Canadian M&A Perspectives

Private and Public Mergers & Acquisitions | Private Equity

Plan of Arrangement – A Flexible “Made-in-Canada” Acquisition Structure

By Robert Hansen and Heidi Gordon on Posted in Public M&A, Shareholders, Strategy

Our colleague Matthew Cumming recently discussed some of the most important considerations when choosing between a take-over bid and a plan of arrangement for the acquisition of a Canadian public company. But if you’re like many of our other friends to the South, perhaps you’re wondering, what exactly is a plan of arrangement?

The answer is pretty simple actually. A plan of arrangement is a feature in most Canadian corporate statutes that essentially lets a company carry out a transaction using a process designed by the company, as opposed to following the rather strict rules laid down for an amalgamation or a take-over bid. The company designs the process and the approvals it thinks are appropriate and consistent with past practice and a court grants approval to the process and to the final result.

Once the corporation (often the target corporation in what would otherwise be a merger or take-over bid) has identified what approvals are needed, and who it thinks should be entitled to vote on, and receive notice of,  the transaction, the corporation applies for an initial court order directing it to seek the approval of its shareholders or other stake holders (typically not less than two-thirds of the votes cast at the meeting, with similar class vote thresholds), and to fix certain procedural requirements for obtaining such approval. The target company will schedule a second court appearance for shortly after the transaction is approved by those entitled to vote during which the court will consider the substantive fairness of the transaction. At this hearing, any interested party can appear and object to the completion of the transaction.  Such objections occur rarely, and most practitioners are of the view that the flexibility advantages of a plan of arrangement outweigh the uncertainty risk imposed by the court process.

As Matthew pointed out, one of the key advantages of a plan of arrangement is that it may allow the parties to rely on the exemption in Section 3(a)(10) of the United States Securities Act of 1933 such that any securities being issued by the acquirer to shareholders of the target who reside in the United States will be exempt from registration in the U.S due to the fact that this is a court supervised process. The flexibility of a plan of arrangement also enables the parties to creatively structure transactions (for example, sequencing multiple transactions or providing for the concurrent completion of some steps) to achieve advantageous tax results.

Want to learn more about what to think about when considering the purchase of a Canadian target? Check out our publication, Doing Business in Canada 2012.

MAC Primer: An Overview to the Material Adverse Change Clause

By Tyler McAuley on Posted in Contractual Matters, Private Transactions, Public M&A, Strategy

In most acquisitions, the distance between signing and closing is measured in weeks, if not months. During this interim period the buyer’s ability to safeguard or control the target’s business is limited. This is an uncomfortable position that can be exacerbated if the transaction is consummated between strategic competitors or in a market with substantial volatility. Accordingly, this is a context in which astute counsel can provide significant value to clients through effective risk allocation. There are a number of contractual tools that can be employed to help mitigate the inherent risks during this gap period (i.e. indemnities, escrows, price adjustment clauses); one of the most basic tools at the drafter’s disposal is the material adverse change clause, commonly referred to as the “MAC clause”.

Understanding the MAC Clause

In essence, a MAC clause is a contractual trigger that releases a party from its obligation to complete a transaction where a “material adverse change” affects one of the parties or the underlying assets of the deal. Practically speaking, it can be used by a buyer to walk away from, or more likely to renegotiate, an acquisition in the event that the target’s business, operations or financial condition is significantly impaired prior to closing. This is a very powerful tool that warrants serious attention from parties on both sides of the deal table.

The core of a MAC clause is the definition of “material adverse change”. As such, this is often an area of heated negotiation. MAC clauses are malleable provisions; they can be drafted broadly, to give buyers an easy escape route, or narrowly to drag them along to closing. The scope of the final clause adopted by the parties usually reflects their relative bargaining power and their respective interests during the trajectory of the transaction.

The Drafter’s Dilemma

There are two principal characteristics that make MAC clauses difficult to draft. First, there is a dearth of authorities to provide any meaningful drafting guidance. In part, this is because MAC clauses are creatures of contract and thus are not governed by statute. In addition, they are infrequently litigated in Canada or the United States. Consequently, parties are often left to haggle over the “market standard”, and how such standard should be implemented in a particular deal. Second, MAC clauses are forward-looking in nature. Thus, drafting an appropriate MAC clause requires the parties to foresee future events and to consider their potential effect on the substance of the transaction. The combination of these two characteristics can make drafting a MAC clause a precarious exercise. The upcoming posts in our MAC clause series shed some light on this process by exploring some of the key drafting issues that should be considered in order to craft a MAC clause that works for you.

MAC-Ademy: An Introduction to the Material Adverse Change Clause

By Cristian Blidariu, Waleed Elgohary and Tyler McAuley on Posted in Contractual Matters, Private Transactions, Public M&A, Strategy

Recently, a curious team of our M&A bloggers presented an internal roundtable discussion aimed at understanding some of the key issues regarding material adverse change (otherwise known as “MAC”) clauses. Part of what came out of that discussion is a presentation that provides an introduction to the MAC clause and some analysis regarding current trends in the way MAC clauses are being negotiated and implemented in the Canadian deal market.

In the coming weeks we will publish a series of posts that address some of these trends and other issues to keep in mind when negotiating, drafting, or interpreting MAC clauses. Stay tuned for what we hope to be an interesting and informative discussion.

Will the Battle for Fibrek Impact the Canadian M&A Landscape?

By Leslie Milroy on Posted in Public M&A, Shareholders, Strategy

The recent saga of Fibrek Inc. has been of great interest to those in the M&A community. Many hoped that it would lead to the Supreme Court of Canada giving its view of defensive tactics and strengthen the hand of boards of directors seeking ways to maximize shareholder value in the face of an unsolicited offer.  This would have been very timely as regulators have recently been considering the future of certain defensive tactics (for more on this, please see one of our earlier posts: here). Despite the SCC dismissing Fibrek’s application for leave to appeal, the regulatory and court decisions may still very well have implications for M&A inCanada. 

In the spirit of full disclosure, I feel inclined to tell you that I’ve just returned to McCarthy Tétrault after a very exciting six month secondment to the Corporate Finance Branch and M&A Team of the Ontario Securities Commission. While at the OSC, I worked on aspects of the Fibrek matter. I’m going to post about the saga and its implications over the coming weeks. I note that my posts are limited to publicly available information. 

For those not as familiar with the matter, I thought I’d start out with a short history of the offers for Fibrek and the related proceedings.     

On December 15, 2011, AbitibiBowater Inc. (d.b.a. Resolute Forest Products) made a take-over bid to acquire all of the shares of Fibrek for $1.00 per share (shareholders were also permitted to select consideration in the form of shares or a combination of shares and cash). Abitibi also entered into irrevocable lock-up agreements with three of Fibrek’s largest shareholders, representing approximately 46% of the outstanding Fibrek shares. About a week later, Fibrek’s board recommended that the shareholders reject Abitibi’s offer and adopted a shareholders rights plan. On February 9, 2012, the Québec Bureau de décision et de révision (the Bureau) issued a cease trade order with respect to Fibrek’s shareholders rights plan.

On February 10, the public learned that Fibrek and Mercer International Inc. had entered into a support agreement pursuant to which Mercer would make an offer at $1.30 per share (again, shareholders were also permitted to select consideration in the form of shares or a combination of cash and shares). At the same time, it was announced that Mercer had agreed to subscribe for special warrants pursuant to a private placement at a price of $1.00 per special warrant for an aggregate subscription price of $32.32 million. Because each special warrant entitled Mercer to acquire one Fibrek share without further payment, if issued, the special warrants would result in the holdings of the locked-up shareholders being reduced to 40%. Shortly thereafter, Mercer’s take-over bid was launched.

A couple of days later, Abitibi applied to the Bureau for a cease trade of the Mercer offer and the special warrants, after which the Bureau issued an order that prohibited Fibrek from issuing the special warrants, reasoning that the special warrants and break-up fee contained in the support agreement with Mercer were inappropriate defensive tactics; however, the Bureau also found there was no reason to prevent Mercer from proceeding with its offer.

On March 13, the Bureau’s decision was reversed by the Court of Québec, a decision which was in turn appealed and, on March 27, the Québec Court of Appeal reinstated the Bureau’s decision. 

During this time, Fairfax Financial Holdings Limited, the largest shareholder of both Abitibi and Fibrek, filed an application for hearing and review to the OSC seeking to set aside the decision of the Toronto Stock Exchange to approve issuance of the special warrants and suspend the decision of the TSX until the application is heard by the OSC (the hearing had been adjourned until May 3).

On March 28, Fibrek announced its intention to apply for leave to appeal to the SCC. Shortly after, the SCC granted Fibrek’s motion seeking permission for an expedited process to hear an application for leave to appeal and, if leave was granted, the appeal itself of the Québec Court of Appeal’s decision to maintain the cease trade order of Fibrek’s proposed private placement of special warrants to Mercer. 

On March 28, Mercer filed an application with the OSC requesting a simultaneous hearing with the Bureau to consider whether Abitibi’s offer should be cease traded and other relief granted. After a preliminary hearing, the OSC dismissed the application. The Bureau did hear the matter in early April. Shortly after the application was filed Fibrek’s second largest shareholder, Steelhead Partners LLC, announced it would not tender its approximately 5% holdings of Fibrek shares until Abitibi’s minimum tender condition was met.

On April 11, Mercer announced that it had increased its bid to $1.40 per Fibrek share. On the same day, Fibrek announced it had adopted a second shareholder rights plan that would automatically terminate on May 11. The timing of these actions was critical because the locked-up shareholders of Abitibi were entitled to terminate the lock-up agreements on or after April 13, and the Abitibi offer was to expire at 11:59 p.m. on April 11. Later that same day, the Bureau cease traded Fibrek’s shareholders rights plan. The following day it was announced that Abitibi had taken up 46.8% of Fibrek’s shares and extended its offer to April 23.

On April 18, the SCC dismissed Fibrek`s application for leave to appeal. As a result, the private placement to Mercer cannot be completed.  Shortly thereafter, it was announced that Mercer withdrew its application from the Bureau. 

As of today, both the Mercer and Abitibi offers remain outstanding and 53.2% of Fibrek’s shares remain in play. Currently, Abitibi has taken up 46.8% of Fibrek’s shares and is now its largest shareholder. Many expect that Abitibi will win the battle for Fibrek at the end of the day.  But if this battle has taught us anything, it is to expect the unexpected.

So how will the saga end? And what does it mean for boards of directors? Stay tuned…

Financing the Acquisition of a Canadian Business: Cross-Border Credit Transactions

By Ana Badour on Posted in Contractual Matters, Private Transactions, Public M&A

The acquisition of a Canadian business by US-based purchasers is often financed by way of a cross-border credit transaction involving a Canadian borrower (such as when the US purchaser sets up a Canadian company to make the acquisition, often for tax reasons), possibly also a US borrower (or as is common when a new Canadian company is set up to make the acquisition, a US guarantor), and some combination of Canadian and foreign lenders. In cross-border credit transactions involving a Canadian borrower, certain particularities of Canadian law should be kept in mind when structuring and negotiating documentation:

  • Bank Act – Under the Bank Act (Canada), foreign banks are not authorized to “carry on business in Canada”, other than through a Canadian branch or a Canadian bank subsidiary. This issue arises when a foreign bank lends to a Canadian entity. Any cross-border transaction with a Canadian borrower will need to be structured to ensure Bank Act compliance.
  • Bankers’ Acceptances – LIBOR is only very rarely used in Canada for Canadian dollar-denominated loans (although it is frequently used for US dollar-denominated loans). The equivalent method of availment for Canadian dollar-denominated loans is bankers’ acceptances (for Canadian banks) or bankers’ acceptances equivalent notes (for lenders that are not Canadian banks). There are specific mechanics that are required to be included in agreements in connection with bankers’ acceptances and bankers’ acceptances equivalent notes.
  • Interest Act – As a consumer protection measure, the Interest Act (Canada) requires that the rate of interest be stated in an agreement as a yearly rate, or an annual rate of 5 per cent will apply. As a result, it is customary where there is interest charged to a Canadian borrower to provide for a statement as to how to calculate interest on a yearly basis. This is especially relevant where any of the interest is to be calculated on a 360-day basis.
  • Permitted Liens – In Canada, similar to other jurisdictions, there are customary types of standard permitted liens that should be considered and included in the credit documentation as applicable. In addition, further to the Ontario Superior Court of Justice case Engel Canada Inc. v. TCE Capital Corp., there is a risk of “unintentional subordination”, whereby a lender may unintentionally subordinate its interest as a result of listing permitted liens in credit documentation. It is typical in Canada to include protective language in credit agreements to avoid such a risk.
  • Bankruptcy Matters – The Canadian bankruptcy regime is quite distinct from the US regime. As a result, provisions dealing with bankruptcy matters, such as bankruptcy events of default and any agreement dealing with intercreditor arrangements, should be customized to reflect the Canadian bankruptcy regime.

One note of caution, the Quebec legal system is based on civil law, and accordingly, additional considerations are applicable if the transaction involves a Canadian entity that is a Quebec entity or if any of the documents are to be governed by Quebec law. To learn more about some of the key considerations when planning to acquire a Canadian business, see our publication Doing Business in Canada 2012.

Read the first post in our special series, Buying a Canadian Business, eh? An Introduction to a Special Series.

