’s long-standing application of the linkage principle under which a gain on the settlement of a derivative contract could only be considered to be a capital gain if the derivative contract were closely linked to an identifiable underlying transaction that was on capital account. Here, the taxpayer had entered into currency swaps to protect against US/Canadian dollar currency fluctuations that affected the reported value of the taxpayer’s US operations in the equity section of its consolidated balance sheet. The court concluded that the currency swaps were not speculative transactions but were instead hedges in the sense that they offset a tangible economic risk faced by the taxpayer. The court further concluded that, because such economic risk was capital in nature and the currency swaps were closely linked to this capital item, the gain realised by the taxpayer on the termination of the currency swaps was a capital gain.
In Kruger Inc v. The Queen, 2015 TCC 119 (‘Kruger’), the issue was whether the taxpayer was entitled to mark-to-market its foreign currency option contracts or to treat them as inventory. The taxpayer carried on a business of speculating in foreign currency options that the court found to be separate from the taxpayer’s manufacturing business. The foreign currency options were subject to mark-to-market treatment under generally accepted accounting principles and the taxpayer argued that such treatment should apply
Canada
156
for tax purposes as well.7 Alternatively, the taxpayer argued that the foreign currency options should be considered to be inventory, which would allow the taxpayer to value it at the lower of cost and fair market value at the end of each taxation year. Based on the reasoning set out in certain past Supreme Court of Canada decisions, the court in Kruger concluded that the foreign currency options could not be subject to mark-to-market treatment but that they could be characterised as inventory. As a result, the taxpayer was entitled to value the foreign currency options at the lower of cost and fair market value at the end of each of its taxation years.
VIII COMPETITION LAW
Canada’s competition law merger review regime is, to a large extent, aligned with its US counterpart. Subject to certain exceptions, the Competition Act requires parties planning to undertake certain types of transactions that affect businesses with assets or sales revenue in Canada (even if only indirectly as a result of a transaction occurring principally outside Canada) to file a pre-merger notification with the Competition Bureau prior to completing a transaction. In general, a transaction is notifiable in the following circumstances:a ‘party size’ threshold, where the parties to the transaction, including affiliates, have
assets in Canada with an aggregate gross book value that exceeds C$400 million or aggregate gross revenues from sales in, from or into Canada that exceed C$400 million; and
b ‘transaction size’ threshold, where, for an acquisition of assets in Canada of an operating business, the aggregate value of those assets, or the gross revenues from sales in or from Canada generated from those assets, exceed C$86 million; or where, for an acquisition of voting shares of a corporation, the aggregate value of the assets in Canada of the corporation, or the gross revenues from sales in or from Canada generated from those assets, exceed C$86 million.
If the transaction is an acquisition of shares, an additional threshold requires that the voting interest of the purchaser post-transaction exceed 20 per cent for a public company or 35 per cent for a private company (or 50 per cent if the lower threshold is already exceeded).
Upon receipt of the parties’ filing, the Competition Bureau will conduct a substantive merger review to determine whether the proposed transaction will be ‘likely to prevent or lessen competition substantially’. The transaction may not be completed until the expiry of a 30-day waiting period, following which the parties can close provided the Commissioner has not exercised his discretion to extend the waiting period
7 The taxpayer acknowledged that the foreign currency options were not ‘mark-to-market’ property under the specific regime in the Income Tax Act (Canada) that requires certain properties to be subject to mark-to-market treatment for income tax purposes, but argued that, in the taxpayer’s case, the foreign currency options should be eligible for mark-to-market treatment under general principles, as would generally be the case for financial institutions.
Canada
157
by requiring the notifying parties to supply additional information (a supplemental information request or SIR). Upon the issuance of an SIR, the waiting period stops until a complete response has been submitted. Once the response to the SIR is submitted, a further 30-day period starts to run and the parties can close their transaction following its expiry unless the Commissioner challenges the transaction or obtains an injunction to prevent or delay closing, or the parties have agreed otherwise. The issuance of an SIR is typically reserved for transactions between competitors where there is a serious concern about a potential prevention or lessening of competition.
The Competition Act also provides a procedure pursuant to which transactions that do not give rise to significant substantive merger issues may be exempted from the pre-merger notification requirements and from substantive review. This procedure allows the Commissioner to issue an advance ruling certificate in cases where he is satisfied that he would not have sufficient grounds on which to seek an order from the Competition Tribunal in respect of a transaction.
The Commissioner has a general discretionary right to review (and challenge) on substantive competition law grounds any merger, including mergers that do not meet the thresholds for mandatory pre-merger notification, until one year after closing (unless this discretionary authority has been relinquished, which is rare). Where the Commissioner challenges a transaction, the Competition Tribunal may make an order prohibiting a merger, dissolving a completed merger, or requiring other remedial action such as divestitures.
IX OUTLOOK
Canada saw a significant increase in the volume of M&A activity in 2014 and the early part of 2015 suggests that this trend is likely to continue in the short term. Much will however continue to depend on whether activity levels and confidence in the United States also continue to grow. Moreover, Canada is dealing with concerns about the state of its natural resources sector in light of low commodity prices, including the recent and significant decrease in oil prices. We nevertheless anticipate that in 2015 we will continue to see more M&A transactions in furtherance of strategic growth.
857
Appendix 1
ABOUT THE AUTHORS
ROBERT YALDENOsler, Hoskin & Harcourt LLPRobert Yalden is a partner in Osler, Hoskin & Harcourt LLP’s business law department. He is co-chair of the firm’s mergers and acquisitions group and head of the Montreal office’s corporate law group. Mr Yalden’s career with Osler spans over 20 years, during which he has participated in some of Canada’s most innovative and groundbreaking transactions. He was intimately involved with implementing the first poison pill in Canada and has since worked with many companies on their defence strategies. He led the Osler team involved in Canada’s largest ever completed leveraged buyout. He also recently led the Osler team involved with significant proxy fights that have seen the problem of ‘empty voting’ on the part of hedge funds receive considerable public scrutiny in Canada. Mr Yalden advises management and board of directors in connection with a wide range of M&A transactions, including hostile and friendly business acquisitions, the implementation of defensive strategies, going-private transactions and strategic alliances. Mr Yalden is a former Supreme Court of Canada Law Clerk, teaches a course in comparative corporate governance at McGill University’s Faculty of Law, and has written extensively on business law issues.
EMMANUEL PRESSMANOsler, Hoskin & Harcourt LLPEmmanuel (Manny) Pressman is a partner in the firm’s business law department and co-chair of the corporate department. He has acted for acquirors, targets, selling shareholders, boards, special committees and financial advisers that have been involved in friendly and contested takeover bids, proxy contests, going-private transactions, negotiated acquisitions and a range of corporate transactions and restructurings. He is a ‘most frequently recommended’ M&A lawyer in Lexpert’s Guide to the Leading Corporate Lawyers in Canada. Recent assignments include acting for Shoppers Drug Mart in its merger with Loblaw Companies; KingSett Capital in its hostile takeover bid
About the Authors
858
for Primaris Retail REIT and ultimately, friendly plan of arrangement with H&R REIT, RioCan REIT and Primaris REIT; The ADT Corporation in its acquisition of Reliance Protectron from Alinda Capital; Walter Energy in its acquisition of Western Coal; and Magna International in its dual-class share recapitalisation. Mr Pressman is a frequent speaker at conferences relating to M&A and developments in corporate and securities law and has guest lectured at the McGill University Faculty of Law and the University of Toronto Faculty of Law. He received a JD from the Western University Faculty of Law in 1996 and was called to the Ontario Bar in 1998.
JEREMY FRAIBERGOsler, Hoskin & Harcourt LLP Jeremy is co-chair of the firm’s mergers and acquisitions group. He has acted for public and private companies, private equity firms and investment bankers on a range of acquisitions, securities offerings and other corporate transactions. He is a ‘most frequently recommended’ M&A lawyer in Lexpert’s Guide to the Leading Corporate Lawyers in Canada. He has taught at the University of Toronto Faculty of Law on contested mergers and proxy contests and has spoken and written about a range of legal issues. After graduating from law school he served as a law clerk to Chief Justice Antonio Lamer at the Supreme Court of Canada.
OSLER, HOSKIN & HARCOURT LLPBox 50, 1 First Canadian PlaceToronto, Ontario M5X 1B8CanadaTel: +1 416 362 2111Fax: +1 416 862 [email protected]
1000 De La Gauchetière Street WestSuite 2100Montreal, Quebec H3B 4W5CanadaTel: +1 514 904 8100Fax: +1 514 904 [email protected]
www.osler.com
