The following is a brief review of M&A activity and developments in Canada in 2004.
M&A activity in Canada is regulated under:
- Corporate Statutes. Canadian corporations may be incorporated under the Canada Business Corporations Act or one of the similar provincial or territorial statutes. These statutes regulate a variety of extraordinary corporate transactions (including statutory amalgamations and plans of arrangement, the sale, lease or exchange of all or substantially all of the property of a corporation, liquidation and dissolution). Most statutes require that these transactions be approved by a special resolution of shareholders (662/3% of the votes cast) and give shareholders rights to dissent and demand fair value for the shares held by them. Canadian courts have broad remedial powers under these statutes to intervene in respect of transactions that are oppressive or unfairly prejudicial to or that unfairly disregard shareholder interests.
- Securities Laws . Securities regulation in Canada is the responsibility of the provinces and territories. Each province and territory has its own legislation and securities regulatory authority that regulates, among other things, takeover bids. The provincial and territorial securities regulatory authorities coordinate their activities through the Canadian Securities Administrators, a forum for developing a harmonized approach to securities regulation across the country. The Provinces of Ontario and Quebec have additional rules (including approval by a majority of the minority shareholders and independent valuation of the subject matter of the transaction) designed to ensure fair treatment of minority shareholders in connection with certain types of transactions involving controlling shareholders and "related parties" (which include shareholders owning 10% or more of the voting securities of a corporation).
- Stock Exchanges. The two principal stock exchanges in Canada are the Toronto Stock Exchange (TSX) (senior market) and the TSX Venture Exchange (junior market). These exchanges regulate selected aspects of M&A activity.
- Competition Law . The Canada Competition Act confers upon the Commissioner of Competition and the Competition Tribunal the ability to review mergers to determine whether they will or are likely to prevent or lessen competition substantially. Mandatory pre-merger notification of certain large mergers is also required.
Although the number of M&A transactions dipped slightly in 2004, the value of M&A transactions grew significantly. According to industry sources, 1,051 transactions worth C$101 billion were announced in Canada between January 1, 2004 and November 29, 2004 compared to 1,110 transactions worth C$58 billion for the same period in 2003. The significant increase in the value of M&A transactions in 2004 reflects a number of significant cross-border acquisitions completed in 2004 (eg, the acquisition of John Hancock Financial Services by Manulife Financial).
Canadian companies were net acquirors in 2004: seven out of the ten largest cross-border transactions involved a Canadian company acquiring a foreign business. This trend is expected to continue in 2005 driven by a higher Canadian dollar, the mining and income trust sectors and strong capital markets.
Further Delaware Developments in Deal Protection Mechanisms
Last year, we reported on Omnicare, Inc. v. NCS Healthcare, Inc., a Delaware case with particular relevance for those negotiating merger transactions involving lock-up agreements with controlling shareholders. The principal holding of the Delaware court in Omnicare was that merger arrangements that create a fait accompli (in the case of Omnicare, a lockup agreement requiring the controlling shareholders to vote their shares in favour of the merger transaction and a merger agreement requiring the board of directors to put the merger transaction to a shareholder vote without a fiduciary out if a better offer came along) are not enforceable under Delaware law.
In Orman v. Cullman, the first reported case to apply the Omnicare decision, the Delaware court ruled that merger arrangements that contain the same elements as the Omnicare arrangements but do not create a fait accompli are enforceable under Delaware law.
The Orman case involved a merger transaction pursuant to which Swedish Match AB agreed to purchase all of the shares of General Cigar Holdings Inc. held by the public shareholders and half of the shares held by the controlling shareholders, the Cullman family. The merger arrangements included a lock-up agreement pursuant to which the Cullmans agreed to vote in favour of the merger transaction and not to sell their shares or vote in favour of a competing transaction for a period of 18 months and a merger agreement pursuant to which the board of directors agreed to put the merger transaction to a shareholder vote without a fiduciary out if a better offer came along. The principal difference between Omnicare and Orman was that, in order to become effective, the Orman merger transaction required the approval of a majority of the public shareholders. The public shareholders overwhelmingly approved the transaction.
The plaintiffs in Orman claimed that the board of directors of General Cigar had breached their fiduciary duties in entering into the merger agreement and advanced three main arguments in support of their position: (1) by entering into the lock-up agreement, the Cullmans, who were also directors of General Cigar, had breached their fiduciary duties to General Cigar; (2) the lock-up agreement entered into between the Cullmans and Swedish Match was not distinguishable from the lock-up agreement in Omnicare because it prevented an alternative transaction from taking place for 18 months and thus coerced shareholders into voting for the merger transaction; and (3) the merger arrangements made the transaction a fait accompli.
The Delaware court rejected the argument that the Cullmans had breached their fiduciary duties to General Cigar by entering into the lock-up agreement for two reasons: the Cullmans were free to enter into any agreement they wished with Swedish Match in their capacities as shareholders; and the lock-up agreement specifically stated that it did not impose any restrictions on the Cullmans in their capacities as directors.
The court also disagreed that the lock-up agreement was indistinguishable from the lock-up agreement in Omnicare. The court concluded that, although the existence of the lock-up agreement (which effectively precluded a competing transaction for 18 months) might have influenced the public shareholders in deciding whether to approve the transaction, it was not coercive because there was no alternative transaction on the horizon, the public shareholders were free to accept or reject the transaction and, without the lock-up agreement, there would have been no transaction for the public shareholders to approve.
Finally, the court concluded that the transaction was not a fait accompli. Although the board of directors was required to put the merger transaction to a shareholder vote without a fiduciary out, the transaction would not proceed without the approval of a majority of the public shareholders. This measure provided meaningful and effective protection for the public shareholders.
The Orman decision is relevant for those negotiating merger transactions in Canada:
- Canadian courts have tended to consider Delaware cases as part of their review process; and
- the decision may encourage parties to provide minority shareholder approval with respect to transactions similar on their facts to Orman.
- New Merger Enforcement Guidelines
In September 2004, the Competition Bureau, the agency headed by the Commissioner of Competition, issued updated Merger Enforcement Guidelines. The Guidelines are broadly consistent with mainstream economics and the approaches of competition authorities in the United States and the European Union.
The most important elements of the updated Guidelines from an M&A perspective are:
- The Bureau has reasserted its expansive interpretation of its jurisdiction to examine the acquisition or increase of a significant, but non-controlling, interest in another person’s business, including arrangements that confer "material influence" with little or no voting equity.
- The Bureau has retained its existing "safe harbour" market share thresholds (ordinarily 35%): if the combined market share of the merger parties is below the applicable threshold, the Commissioner will generally not challenge the merger. Both the Guidelines and the Competition Act make it clear that a merger will not be challenged on the basis of high market share alone.
- The Guidelines continue to focus on the price effects of a merger as a proxy for the impact of the merger in the marketplace. They also clarify the circumstances in which a prevention of competition may occur by adding examples that include an acquisition that prevents expansion into new geographic markets and an acquisition that prevents or limits the introduction of new products.
- Influenced by recent case law, the Guidelines recognize an exemption for anti-competitive mergers where efficiency gains brought about by the merger are "greater than and offset" any anti-competitive effects. Although the Guidelines have clarified that these efficiencies need not be passed on to consumers for parties to rely on this exception, the Bureau remains hostile to this exception and will vigorously scrutinize any efficiency claims submitted by merging parties.
2004 was a busy year for M&A in Canada. Early signs are that it will be even busier in 2005.
The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.
© Copyright 2005 McMillan Binch LLP