Buying a Canadian Business, eh? An Introduction to a Special Series

By Robert Hansen and Heidi Gordon on Posted in Private Transactions, Public M&A

We’re often called upon to provide Canadian legal advice to US-based purchasers contemplating the acquisition of a Canadian business. In many transactions, we act directly for the purchaser; in others we’re asked to provide Canadian support to the acquirer’s US legal counsel. There are many similarities between Canadian and US law but if we had a toonie* for each of the important distinctions, we might have enough to buy a Tim Hortons franchise.

Whether you’re a US purchaser or US legal counsel, there are many differences between the two legal regimes that you’ll want to know before delving into the purchase of a Canadian target. Sure, you’ll have to change “labor” to “labour”, “acknowledgment” to “acknowledgement” and “guaranty” to “guarantee” before the target’s Canadian lawyers make these changes on their first mark-up of the purchase agreement.  We also like to keep our definitions section at the front of the purchase agreement rather than tucked away in the back.  But there are many much more important distinctions between Canadian and US law that ought to be considered in the early stages of the proposed acquisition of a Canadian target.

Over the next several months, we’ll be highlighting some of the most significant of these distinctions in our special series on buying a business in Canada – some of which are considered in greater depth in our publication, Doing Business in Canada 2012. We intend to cover a broad range of areas in this series, including posts relating to general corporate and commercial considerations, antitrust and foreign investment review, tax, employment, real estate and intellectual property. In the meantime, if you’re visiting a target’s business or coming to Canada to attend a closing in July, you can be confident in your decision to leave your skis at home (it rarely snows in Canada in July and the moose would laugh at you).

* Many Americans are familiar with the one-dollar Canadian coin called the “loonie”, but fewer are familiar with the “toonie”, which emerged in 1996 as the Canadian two-dollar coin.

Five Considerations for Borrowers Completing a Disposition

By Ana Badour on Posted in Contractual Matters

In my prior post, Seven Considerations for Borrowers Completing an Acquisition, I described seven key issues that borrowers should consider when completing an acquisition.   Similarly, if your company is considering a disposition (either of assets or of shares) and is a borrower under a credit facility, it is important to consider whether the proposed disposition will result in a breach of any of the provisions of your credit documentation.  Here are five key questions to ask when undertaking a disposition:

  1. Is the disposition permitted under the credit agreement? Many credit agreements contain negative covenants that prohibit dispositions without consent of the lenders or impose restrictions on dispositions. For example, some credit agreements will impose limits on the dollar amount of permitted dispositions (either in the aggregate over the term of the credit facility, in the aggregate over a fiscal year or individually) or a requirement that the disposition meet certain requirements, such as being on reasonable commercial terms with a third party. If the disposition is not permitted, you will need to seek consent of the lenders.
  2. Is there a requirement to use the proceeds of the disposition in a specific manner?  Some credit agreements require either that the borrower re-invest the proceeds of a disposition in the business within a certain time, or that all, or a portion of, the proceeds of the disposition be applied as a repayment of the credit facilities.
  3. Are there several steps to the disposition? If so, each step should be reviewed to determine whether it is permitted under the credit agreement or whether consents or notices are required under the terms of the agreement in order to implement any step or series of steps.
  4. Will the disposition affect the calculation of financial covenants?  The completion of a disposition may affect the calculation of various financial covenants under the credit agreement.
  5. Is there a need for a release of security?  If the credit facilities are secured, the purchaser may require the delivery of a specific release of security from the lenders whereby the lenders agree to release their security interest against the assets or shares being sold.  There may be timing concerns since lenders generally do not wish to provide a release of security prior to the disposition having been successfully completed. These timing issues are typically addressed through escrow arrangements.

As the structure of the disposition transaction evolves, you should regularly review and consider your existing credit documentation to ensure that such changes do not result in non-compliance with the credit documentation.

Once Sold, D&O Liability Doesn’t Stop

By Leila Rafi and William Scott on Posted in Private Transactions, Public M&A

When a company is sold in an M&A deal, directors and officers remain exposed to claims with respect to activities pre-acquisition. Therefore, D&Os have a lot to worry about when their company is being sold. To protect themselves, D&Os on target boards should try to negotiate the purchase of a run-off D&O insurance policy with the acquiring company before the sale is complete, while they still have some bargaining power left.

Run-off policies are a one time purchase which last for a set duration (typically six years) and usually cannot be cancelled or amended once purchased. Sometimes D&Os will have contractual indemnities with the companies for which they work. Generally, contractual indemnities remain silent on the purchase of run-off policies in an acquisition or insolvency context.

