Overview – ESG in the M&A Boardroom
Recent years have seen a significant rise in the prominence of ESG (environmental, social and governance) considerations for Canadian public companies: whether by institutional investors, activist investors or market forces generally, Canadian issuers are being pushed to evaluate their ESG priorities and strategy. Moreover, for the directors of these issuers this exercise involves an added component: weighing the extent to which addressing ESG considerations may be required by their fiduciary duty to act in the best interest of the corporation.
Another area in which directors' fiduciary duties are front and centre is public M&A. When a Canadian public issuer agrees to be acquired, its directors have apparently determined that the transaction is in the best interest of the corporation. Similarly, should the transaction attract one or more competing bids, the target's directors will again have to decide what course of action is in the best interests of the corporation, although this time constrained by the terms of the "fiduciary out" agreed to under the initial transaction.
The question we raise in this two-part series is what happens when the two meet? Or, stated differently, how has the recent rise to prominence of ESG in Canada overall manifest in the specific context of public M&A?
To address this issue we reviewed public M&A agreements involving Canadian reporting issuers executed between May 2021 and May 2023 of individual transaction values of greater than C$100 million, parameters which produced a sample of 73 deals. Moreover, in addition to the applicable transaction agreements, we also reviewed the information circulars filed in connection with each transaction (collectively, our "Public M&A Sample").1
Our main findings were fourfold:
- ESG considerations have been making some interesting inroads into public M&A decision-making, as evidenced in target information circulars.
- While an interesting and perhaps to be expected development, this remains the case in only a small minority of circulars, at least at present.
- Consistent with our general expectations, we have not seen any meaningful evolution in market practice regarding the drafting of "fiduciary outs" specific to ESG-type issues.
- However, ESG considerations can (and sometimes do) manifest in public M&A agreements in other, deal-specific ways.
Our analysis proceeds in two parts.
- In this Part 1, we outline the various inroads by ESG into public M&A decision-making identified in our review of the Public M&A Sample and discuss how this arguably accords with prudent boardroom deliberation.
- In Part 2, coming soon, we consider how ESG considerations may impact the drafting of public M&A agreements, both as relates to "fiduciary outs" and in more customized deal terms such as buyer post-closing commitments.
ESG and Directors' Duties: Old Meets New?
As corporate lawyers know well, the starting point for discussing director's duties is the 2008 Supreme Court of Canada (SCC) decision in BCE.2 The court made several key rulings, three of which are particularly pertinent here. First, the SCC affirmed that directors owe their duties to the corporation itself rather than any of its stakeholders. Second, the SCC clarified that, in deciding the best interests of the corporation, directors may look to the interests of a variety of the corporation's stakeholders, including "shareholders, employees, creditors, consumers, governments and the environment..." Third, the SCC repeatedly underscored that directors are "required to act in the best interests of the corporation viewed as a good corporate citizen..."
These rulings were a helpful clarification for corporate lawyers, the general understanding prior to BCE being that shareholders' interests were at the centre of directors' fiduciary duties. These rulings are also relevant to ESG considerations, the focus of which often includes stakeholders such as employees, consumers and the environment as well as reference to the general notion of companies acting as "good corporate citizens". In particular, BCE allowed boards, to the extent they were not doing so already, to weigh stakeholder interests beyond shareholder interests, including ESG considerations, in deciding whether a proposed course of action is in the best interests of the corporation.
ESG in Public M&A Circulars: ESG from Multiple Angles
Consistent with the foregoing, our review of the 73 public M&A information circulars indicates that ESG considerations are making several different inroads into public M&A decision-making. Three examples are illustrative.
Example A – First Nations at the Forefront
A transaction in which the target circular repeatedly highlighted ESG-considerations regarding First Nations and local community relations occurred in 2021.3 The target was a mining company and, among other reasons for supporting the plan of arrangement, the target board emphasized the two companies' "complementary cultures" and "ESG focus". The target's board indicated that the combined company was "positioned to be a leader in ESG initiatives in British Columbia." The circular also described the offeror as "a respected partner of the First Nations" in B.C. and argued that "First Nations partners and community partners will be very well positioned to succeed and develop under [the offeror's] world-class stewardship." Similarly, the circular argued that the "concurrent operation" of the target's and offeror's nearby mines would "provide enhanced opportunities for both workforces" as well as "allow for aligned and optimal engagement with [local] First nations and the broader community..."
Example B – Is a Competing Bid Less ESG-Friendly?
In another interesting 2021 transaction an issue for the target board was whether a competing bid was less attractive from an ESG perspective.4 Here the board of a large midstream energy company was faced with two concurrent offers, one from another midstream energy player and one from a private equity firm. Although the target would eventually accept a higher second offer from the private equity firm, in an earlier information circular issued in support of the other midstream energy company's bid, the target's board made several noteworthy ESG-related statements.
First was a section highlighting the "sustainability and ESG initiatives" of the target, including its "steadfast commitment to building a sustainable future" and its dedication to conducting its operations in an "ethically, environmentally and socially responsible manner." Second, in arguing against the private equity firm's initial, lower offer, the target board underscored what it claimed to be the "limited transparency on ESG reporting" anticipated from the private equity firm, an alleged "lack of accountability" that was tied to the firm being privately held. Finally, in arguing for the other midstream energy company's bid, the circular emphasized its ESG commitments and track record before reasoning that the combined company would have "greater capacity and a broader portfolio of opportunities to pursue ESG-related investments, including those that... support the transition to a lower carbon economy."
Example C – Is a Competing Bid More ESG-Friendly?
Similarly, in a 2022 mining transaction an apparent issue for the target board was whether a subsequent, competing offer was more attractive from an ESG perspective.5 The target was poised to be acquired by another mining company and among the reasons to recommend the combination the target's board highlighted the companies' complementary cultures and aligned strategic priorities, which included their common commitment "to decarbonisation, environmental, safety and health, diversity and stakeholder value creation targets."
However, the deal was terminated by the target's board after determining that a later bid in the form of a three party arrangement with two other publicly listed mining companies constituted a superior proposal. This included a 15% premium to the implied price of the previous offer as well as a significant cash component. However, the competing proposal also appeared to feature somewhat stronger ESG merits than the previous transaction. One was that the three companies were committed to "responsible growth... underpinned by a strong focus on... upholding leading sustainability and ESG performance." Another was that the target's "leading [ESG] credentials and results" would "improve [the combined company's] ESG position among its peers..." A third was the target's "climate action strategy and its leading efforts in emissions reduction" which were "expected to support and advance the greenhouse gas emissions intensity performance in the combined company."
A Minority Trend, or More to Come?
In total, these examples (and the other examples identified in our review but not summarized here) suggest that it is becoming more common to expressly invoke ESG considerations in public M&A information circulars, and that this can be done from several different angles, including:
- The parties' mutual and/or complementary commitment to certain ESG principles or to ESG generally.
- A particular ESG strength or initiative one or both parties brings to the arrangement.
- A particular ESG-related synergy that stands to be gained via the combination of the companies.
- How a competing bid (where such a competing bid exists) may be more (or less) attractive from an ESG perspective.
That said, the foregoing examples also remain a minority in our sample. Specifically, of the 73 M&A circulars reviewed, only approximately 11% included express discussions of ESG considerations. Therefore, although there has been heightened emphasis on ESG issues over recent years generally, this emphasis has apparently not yet translated into widespread directors' deliberations regarding ESG considerations in the specific context of public M&A, at least to the extent deemed worthy of summarizing in the target's information circular. It therefore remains an open question whether such state of affairs will persist into the future, or whether a continued focus on ESG in the boardroom will gradually lead to more frequent deliberations around, and a clearer articulation of, ESG considerations in deciding the merits of an M&A transaction. After all, although in our sample only approximately 11% of the circulars included express treatment of ESG considerations, we would suspect that a sample from 10 or 20 years ago would feature even less, if any.
Furthermore, these different invocations of ESG considerations arguably accord with prudent boardroom deliberations. Per BCE, where a proposed transaction presents not-insignificant ESG-related benefits, it is arguable that such benefits should be weighed by target directors in judging the overall merits for the transaction. Similarly, should a competing bid appear to be more or less advantageous from an ESG-perspective, it is arguable that this should factor into the target directors' analysis of the competing bid's relative merits. Finally, it is arguable that consideration of ESG-related issues (where such issues are material in the circumstances) is indicative of a robust and informed review process by the directors such as to help attract the business judgment rule and the deference of the courts (i.e., should the diligence exercised by the directors ever be put into question).
ESG in Public M&A: What's Market? – Part 2
Stay tuned for Part 2, coming soon, where we discuss how ESG considerations may impact the drafting of public M&A agreements, both as relates to "fiduciary outs" and in more customized deal terms such as buyer post-closing commitments.
1. The authors give their deep thanks to Andrea Chabot and Simon Brissette for their hard work compiling, organizing and reviewing the Public M&A Sample.
2. BCE Inc. v. 1976 Debentureholders, 2008 SCC 69 (CanLII),  3 SCR 560.
3. See the acquisition of Pretium Resources Inc. by Newcrest Mining Ltd. pursuant to an Arrangement Agreement dated November 8, 2021.
4. See the proposed acquisition of Inter Pipeline Ltd. by Pembina Pipeline Corporation pursuant to an Arrangement Agreement dated May 31, 2021. Note this transaction did not close as the target accepted a revised competing bid.
5. See the acquisition of Yamana Gold Inc. by Pan American Silver Corp. pursuant to an Arrangement Agreement dated November 4, 2022.
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