Relevant Authorities and Legislation
1.1 What regulates M&A?
Canada's federal structure divides the power to legislate between the national (federal) and provincial governments. The provinces have historically been responsible for securities laws. Despite the general adoption by provincial securities commissions of consistent national rules and policies with uniform application, there are certain differences.
In addition, a Canadian corporation and the rights of its shareholders may be governed by provincial or federal law, depending upon which corporate statute applies. For example, a Canadian corporation may be incorporated under the (federal) Canada Business Corporations Act or the (provincial) Business Corporations Act (Ontario), or other provincial corporate statutes.
In addition to corporate and securities laws, and stock exchange requirements, the principal regulatory issues of general application in public company purchases relate to competition or anti-trust (Competition Act) and foreign ownership approval (Investment Canada Act). Certain businesses are subject to additional regulation at the federal level because there are statutes that regulate and restrict foreign and other ownership. For example, to acquire a 10% or greater interest in a bank requires the approval of the Minister of Finance. Telecommunications companies, transportation companies, insurance companies, railways and airlines, among others, are also subject to additional federal regulatory restrictions. There are also provincial restrictions that apply to some businesses.
1.2 Are there different rules for different types of company?
Canadian securities regulations generally apply to companies that have completed public offerings or are listed on a stock exchange in Canada. Non-Canadian public companies that are engaged in securities or M&A transactions with a Canadian nexus and privately held companies tend to be subject to fewer rules.
1.3 Are there special rules for foreign buyers?
The primary investment restrictions imposed upon foreign buyers relate to foreign ownership and are contained in the Investment Canada Act. There are different rules depending upon the jurisdiction of ultimate control of the buyer, the nature of the industry, and whether the transaction could raise national security concerns. If a foreign buyer is ultimately controlled in a country that is not a member of the World Trade Organisation (WTO), the federal government will review the transaction if: (i) the buyer proposes a direct acquisition of a Canadian business with assets which have a book value of C$5 million or more; or (ii) the buyer proposes an indirect acquisition of a Canadian business (i.e., an acquisition of a Canadian business through the acquisition of a foreign corporation), with assets which have a book value of C$50 million or more, or C$5 million or more if the Canadian business accounts for more than 50% of the total book value of the businesses being acquired. If it is a direct acquisition, clearance will be required prior to closing.
If a foreign buyer is ultimately controlled in a jurisdiction that is a member of the WTO, the federal government will screen the transaction in advance of closing if the buyer proposes a direct acquisition of a Canadian business with assets which have a book value of C$330 million or more (which figure is indexed annually to inflation).
All foreign buyers who intend to acquire a "cultural business" (which generally includes the publication, distribution, exhibition or sale of items such as films, videos, magazines, periodicals, newspapers, music and books), regardless of the country in which they are ultimately controlled, will be subject to the lower review thresholds (C$5 million (direct) and C$50 million (indirect)). The federal Department of Heritage also has the additional jurisdiction to review any acquisition of such a "cultural business", regardless of the asset value.
The Investment Canada Act includes a "national security" review mechanism for foreign investment. National security is undefined in the statute, and national security reviews may be triggered by federal government ministers even with respect to minority acquisitions of entities doing business in Canada, with closing prohibited pending the review. To date, the national security review mechanism has not been frequently applied - it is believed that a national security notice has only been issued in respect of a single transaction, which was a transaction in which George Forrest International proposed to acquire Forsys Metals, a TSX-listed company with uranium assets in Namibia. It is believed that George Forrest International may have had certain connections to Iran. The transaction collapsed.
1.4 Are there any special sector-related rules?
The Telecommunications Act, the Bank Act and the Insurance Companies Act are examples of federal legislation that place certain limitations on foreign or other ownership in specific sectors. Ontario's Paperback and Periodical Distributors Act and Mortgage Brokers Act, and Quebec's Cinema Act, also include prohibitions or restrictions against the practice of certain trades or the carrying on of certain kinds of businesses by non-Canadians or non-residents of those provinces. There are also other examples.
1.5 Does protectionism operate in faovurof local owners?
While there are some cases of protectionism, the Canadian environment is largely open to foreign ownership.
