Canada: Canadian Securities Administrators Provide Guidance On M&A Transactions Involving Material Conflicts Of Interest

Guidance extends to Special Committees and Fairness Opinions

Summary

The securities regulatory authorities of Ontario, Québec, Alberta, Manitoba and New Brunswick (the "CSA Members") published a notice (the "Notice") on July 27, 2017 relating to M&A transactions which involve a material conflict of interest, such as insider bids and certain business combinations.1 The Notice published by staff ("Staff") of the CSA Members addresses the following:

  • Staff review and oversight of material conflict of interest transactions;
  • Staff views with respect to the role of boards of directors and special committees; and
  • Staff views with respect to disclosure obligations in connection with public M&A transactions involving material conflicts of interest, including as they relate to fairness opinions.

The securities regulatory authorities of Ontario (the Ontario Securities Commission ("OSC")) and Québec (the l'Autorité des marchés financiers ("AMF")) previously adopted rules addressing material conflict of interest transactions (see Multilateral Instrument 61-101 — Protection of Minority Security Holders in Special Transactions ("MI 61-101")). The Notice confirms that Staff will, as a matter of course, review the disclosure documents (including those provided to security holders) relating to material conflict of interest transactions. In addition, the Notice indicates that the securities regulatory authorities of Alberta, Manitoba and New Brunswick propose to adopt a review approach to conflict of interest transactions consistent with that of the OSC and AMF. The securities regulatory authorities of Alberta, Manitoba and New Brunswick formally adopted MI 61-101 as a rule effective July 31, 2017.

The Notice describes "material conflict of interest transactions" as transactions in respect of reporting issuers which involve related parties and are structured as insider bids, issuer bids, business combinations and related party transactions, each as defined in MI 61-101.2 Accordingly, arm's length transactions not involving related parties are not the focus of the Notice.

As stated in the Notice, "MI 61-101 establishes a securities regulatory framework that mitigates risks to minority security holders when a related party of the issuer, who may have superior access to information or significant influence, is involved in a material conflict of interest transaction".

The Notice provides guidance in respect of a number of the issues involving material conflicts of interest which had been referred to in prior OSC decisions. The Notice also emphasizes that Staff expects market participants to take a purposive interpretation of the requirements of MI 61-101 and "to adopt practices designed to effectively mitigate conflicts in material conflict of interest transactions".

Staff Review of Transactions

The Notice confirms that Staff will "generally initiate a review of a material conflict of interest transaction upon the filing of a disclosure document". Any complaint received by Staff will factor into the review. Staff's review will focus not only on compliance with disclosure requirements, but also on the process employed by the issuer's board of directors in negotiating and reviewing a proposed transaction and whether that process raises concerns that the interests of minority security holders have not been adequately protected.

Staff may ask the relevant parties detailed questions and request supporting documents (including minutes of board and special committee meetings, work product associated with a formal valuation and other relevant materials).

The Notice also sets out the remedial action Staff may seek in the event of non-compliance, including corrective disclosure, orders under securities legislation (e.g., cease trade orders) and enforcement action.

Staff Views on Special Committees and Enhanced Disclosure

The Notice provides guidance with respect to Staff's views of the role of special committees and disclosure to the shareholders in the context of material conflict of interest transactions, including the following:

  • timely formation and effectiveness of special committees;
  • composition of special committees;
  • role and process of special committees;
  • mandates of special committees;
  • role of special committees in negotiating transactions;
  • role of special committees in retaining financial advisors and the use of fairness opinions; and
  • the importance of insulating special committees from "coercive conduct" on the part of interested parties.

In the Notice, Staff provides its views on the role of special committees but also notes that the formation of a special committee of independent directors is not the sole governance arrangement that can protect the interests of minority security holders.

The Notice also provides guidance on the expectations of Staff with respect to enhanced disclosure in materials provided to security holders in the context of material conflict of interest transactions, including with respect to the following:

  • background to the transaction and process followed by the target;
  • desirability or fairness of transaction;
  • board of directors and special committee recommendation; and
  • fairness opinions.

Staff Views on Fairness Opinions

The guidance provided with respect to fairness opinions addresses some of the issues raised in the context of recent Yukon court decisions in the InterOil matter.3 There the Yukon Court of Appeal had commented on concerns relating to a fairness opinion provided by InterOil's financial advisors, as well as concerns with respect to the process adopted by the board in respect of a proposed plan of arrangement involving an unrelated entity which was not a material conflict of interest transaction as defined in the Notice. See our bulletins dated March 27, 2017 and December 9, 2016.

The Notice reiterates that fairness opinions are not mandated by law and that it is the responsibility of the board of directors and special committee to determine whether a fairness opinion is necessary "to assist in making a recommendation to security holders", and that it is generally the responsibility of the board of directors and the special committee "to determine the terms and financial arrangements for the engagement of a financial advisor". The Notice stops short of commenting on whether compensation arrangements of a financial advisor which include a success fee bring into question the impartiality of a fairness opinion provided by that advisor (as the Yukon Court of Appeal had commented in InterOil). Moreover, Staff cautions that a special committee cannot substitute the "results of a fairness opinion for its own judgment" with respect to a transaction. The Notice also comments that if a fairness opinion is requested and not provided, Staff expects the issuer to provide an explanation of the reasons to security holders.

The Notice recommends that when a fairness opinion is obtained for a material conflict of interest transaction, the disclosure document provided to security holders should:

  • disclose the financial advisor's compensation arrangements;
  • disclose how the board or special committee took into account the compensation arrangement with the financial advisor when considering the advice provided;
  • provide a clear summary of the methodology, information and analysis (including, as applicable, financial metrics) underlying the opinion; and
  • explain the relevance of the fairness opinion to the board of directors and special committee in coming to the determination to recommend the transaction.

In this respect, Staff also refers to rules of the Investment Industry Regulatory Organization of Canada ("IIROC") which address disclosure requirements relating to fairness opinions provided by IIROC members in the context of "subject transactions" (defined similarly to material conflict of interest transactions generally), as well as standards of The Canadian Institute of Chartered Business Valuators.

Practical Implications for Market Participants

The Notice is a reminder to market participants of the importance of process and comprehensive disclosure in M&A transactions, and in particular in the context of material conflict of interest transactions. As the Canadian disclosure regime does not contemplate pre-clearance of disclosure documents by CSA Members, deficiencies in disclosure documents noted by Staff after mailing may necessitate corrective disclosure (among other regulatory actions) which may impact on the timing of a transaction. The Notice makes it clear that Staff expects that disclosure documents will provide more than the minimum prescribed by the applicable form requirements.

Another point to note in light of the deferential approach of Staff to compensation arrangements of financial advisors, is that market participants will need to continue to be mindful of the judicial approach to expert evidence as it may apply to fairness opinions in the context of court-approved M&A transactions.

Conclusion

The Notice's guidance highlights the sensitivity of CSA Members to M&A transactions involving related parties and formalizes the approach of Staff to the systematic review of disclosure documents and processes. While providing standards with respect to the role of special committees, disclosure obligations and fairness opinions in the context of material conflicts of interest transactions, the Notice leaves to issuers to determine how matters should be dealt with in arm's length M&A transactions.

Footnotes

1. Multilateral CSA Staff Notice 61-302 — Staff Review and Commentary on Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions (2017), 40 OSCB 6577

2. The Notice does clarify that business combinations which are subject to MI 61-101 only as a result of employment related collateral benefits would have not generally been included in what Staff considers to be "material conflict of interest transactions".

3. InterOil Corporation v. Mulacek, 2016 YKCA 14; Re InterOil Corporation, 2017 YKSC 16

About BLG

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions