Canada: Boards Beware: Regulators Actively Monitoring Related Party Transactions

On July 27, 2017, staff of the Ontario, Québec, Alberta, Manitoba and New Brunswick securities regulatory authorities offered guidance on the role of boards and special committees and on their process and disclosure obligations in conflict of interest transactions.1 The Notice is helpful in that it provides clear and considered guidance on the requirements of MI 61-101 and the role to be played by special committees in such transactions. In summary, the guidance notes that a well-run special committee process will include a robust mandate, the hiring of independent advisors to the special committee, supervision over or direct conduct of negotiations, accurate record-keeping and non-coercive conduct on the part of interested parties. In addition, if a fairness opinion is obtained in a material conflict of interest transaction, it should be accompanied by disclosure regarding the nature of the financial advisor's compensation and the financial metrics supporting the opinion. The guidance is rooted in a long line of securities commission decisions, including Hollinger in 2005, Sears in 2006 and Magna in 2011.2

What the Guidance Applies To

The Notice applies to a subset of MI 61-101 transactions – namely, MI 61-101 transactions that give rise to substantive concerns as to the protection of minority securityholders. The Notice coins the descriptor "material conflict of interest transactions" (here, material conflict transactions). The Notice does not apply to transactions that are caught by MI 61-101 for purely technical reasons. It also does not apply to conflict of interest transactions that are outside MI 61-101. Significantly, it does not apply to the type of transaction that was the subject of the Yukon Court of Appeal's highly controversial decision in InterOil last year.

Staff Is Watching

Staff is actively reviewing material conflict transactions during the pendency of the transaction. These reviews are not limited to the adequacy of disclosure or the availability of claimed exemptions from valuation and minority approval requirements, but also include consideration of the substance of the process followed by the board and special committee in negotiating and reviewing the transaction. The Notice emphasizes the importance of the process and its substance over form, and the necessity for issuers and boards to treat the minority shareholders fairly by complying with the spirit and intent of MI 61-101 and avoiding tactical or self-serving disclosure.

Issuers are warned that the regulators' review may include the special committee's mandate, minutes of meetings of the special committee and the board, and valuation work product. Staff will assess the substantive steps that boards and special committees take to protect minority shareholders by adopting a broad purposive interpretation of MI 61-101. Non-compliance could result in Staff seeking cease trade orders, corrective disclosure, orders under securities legislation and possible enforcement action.

Role of Special Committees

The formation of a special committee of independent directors is mandated by MI 61-101 only in the context of insider bids. However, Staff are of the view that a special committee is advisable for all material conflict transactions. This view is consistent with current best practice.

The Notice sets out the focus of Staff's scrutiny of material conflict transactions, including the following:

Timely Formation and Effectiveness. Staff call for formation early in the events leading up to a transaction and before a proposed transaction is substantially negotiated. The exact nature of the involvement of the special committee in negotiations will depend on the context of a particular transaction but, in Staff's view, in certain cases the committee should play an active role in negotiating a transaction from the outset, either directly or through advisors by way of supervision. If preliminary negotiations are carried out by interested parties before the special committee assumes control, these should be non-binding on the special committee and subject to a robust review.

Broad Mandates. A narrow mandate may constrain special committees and diminish their effectiveness. In Staff's view, a committee's mandate should provide members with the autonomy to supervise negotiations or negotiate directly; to consider alternatives to the conflicted transaction, including maintaining the status quo; to make a recommendation or provide reasons why a recommendation cannot be made; and to hire its own independent legal and financial advisors. The Notice cautions against mandates merely to review a proposal developed by management in conjunction with a related party or to assess whether a transaction should be put to securityholders for a vote.

Independence. The Notice warns special committees to protect their independence and to properly manage conflicts of interest. For example, while assistance may be obtained from interested board members or subject-matter experts, or advisors with ties or historical relationships, non-independent persons should be excluded from decision-making deliberations. Insiders and interested parties are cautioned against exerting undue influence or engaging in threatening or coercive conduct because this may taint the special committee process.