1.6 What are the principal sources of liability?
The principal sources of liability relate to failures to address the technical rules under securities laws that apply to the offer process (e.g. take-over bid rules) and to any misrepresentation made by an offeror in offer documents. There are additional rules of general application under securities laws that apply to such matters as insider trading, market manipulation or engaging in conduct inconsistent with the "public interest". Penal and civil sanctions may be imposed upon companies as well as their directors, officers and other joint actors.
2 Mechanics of Acquisition
2.1 What alternative means of acquisition are there?
The three most prevalent ways to acquire control of a public company in Canada are by way of: (i) a take-over bid (or tender offer), with consideration comprised of cash, securities or a combination of cash and securities; (ii) a statutory merger known as an "amalgamation" (which is used rarely); or (iii) a courtsupervised merger or "plan of arrangement". Other methods may also be available.
2.2 What advisers do the parties need?
The principal advisors will almost always include legal counsel and financial advisors. Auditors are invariably involved, as financial reports are usually an essential part of disclosure and due diligence review by the buyer. In some transactions and industries, consulting engineers, public relations advisors, proxy solicitors and other experts will be retained.
The role of legal counsel is primarily to provide strategic advice, navigate the relevant legislation, assist in the preparation of disclosure and offer documents and the closing of the transaction, negotiate and prepare contracts and provide any required legal opinions to the parties. Financial advisors often provide strategic and financial analysis, prepare valuations, advise boards of directors and provide fairness opinions, if required or desired.
2.3 How long does it take?
The timetable for a transaction varies with the form chosen. Taking into account regulatory approval requirements and statutory procedures, a three-month time frame is a fair estimate of the time required to conclude most acquisitions that are not in a "sensitive sector" or that do not raise significant competition law or national security issues.
2.4 What are the main hurdles?
The principal milestones are usually: (i) if applicable, entering into "lock-up" agreements with key shareholders of the target; (ii) entering into a "merger" or "support" agreement with the target (or the launch of an offer if it is hostile); (iii) shareholder approval at a meeting or shareholder acceptance in response to the offer; (iv) applicable regulatory and third party approvals; and (v) court approval, if the transaction is done by way of a "plan of arrangement".
2.5 How much flexibility is there over deal terms and price?
In a take-over bid, the general rule is that all shareholders must be offered the same consideration and no other agreement or understanding can provide a collateral benefit to one or more but not all holders. Pre-bid integration rules require that, if stock is purchased within 90 days preceding a take-over bid, all offerees under the bid are generally entitled, with certain exceptions, to receive at least the same consideration (and in the same form) as was previously offered. There are several technical exceptions to this general rule and the rule only applies expressly to tender offers, thus providing more flexibility in non-tender offers (where generally votes will be disenfranchised in an additional minority approval process).
2.6 What differences are there between offering cash and other consideration?
While take-over bids in Canada can be made by way of cash, securities or some combination thereof as consideration, there are several factors that are relevant to the decision as to whether to proceed by way of a cash offer or a share (or combination) exchange offer. The following differences merit highlighting: (i) disclosure obligations; (ii) target shareholders' preferences; and (iii) tax considerations.
The threshold requirement (whether consideration is cash, securities or a combination) is that information must be sufficient to allow shareholders to make an informed decision about whether to tender their shares. If securities are offered, prospectus-level disclosure ("full, true and plain disclosure" of all material facts) regarding the securities offered is required. Accounting disclosure is also regulated (see question 2.12).
If the bidder was not previously a "reporting issuer" in the applicable province(s), there may be securities commission review of the take-over bid circular. Lower levels of disclosure are required for all-cash offers. Discretionary exemptions are available from these obligations but they are not frequently given by the securities regulators.
As a general rule, "public" shareholders prefer cash, particularly where there are alternative investment vehicles in the target's industry. Canadian taxpayers (which do not generally include pension funds and other tax-exempt institutions) may prefer shares of Canadian companies as consideration, as deferrals or "tax free rollovers" can be material. Foreign companies have used exchangeable share structures to allow Canadian taxpayers to achieve this result.
2.7 Do the same terms have to be offered to all shareholders?
See question 2.5 above.
2.8 Are there obligations to purchase other classes of target securities?
Although there are no obligations to purchase other classes of the target's securities, absent an exemption, the bidder must make an offer to all holders of the class of equity or voting securities subject to a take-over bid.
2.9 Are there any limits on agreeing terms with employees?
Existing employee benefit arrangements must always be addressed as part of any acquisition and may ultimately be a factor in the approach a bidder takes to the acquisition of the target. There are restrictions on the granting of collateral benefits to those employees who are also shareholders. If collateral benefits are offered to employees of the target in a take-over bid context, it must be clear these benefits relate to their employment and are not given in their shareholder capacity, and certain restrictions apply. In certain kinds of mergers, certain employees' votes may not count. See question 2.5 above.
2.10 What documentation is needed?
Although there are sometimes specific requirements in applicable collective bargains, there is no general requirement to consult with, or seek approval from, employees upon a change of control.
2.11 What documentation is needed?
For a take-over bid, the principal documents are the bid circular, applications for regulatory approval and credit documentation, if any. To acquire the balance of shares not tendered to the bid, a notice of compulsory acquisition (if 90% of the shares not previously owned by the offeror have been tendered) or notice of a shareholders' meeting and proxy circular (if a second step merger transaction is required) comprise the principal documents. A wide range of possible filings and other agreements may also be needed.
If an amalgamation or plan of arrangement is sought, the principal document will be a "merger agreement" and, for a plan of arrangement, court documents will also be required. Shareholders' meeting materials are required for both.
If there is a substantial shareholder, a "lock up" agreement may also be used.
2.12 Are there any special disclosure requirements?
Historical audited, unaudited and pro forma financial information is required whenever securities are offered as consideration and may be required in any event depending on what shareholder approvals are sought.
2.13 What are the key costs?
Borrowing costs, financial advisors' fees, legal costs, audit charges, consulting fees and printing and mailing charges may be significant. Depending upon the transaction size and the target's industry, there could also be significant costs associated with filings and obtaining requisite regulatory and third party consents.
2.14 What consents are needed?
The principal consents that are typically necessary are: (i) applicable shareholder approvals; (ii) applicable regulatory and (in the case of a plan of arrangement) judicial consents; and (iii) any applicable third party consents, such as for a change of control restriction in a contract.
2.15 What levels of approval or acceptance are needed?
In most cases, the objective of the bidder is to acquire 100% of the common shares of the target, for which there are generally two options. Where a bidder through the take-over bid acquires more than 90% of the shares of the target that the bidder did not own at the start of the bid, the bidder can take advantage of the "compulsory acquisition" provisions of most corporate statutes. Where a bidder falls short of that threshold but still acquires enough shares so that it owns more than 66⅔% (75% in some cases) of the shares of each class, it can usually effect a squeeze-out transaction (i.e., through an amalgamation, consolidation or capital reorganisation). In the case of material-related party transactions, the transaction may in certain cases also need to be approved by a majority of "disinterested" shareholders – what is called a "majority of the minority". The general rule is that all shares beneficially owned or over which control or discretion is exercised by the related party and any of its joint actors cannot be included as part of the minority vote, although previously tendered shares of minority holders may be counted in certain cases.
2.16 When does cash consideration need to be committed and available?
The procedures for the settlement of consideration will depend upon the type of acquisition. For example, if a take-over bid is used, the consideration must be paid no later than 3 business days after the securities are taken up by the bidder. Additionally, adequate arrangements need to be made before the bid is launched to ensure that funds are available for full payment. If an amalgamation or a plan of arrangement is used, the "merger agreement" will provide for payment, typically at the time of closing of the transaction, and, while not legally required, target boards generally want to see committed financing prior to signing a support agreement (as is also the case with take-over bids).
3 Friendly or Hostile
3.1 Is there a choice?
It is generally possible to engage in a hostile acquisition in Canada, and it is generally considered easier than in most other countries, as defensive tactics (including poison pills) are regulated.
3.2 Are there rules about an approach to the target?
There are no general requirements about how to approach the target, although a potential purchaser will generally approach senior management or the board of directors or, if one exists, an independent committee.
3.3 How relevant is the target board?
The target's directors must respond to a take-over bid and advise the shareholders within 15 days after the bid is launched. Directors may: (i) recommend in favour of the bid; (ii) recommend against the bid; or (iii) decline to make a recommendation as long as they provide reasons for so doing. Negative board recommendations, supported by compelling financial and other arguments, can be persuasive.
With amalgamations and plans of arrangement, directors of the target are an important part of the process when they negotiate a merger agreement and convene shareholders' meetings and prepare meeting materials. Hostile amalgamations or plans of arrangement are, therefore, very problematic and rare.
The target's board is also very relevant in a take-over bid context if a support agreement is desired.
3.4 Does the choice affect process?
A hostile transaction is generally commenced with a take-over bid, whereas other types of transactions generally involve a negotiation process and agreement.
4.1 What information is available to a buyer?
The only information available to a bidder in a hostile transaction would usually be the target's public file, including financial statements, prior prospectuses, charter documents, annual information forms (in the case of senior companies, and similar to a 10-K), proxy circulars, material change reports, certain key agreements and press releases.
4.2 Is negotiation confidential and is access restricted?
Undisclosed negotiations may be permitted on the basis that there is nothing to disclose that would not be misleading until the transaction is finally agreed. However, a ruling by the Ontario Securities Commission held that a material change can occur in advance of the signing of a definitive agreement, but it is not a "bright line" test whether a material change has occurred. Factors to consider in this determination include the level of commitment from the parties to proceed with the transaction and whether there is a substantial likelihood that the preliminary agreements will be completed. It is also problematic when discussions leak, or there are unexplained increases in the stock price, and the parties would otherwise prefer to deny the facts. There is no universal rule or safe harbour, and practices vary.
4.3 What will become public?
Rules require disclosure of the acquisition process, and documentation must include details with respect to prior negotiations related to the transaction.
4.4 What if the information is wrong or changes?
Take-over bid rules require both the bidder and target to update their disclosure in the event of any change in information that would reasonably be expected to affect the decision of a holder of affected securities. Assuming an acquiror has included appropriate conditions (as part of an offer), the acquiror may not need to proceed if changes occur. Similar approaches are also usually negotiated in mergers.
5.1 Can shares be bought outside the offer process?
A stake of up to 10% (5% if another bid is outstanding) can be acquired before it must be reported.
The pre-bid integration rules (see question 2.5) are a critical consideration in acquiring shares, as these rules may affect the price, form of consideration and percentage of stock a bidder must buy later. Once a bid is announced, an acquiror can reserve the right to acquire up to 5% of the class for which the bid is made, subject to daily reporting of purchases. In addition, no purchases may be made within 20 business days after the expiry of a bid even if no stock was taken up by the acquiror, unless the transaction is available on identical terms to all security holders.
5.2 What are the disclosure triggers?
After a 10% level (5% if another bid is outstanding) is reached, if the acquiror continues to acquire shares, there is accelerated reporting each time another 2% is purchased or other previously disclosed facts change. Above 10%, the acquiror is an insider and may become subject to insider bid rules if it proposes to acquire more than 20%. A purchase that will take an acquiror over the 20% threshold is, unless an exemption is available, a take-over bid to which additional rules apply. Special and less demanding rules apply to certain passive institutional investors.
5.3 What are the limitations and implications?
See questions 5.1 and 5.2 above. Also, a substantial number of companies have shareholder rights plans ("poison pills") in place or can put these in place quickly if a hostile bid occurs or appears likely.
6 Deal Protection
6.1 Are break fees available?
It is possible to obtain a "break fee" or other inducement fee from a target. The total of all fees typically ranges from 1-5% of a deal's equity value, often around 2-3%.
6.3 Can the target agree not to shop the company or its assets?
The target may agree not to solicit other competing offers or transactions, or to co-operate or provide information to others. This kind of agreement generally includes a fiduciary duty carve-out for unsolicited superior proposals, and may also be subject to a timelimited right to match, and occasionally, a "go shop" provision.
6.3 Can the target agree to issue shares or sell assets?
Subject to fiduciary duty obligations, a target can issue stock and sell assets, including so-called "crown jewels". All issuances of stock are subject (if the target is listed on the Toronto Stock Exchange) to the approval of the Toronto Stock Exchange and, if the issuance of stock will have a material impact on control of the company, shareholder approval will likely be required. Dispositions of assets may be subject to shareholder approval where they comprise "all or substantially all" of the corporate assets or involve related parties. Defensive tactics may also be regulated by securities regulatory authorities.
