As the new year dawns, Bennett Jones looks ahead to the trends that we believe will influence business in Canada in 2008.
Survival Of The Fittest In The Oil Patch.
2008 will feature a significant level of M&A activity in the oil and gas sector with junior players being acquired by larger companies or merging with other juniors to achieve synergies. Likely targets include junior natural gas weighted producers, who are struggling with low commodity prices, high operating costs and Alberta's recently increased royalties, and small oil sands companies that might have viable projects but lack financing capability.
New Opportunities In Income Trust Markets.
The elimination of the ability to create new public flow-through entities and the government's treatment of income trusts will lead to examination of conversions of income trusts back to corporate form and increased mergers and acquisitions activity. At the same time, there will be a demand for new high-yield distribution securities, creating new opportunities for public debt.
Increased Scrutiny On Foreign Investment.
Foreign investment review of Canadian business acquisitions by state-owned enterprises, particularly in the resource sector, will be more rigorous in 2008. State-owned enterprises can expect to provide Industry Canada with greater disclosure of internal governance procedures and commercial criteria and objectives to obtain the net-benefit-to-Canada seal of approval. New federal guidelines for the review of acquisitions that raise national security concerns are also expected, which will likely involve an interdepartmental process, adding more complexity and time to the review.
Picking Up The P..P..Pace.
Public-private partnerships (or PPPs) are here to stay. With Canada's continuing huge infrastructure deficit and the success of PPP projects in Canada so far, 2008 promises to be a boom year with increasing participation by both domestic and off-shore players. Canada is now one of the most attractive markets for big international infrastructure developers, contractors, operators and financiers looking to expand their horizons. Expect to see more of them arriving on our shores over the coming year.
Stimuli To Early-Stage And Research-Based Organizations.
New funding and tax rules by the federal government and certain provinces will stimulate research and development and commercialization activity and encourage greater early-stage investment in technology-innovation-based business. This should feed more small and medium-sized business into future venture capital and public markets financings and M&A transactions.
Further Maturing Of Corporate Governance.
2008 will be a year of increased focus on board processes, driven by the evolving caselaw and regulatory requirements for boards of directors to rely on the business judgment rule and due diligence defences. Pressure will continue on director competency and commitment, board accountability and succession. Compensation committees will become a centre of attention with the focus on enhanced compensation committee processes, "compensation literacy" of committee members and increased disclosure of executive compensation practices.
Corporate Social Responsibility – The New Catchphrase.
Corporate social responsibility will become the next frontier of corporate governance, with particular initial emphasis on environmental and employee health and welfare issues. Boards of directors will have to decide on how far they can go and how far they should go.
Green Is The New Black.
Green issues will be at the forefront as corporate social responsibility becomes a key reputational and corporate governance issue for businesses, and government increasingly exercises its environmental authority, driven in part by rapidly developing international standards and the green preferences of Canadian voters. Green businesses will increasingly provide profitable opportunities for capital deployment. The management of environmental issues both domestically and internationally will become more complex. Dealing with climate change will enter mainstream business planning as a carbon-constrained future becomes a close-enough reality.
Continuing Credit Market Problems.
The fallout from the U.S. subprime and Canadian asset-backed commercial paper problems will continue to have an adverse effect on banks and corporate borrowers with reduced credit availability, higher lending costs and stricter lending terms, including renewed focus on material adverse change and market disruption conditions in lending commitments. Also expect shrinking credit availability from capital-challenged lenders with their own exposure to structured investment vehicles. Banking relationships may become fluid.
Revamped Tax Rules Open New Doors.
The lowering of withholding tax barriers to the payment of interest between Canada and the rest of the world will open up new opportunities for Canadian borrowers to broaden their funding sources and for foreign lenders to exploit new lending opportunities on a cross-border basis. Expect to see increasing integration of Canadian and U.S. debt markets as a result, which may help off set the adverse impact of other credit market problems.
M&A Financings Under The Microscope.
The credit crunch and widely-publicized, recently aborted M&A transactions will have boards of directors of targets in buy-out transactions giving renewed consideration to the sufficiency of buyers' funding arrangements, their ability to back out for material adverse changes and the remedies for terminating the deal, for whatever cause.
Restructurings On The Rise.
Restructuring and bankruptcy filings will increase, as companies succumb to depressed capital markets, continued exposure to the global credit crunch, the high level of the Canadian dollar and the slowdown in the commercial real estate and construction industries. All of this comes at a time when Canada is on the verge of implementing significant changes to its bankruptcy and restructuring legislation, which will affect the rights of debtors and creditors in significant ways.
Towards National Securities Regulation?
Expect more talk but little action to replace 13 provincial and territorial securities commissions with one national regulator. But the new passport system, allowing reporting issuers to interact with securities regulators through one provincial regulator, should make things work better – even in Ontario where an interface arrangement between non-participating Ontario and the other regulators will come into effect.
Continuous Disclosure Reporting Under Scrutiny.
2008 will see increased efforts from securities regulators to crack down on reporting issuers who do not comply with continuous disclosure requirements. Naming and shaming noncompliers, as well as more frequent insistence on refilings, will be the principal tools. More widespread provincial securities laws creating civil liability in the secondary market for tardy or incomplete disclosure will keep boards of directors focused.
Ontario Will Be The New Lead Province For Class Actions.
After Quebec had been the province-of choice for class action plaintiff s as a result of an easy test to have a class action certified, Ontario may take the prominent role in 2008. A number of recent decisions delivered by the Ontario Court of Appeal support an easier test for certification, an easier test for claiming jurisdiction over non-resident defendants, and an easier test for proving damages in class actions.
Mountains Of Paper Over Commercial Paper.
The litigation relating to asset-backed commercial paper has just begun with a few minor skirmishes in Ontario and B.C.; expect full-out warfare in 2008. Also expect securities enforcement investigations and proceedings in relation to the disclosure of risk and exposure in relation to asset backed commercial paper.
Stock Option Litigation Everywhere.
After many notable cases in the United States, and a small number in Canada, derivative and oppression actions will be on the rise, and possibly class actions, against publicly traded companies, with more regulatory investigations into stock options granting practices. The Ontario Securities Commission's sweep for companies with options dating issues, combined with aggressive action by plaintiff class action firms, has created a pincers movement for companies with options dating issues.
E-documents Lead To Increased Document Retention Focus.
Recent mandatory privacy legislation for the private sector in Canada, and the increasing importance of e-mail production in litigation, has led businesses to confront the burden of additional document retention and destruction obligations. Sophisticated businesses will increasingly adopt information and document retention policies to manage their legal compliance obligations as well as mitigate risk in subsequent litigation.
Defending Against Data Breaches.
Recent major data security breaches and the prevalence of identity theft will require businesses to focus on corporate plans to ensure that security policies are in place to limit exposure to these risks, including robust password and encryption protocols, strict record retention and access policies, employee screening and reference checks and a clear emergency response plan.
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