Reliance on Fairness Opinions. The Notice cautions against overreliance on fairness opinions, reminding special committees that advisors are not a substitute for the committee's own considered judgment of a transaction's merits from a perspective broader than financial fairness. The Notice also reiterates the potential relevance of prior financial work product that could amount to a prior valuation – and trigger separate disclosure obligations under MI 61-101.

Recommendation. The board must consider not only whether a transaction is in the best interests of the corporation, but also whether it is in the best interests of the minority securityholders. Staff believe these interests will generally not be in conflict, but if they are, the board must explain the conflict and how the board addressed it.

Fairness Opinions

Fairness opinions are not mandated by MI 61-101 and Staff have not taken a firm view in the Notice on whether a fairness opinion should be obtained. Staff will continue to defer to boards of directors and special committees to determine whether such an opinion is necessary. In addition, the Notice confirms Staff's view that it is the responsibility of the board of directors or the special committee to determine the terms and financial arrangements for the engagement of the advisor providing the opinion.

In a material conflict transaction, Staff expect issuers to disclose when a fairness opinion was requested but the financial advisor was not able or willing to provide one, including the reasons for not providing the opinion and how this impacted the recommendation made to shareholders in respect of the transaction. Where a fairness opinion is obtained to support a material conflict transaction, Staff expect issuers to provide shareholders with a meaningful understanding of the opinion and how it was considered by the board or the special committee. This disclosure should include the following:

Financial Advisor Compensation. Disclosure of the compensation arrangements with the financial advisor should include whether payments are contingent on successful completion of the transaction or flat-fee based and an explanation of how the compensation arrangement was taken into account in considering the advice provided. It is notable that the requirement to disclose compensation arrangements does not specifically call for the disclosure of compensation quantum.

Independence of Financial Advisor. Any relationship with an interested party that could influence the independence or perceived independence of the advisor delivering the opinion should be addressed and explained.

Methodology and Financial Metrics. Staff expect to see a discussion of the fairness opinion's methodology, including the information and analysis underlying the opinion and financial metrics to supplement the narrative explanation. This requirement is generally satisfied by the disclosure of the formal valuation typically required under MI 61-101 for material conflict transactions. However, this requirement appears to be a change to current practice in situations in which a fairness opinion is being delivered for a material conflict transaction that is exempt from the formal valuation requirements.

Relevance of the Opinion to the Decision to Recommend the Transaction. Staff expect an explanation of the relevance of the fairness opinion in arriving at the determination to recommend the transaction.

What the Notice Does Not Do

What the Notice does not do is address the many M&A transactions that are not subject to MI 61-101 but that nonetheless may give rise to the appearance of conflicts of interest – because of either board or management entrenchment concerns or management incentives to transact (where these conflicts are not adequately addressed by a robust special committee process). Nonetheless, we think two wider lessons can be drawn from the Notice and applied to these situations. First, the Notice should serve as support for the view that no higher standard should be applied to non-MI 61-101 transactions than to material conflict transactions governed by the Notice. In this sense, the Notice implicitly rejects the InterOil standards dictating a fixed fee and disclosure of the amount of the financial advisor's compensation. Second, because the principles underlying the guidance would apply equally in the case of a non‑MI 61‑101 transaction in which management conflicts are not adequately addressed, it would be prudent to follow the dictates of the Notice in respect of process, disclosure and fairness opinions.

Footnotes

1Multilateral CSA Staff Notice 61-302 (Notice), Staff Review and Commentary on Multilateral Instrument 61-101, Protection of Minority Security Holders in Special Transactions (MI 61-101)

2 Hollinger Inc. (Re), (2005), 28 OSCB 3309; Sears Canada (Re), (2006), 35 OSCB 8781; Magna Partners Ltd. (Re), (2011), 34 OSCB 8697.

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