Liability is always a consideration for the players in a share sale, but depending on who you are, the concerns are different. Like everything, insurance comes in many shapes and sizes and D&O insurance is no different. Basically, there are four types of primary D&O insurance including:

  • Side A coverage where the insurer pays the D&O directly in instances where the company will not or cannot pay;
  • Side B coverage where the insurer reimburses the company for indemnification payments made to the D&O; 
  • Side C coverage where the insurer pays the company with respect to the company’s liabilities for certain wrongful acts including securities claims or employment practices claims; and
  • Side A Excess Difference-In-Condition coverage where the insurer pays the D&O directly and operates as enhanced coverage (which can fill gaps in underlying coverage).

Keeping the types of insurance in mind, see below for a snapshot of considerations in a share sale which change, depending on who you are. 

Who

What to Worry About

What to Check

Get Protected
Acquiring Company Liability for claims regarding pre-acquisition conduct by D&Os who retire at acquisition. Is there a written  contractual indemnity that will continue post-acquisition?   If there is a contractual indemnity, read it as it will likely provide for indemnification by you for claims made against former D&O for activities while they acted for the company. This means you remain liable to D&Os who retire post-acquisition.Insist on retaining Side B and C coverage in any run-off policy obtained. Side B coverage will ensure that you are reimbursed for any indemnification payments you are obligated to make to the former D&O. 
D&Os of Target Company Who Retire on Acquisition Initiation of claims against you for conduct pre-acquisition. Is there a written contractual indemnity that will continue post-acquisition?  If there is a contractual indemnity, read it as it will likely continue indefinitely (including when you cease to act for the company) to cover claims for conduct while you acted as a D&O. If it does terminate, you are exposed.Demand a run-off policy be obtained (ideally with Side A Excess Difference- in-Condition coverage) as the acquiring company may not have coverage or may not have sufficient assets to satisfy any obligations. 
Target Company Responsibility for undisclosed liabilities. Acquisition agreement Resist residual obligations to the acquiring company when negotiating the acquisition agreement.No concerns with respect to any contractual indemnity that may exist or any run-off policy. 
 

What is the lesson to be learned for a D&O in terms of how to stay protected? Always obtain contractual indemnities with the companies you work for and make sure such contracts don’t expire when you cease to be a D&O, and, in an acquisition context, demand a run-off insurance policy be obtained which contains Side A coverage and ideally, Side A Excess Difference-In-Condition coverage.

Cutting Through! Strategies to Address Recent Developments in the Regulatory Review Process

By Oliver J. Borgers and Tyler McAuley on Posted in Private Transactions, Public M&A

In our last post we highlighted some of the important developments in the regulatory rules regarding foreign direct investment and the Competition Bureau’s merger review process. In consideration of these changes, we’ve put together some of the important strategies to keep in mind when conducting a transaction that will fall under these, or any other regulatory review process. 

Issue Spotting and Implementing a Review Strategy

In order to ensure a smooth review process, or to avoid the review process entirely through proper notification, parties to a transaction and their counsel must be alive to the applicable regulatory issues early in the trajectory of the deal. Counsel familiar with the law surrounding regulatory review should be engaged and, where the review process is triggered, a strategy should be developed for notification, review and compliance.

Tolling

Both the foreign investment and competition review process is structured around explicit timing triggers. Activating these triggers at the most desirable time can help deal lawyers “manage the clock” on a transaction. This can have important implications for the momentum of the deal. By triggering the mandatory waiting periods early, parties can avoid unnecessary delays caused by unplanned regulatory review.

Open Dialogue with the Regulators

Under either regulatory regime, parties are encouraged to engage in discussions with the regulators prior to, or as soon as possible after, submission of the first notification filings. The goal of consultation with the regulators is to identify issues early in the review process. Ultimately, this dialogue can help facilitate a more efficient and effective review process.

Implementing these three strategies can help parties navigate the regulatory review process more effectively, preserve their deal and avoid any unnecessary and wasteful delays.

Canadian Contractual Interpretation Law: A New Edition

By McCarthy Tétrault LLP on Posted in Contractual Matters

The second edition of Canadian Contractual Interpretation Law by Geoff Hall (one of our contributing bloggers) has just been published. The book is the only text focused on contractual interpretation under Canadian common law and the new edition includes commentary on contractual interpretation under Quebec civil law. As such, it is a helpful resource for commercial lawyers who, as private practitioners or in-house counsel, are responsible for drafting contracts; litigators who deal with contractual interpretation disputes; and judges and arbitrators who hear such cases.

Further information is found on McCarthy Tétrault’s website and the book is available for purchase on LexisNexis’s website.