6.4 What commitments are available to tie up a deal?
The break fee is the most prevalent incentive. A target can issue an option to acquire stock, or a bidder can acquire stock itself, which would discourage a third party or make an acquisition of 100% of the target problematic. Asset sales can be justified as can joint ventures that would "disqualify" certain bidders. Shareholder rights plans ("poison pills") can delay a third party, and leveraged recapitalisations can also take place.
7 Bidder Protection
7.1 What deal conditions are permitted?
It is common for unsolicited bids to include broadly worded conditions. Conditions may include access to any data room made available to others, absence of any material adverse change, "market outs", and receipt of regulatory and third party approvals. The only item that likely cannot be the subject of a "condition" is a bidder's financing for the acquisition, since securities legislation in Canada requires that bidders make adequate arrangements to ensure that funds required to pay for the cash portion of the consideration will be available prior to launching a bid.
7.2 What control does the bidder have over the target during the process?
See question 7.1 above. Also, agreements with the target can provide additional rights.
7.3 When does control pass to the bidder?
Control will pass to the bidder once the board of directors of the target has resigned and the bidder has replaced the board of directors with its own board. In the interim, negative covenants, subject to competition restrictions and the receipt of any necessary approvals, can apply in a negotiated transaction. Oppression claims under the applicable corporate statute may potentially be brought by minority shareholders or other stakeholders.
7.4 How can the bidder get 100% control?
See question 2.15 above.
8 Target Defences
8.1 Does the board of the target have to publicise discussions?
See question 4.2 above.
8.2 What can the target do to resist change of control?
In 1997, the Canadian Securities Administrators adopted National Policy 62-202 with respect to responses to take-over bids, which provides that the decision regarding whether a bid succeeds should ultimately rest with the target's shareholders rather than with its board of directors. Any activity that denies or severely limits shareholders' ability to make a decision regarding a take-over bid may lead the securities regulators to intervene.
The current policy is that defensive tactics are acceptable if undertaken by the board in a genuine effort to elicit a better bid. Among measures that the board might pursue are the following: (i) arrangements with third parties, including negotiated sales, asset sales, asset purchases, share sales and other "strategic alliances"; (ii) a shareholder rights plan; (iii) an internal business reorganisation; (iv) share buy-backs and special dividends; (v) challenging the bid through regulators or in court; or (vi) lobbying politicians. Also see question 6.4 above.
The current policy may be changing – see question 10.1 below.
8.3 Is it a fair fight?
Some have argued that Canada's regime does not provide the target's board with sufficient discretion to fend off a hostile approach. Under the current regime, the target usually has less than 60 days from the day of a hostile bid to respond, and Canada's securities regulators strike down "poison pills" more readily than U.S. judges on grounds of prejudice to shareholders' interests. Although recent decisions of securities commissions in certain provinces suggest that recent shareholder ratification of a rights plan may be suggestive of a finding that the continuation of a shareholder rights plan is in the bona fide interests of a target's shareholders, there still appears to be very limited ability for a target's board to maintain a poison pill for an extended period of time in Canada (although this may be changing – see question 10.1 below).
9 Other Useful Facts
9.1 What are the major influences on the success of an acquisition?
The principal factors that influence the outcome are: (i) the price and form of consideration; (ii) regulatory issues; (iii) competing bidders; (iv) the successful use of defensive tactics (if the process is hostile); and (v) external events that adversely affect the share price of the bidder (if the bidder is using shares as consideration for the acquisition).
9.2 What happens if it fails?
Bidders must purchase deposited securities unless a condition to a take-over bid is not met (see question 7.1) and bidders will generally be precluded from buying or offering to buy securities for 20 business days after a take-over bid.
10.1 Please provide a summary of any relevant new law or practices in M&A in Canada
In late 2011, staff of the Ontario Securities Commission announced that there was a possibility that the Commission would change its policy to allow poison pills to remain if approved by shareholders but subject to the right of shareholders to terminate the pill with a "majority of the minority" vote (this would force a bidder to launch a proxy battle or proceed with a permitted bid under the pill). The aim would be to increase predictability in the context of defensive tactics and decrease the need for regulatory intervention.
In December, 2011, the Supreme Court of Canada found that the federal government's proposal to nationalise securities legislation was outside of Parliament's general authority to regulate trade and commerce under Canada's constitution. As such, securities regulation in Canada remains under a provincial head of power – property and civil rights.
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