Alberta’s Court of Appeal recently overturned a controversial interlocutory decision involving a proposed acquisition by Alberta Oil Sands Inc. (“AOS”) of Marquee Energy Ltd. (“Marquee”) pursuant to a plan of arrangement under s. 193 of Alberta’s Business Corporations Act (“ABCA”). Even though only Marquee was being arranged, thus necessitating a vote by its shareholders, the underlying decision of the Court of Queen’s Bench required that AOS also seek the approval of its shareholders to implement the transaction. The Court of Appeal set aside the lower Court’s order requiring AOS shareholders to vote on the Marquee arrangement.
In the context of a merger or acquisition, a vendor may unknowingly make untrue representations about the target business. “Sandbagging” occurs when a buyer discovers such misrepresentations prior to closing and seeks to enforce indemnity provisions after closing. The success of such claims will depend on the following:
- The Terms of the M&A Agreement. If the parties expressly agree that the buyer’s knowledge will (or will not) bar post-closing indemnification, Canadian courts will consider, and likely respect, the parties’ intentions.
- The Common Law. In Bhasin v Hrynew (“Bhasin”), the Supreme Court of Canada articulated a general duty of good faith that applies to the performance of all legal contracts.1 If the M&A agreement is silent on sandbagging, Canadian courts will be asked to consider whether the buyer’s indemnity claim is compatible with the general duty of good faith expressed in Bhasin.
Canadian courts have not yet offered specific guidance on whether it is possible to sandbag in good faith. Pending further judicial instruction, the discussion below offers tips on how to minimize uncertainty by including clear and comprehensive pro- or anti-sandbagging provisions in M&A agreements.
The Ontario Securities Commission (OSC) and the British Columbia Securities Commission (BCSC) have released joint reasons for their decisions in the Dolly Varden dispute. As expected, these reasons provide capital markets participants with guidance (including a framework) for assessing the future use of private placements as a defensive tactic (i.e. so-called “tactical” private placements) under Canada’s new harmonized take-over bid regime (New Bid Regime) that came into effect on May 9, 2016.
For more information about the New Bid Regime, see our previous article, Canada’s New Take-Over Bid Rules Seek to Level the Playing Field.
Many US and Canadian public companies have implemented so-called advance notice provisions (“ANPs”), bylaws and policies requiring shareholders to provide a company with notice by a specified deadline should they wish to propose an alternative slate of directors at a shareholder meeting. Recently, a shareholder of a US company listed on the New York Stock Exchange ran out of time to provide the usual form of notice and instead nominated “placeholder candidates”. This article examines the novel and previously untested tactic of nominating “placeholder candidates” in proxy contests.
McCarthy Tétrault’s Doing Business in Canada provides a user-friendly overview of central aspects of the Canadian political and legal systems that are most likely to affect new and established business in Canada. The newest edition reflects legislative changes including:
- Changes to the Competition Act and Investment Act Canada;
- and an updated Mergers and Acquisitions chapter including new rules on takeover bids in Canada.
General guidance is included throughout the publication on a broad range of discussions. We also recommend that you seek the advice of one of our lawyers for any specific legal aspects of your proposed investment or activity.
Download the updated guide
On June 8, 2016 Bill 218 (the Burden Reduction Act, 2016) passed first reading. The Bill is part of a provincial government initiative to, in part, reduce the regulatory burden on Ontario businesses. Schedule 3 of the Bill repeals Ontario’s Bulk Sales Act (BSA). The BSA was enacted in 1917, and is intended to protect unpaid trade creditors (i.e. the people a seller is indebted to for goods, money or services furnished for the purpose of enabling the seller to carry on his or her business) from “bulk sales” by a seller of all or substantially all of its assets over a short period of time.
The consequences of not complying with the BSA can be significant, and can include a non-compliant transaction being set aside by a court upon the application of a trade creditor of the seller. As such, the BSA is an important consideration for both the buyer and the seller in an Ontario M&A transaction that is structured as an asset deal.
Since Canada’s new harmonized take-over bid regime (New Bid Regime) came into effect earlier this year, there’s been a lot of talk about whether tactical private placements will become the new poison pills. For more information on the New Bid Regime see our previous article, Canada’s New Take-Over Bid Rules Seek to Level the Playing Field.
A “tactical private placement” occurs when a target company issues securities to a friendly party in response to an unsolicited take-over bid in order to make it more difficult and/or more expensive for the hostile bidder to complete a take-over of the target company. This outcome is particularly important to target companies under the New Bid Regime for two key reasons. First, as a consequence of the New Bid Regime, shareholders rights plans are largely irrelevant in deterring hostile bids because such offers must remain open for at least 105 days (rather than 35 days under the old rules). Second, the New Bid Regime contains a mandatory condition that a minimum of more than 50% of all outstanding target securities owned or held by persons other than the bidder and its joint actors be tendered and not withdrawn before the bidder can take up any securities under the take-over bid.
While the Canadian securities regulators had considered the use of private placements several times in the context of a take-over bid, regulators had not, until the Dolly Varden hearing, had the opportunity to respond to a claim by a bidder operating under the New Bid Regime that a target company had used a private placement as an inappropriate defensive tactic.
On June 27 Idaho-based Hecla Mining Co. announced its intention to acquire an additional 50% of the shares of Dolly Varden Silver Corp., with the formal offer being launched on July 8. A few days later, Dolly Varden communicated to its shareholders that they should take no action with respect to the hostile bid, and that Dolly Varden would be proceeding with a private placement it had previously announced on July 5. According to Dolly Varden, the proceeds of the private placement are to be used to pay off debt and for working capital purposes.
On July 8, Hecla filed an application with the British Columbia Securities Commission (BCSC) seeking a permanent order cease trading the private placement and any securities issued, in connection with the private placement, or in the alternative, an order cease trading the private placement unless and until Dolly Varden obtains shareholder approval of the private placement. On July 11, Hecla filed an application with the Ontario Securities Commission (OSC) seeking substantially the same relief.
About a week after Hecla’s application to the BCSC, Dolly Varden signed an undertaking to the BCSC that it would not conduct a distribution of any securities, under the private placement or otherwise, until the BCSC rendered its decision in the application. This undertaking was presumably intended to preserve the remedies available to the securities commissions if they were to decide in favour of Hecla.
Earlier today, the OSC and the BCSC released their decisions dismissing Hecla’s application, thus allowing Dolly Varden to proceed with the private placement.
We will provide a further update once the commissions release the reasons for their decisions in the Dolly Varden dispute. The reasons will likely provide capital markets participants with important guidance on the future use of private placements as a defensive tactic under the New Bid Regime.
 Before the New Bid Regime, Canadian regulators have considered allegations that the issuance of securities in the context of an ongoing take-over bid was an improper defensive tactic. For instance, see AbitibiBowater inc. (Produits forestiers Résolu) c. Fibrek inc., 2012 QCBDR 17 aff’d 2012 QCCA 569; ARC Equity Management (Fund 4) Ltd. (Re), 2009 LNABASC 315; Inmet Mining Corporation (Re), 2012 BCSECCOM. 409 and Re Red Eagle, 2015 BCSECCOM 401.
The Canadian Securities Administrators recently released the results of its continuous disclosure review program for the fiscal year ended March 31, 2016, which includes findings and guidance related to disclosure regarding forward looking information, non-GAAP financial measures, information circulars and material contracts – all of which have particular significance in the M&A context.
On July 18, 2016, the Canadian Securities Administrators (CSA) published a summary of the results of their annual continuous disclosure review of reporting issuers for fiscal year 2016, in CSA Staff Notice 51-346 – Continuous Disclosure Review Program Activities for the fiscal year ended March 31, 2016 (Staff Notice). The Staff Notice includes information about areas where common disclosure deficiencies were noted, with examples in certain instances, to help Canadian public companies address these deficiencies and to illustrate their view of best practices.
Although the Staff Notice is of general significance to Canadian public companies looking to fine-tune the quality of their public disclosure, there are a handful of considerations that emerge from the Staff Notice that are particularly relevant in the M&A context. As such, the discussion below provides important reminders to Canadian public companies contemplating M&A activity in the near future. In addition to the matters discussed below, the Staff Notice also includes a discussion of certain M&A specific matters that relate to financial statement disclosure, including how to identify and account for contingent consideration in business combinations, and goodwill and intangible assets recognized in business combinations.
Forward Looking Information
When a Canadian public company makes disclosure of a proposed acquisition, that disclosure will generally involve disclosure regarding possible events, conditions or financial performance that is based on assumptions about future economic conditions and courses of action and includes future oriented financial information with respect to prospective financial performance, financial position or cash flows that is presented either as a forecast or a projection. This is what is known as “forward looking information.” Continue Reading
Undertaking to use “best efforts”, “commercially reasonable efforts” and variations of such specified levels of effort are frequently provided for in M&A deals. Undertaking to use a specific degree of effort addresses parties’ obligations that are not entirely within their control and indicates that performance and result are not guaranteed or assured. Examples of obligations for which parties typically undertake to use a specified degree of effort include the obtaining of regulatory approvals, financing and third party consents. Although the rationale for undertaking to try to accomplish something is clear, the desire to circumscribe obligations by “best” or “reasonable” efforts can produce vague standards open to interpretations. The application of these provisions can be linked to the particular circumstances in which they are applied and which may not have been considered by the contracting parties at signing. There is no clearly defined or settled meaning to the terms “best efforts” or “commercially reasonable efforts.” Although the terms are frequently used in M&A deals, there is much uncertainty as to the meanings associated with the standards of efforts.
Fintech M&A activity, in both the Canadian market and globally, is expected to be on the rise over the next few years. In its 2016 Report, FinTech: Prepare for a Wave of M&A, UK-based investment bank FirstCapital, predicts that fintech M&A deal flow will increase “as financial incumbents look to catch up with widespread innovation from new entrants, the internet majors scale up in financial services and the technology/software majors add new technology to deepen their offerings in this sector”.
Like with the acquisition or sale of any technology company, strategic due diligence is a critical component of the fintech M&A process. However, in addition to the typical focus on issues related to intellectual property and information technology, due diligence in the fintech space requires careful consideration of several unique issues as described below. Continue Reading