In almost every Canadian M&A transaction, the board of directors of the target company, and often also the acquiring company, will expect their financial advisors to provide a fairness opinion to the effect that the price in the proposed transaction is fair to the company and its shareholders from a financial perspective. These opinions are not legally required, but they are commonly used by boards as evidence that the directors have met their duties in approving the transaction. Read more.
If your organization is currently thinking about establishing or acquiring a business in Canada, the newest edition of Doing Business in Canada, written by McCarthy Tétrault, will prove to be a valuable resource. The guide provides a broad overview of the legal considerations that non-residents should take into account to help ensure their success as they enter into a business venture in Canada. Each section offers timely information and insightful commentary on different areas of law.
- public offerings and private placements
- take-over bids
- business combinations
- related-party transactions
Canadian securities legislation provides that a take-over bid may be triggered when an offer to acquire outstanding voting or equity securities of a class of a public company is made to a person in a Canadian jurisdiction, where the securities subject to the offer, together with the offeror’s own securities, constitute in the aggregate 20% or more of the outstanding securities of that class. The take-over bid rules may apply in the context of the grant of put and call options. It is therefore essential to structure the terms of these options to ensure the availability of take-over bid exemptions where necessary.
The pre-merger notification transaction-size threshold for 2014 has increased to $82 million from the 2013 threshold of $80 million. As per the indexing mechanism set out in the Competition Act (Act), the pre-merger notification threshold is reviewed annually.
The threshold is based on the book value of assets in Canada of the target (or in the case of an asset purchase, of the assets in Canada being acquired), or the gross revenues from sales “in or from” Canada generated by those assets, calculated in accordance with the Notifiable Transactions Regulations under the Act. The Competition Bureau must generally be given advance notice of proposed transactions when the acquired assets in Canada or revenues generated in or from Canada from such assets exceed $82 million, and when the combined Canadian assets or revenues in, from or into Canada of the parties together with their respective affiliates exceed $400 million. This amount has not been reviewed and remains the same as in 2013.
During a proxy contest, strategic consideration should be given to strictly abiding by proxy solicitation rules and hawkishly assessing whether your opponent is doing the same. A recent decision provides guidance on factors that a court will consider in determining a seldom litigated issue – when is communication by the company during a proxy contest an illegal proxy solicitation?
Generally speaking, corporate statutes in Canada prohibit the solicitation of proxies unless the sender (board or dissident) provides shareholders with a proxy circular containing prescribed information. Under the Canada Business Corporations Act, “solicitation” is broadly defined to include communication with shareholders “under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy”.
In Smoothwater Capital Partners LP I v. Equity Financial Holdings Inc., 2014 ONSC 324, the board of Equity – following the requisition of a shareholder meeting and proxy solicitation by a dissident shareholder — issued a press release defending the board’s historical actions and responding to criticisms by the dissident Smoothwater. Smoothwater alleged that Equity’s press release was calculated to result in the procurement or withholding of proxies. At the time, Equity had not sent a management information circular.
There are important lessons in a recent Ontario Court of Appeal decision examining shotgun buy-sell provisions, and in particular, the enforceability of a buy-sell offer that does not perfectly comply with the terms and conditions of the shotgun provision.
Unanimous shareholder agreements, partnership agreements, and joint venture agreements often contain what is commonly known as a “shotgun buy-sell provision”, which provides a mechanism for involuntarily expelling one or more parties from the business venture when the business relationship between them sours.
For those who may be interested, McCarthy Tétrault has just launched its eleventh blog, Canadian Class Actions Monitor, at http://www.canadianclassactionsmonitor.com. The blog provides the firm’s views on class actions across Canada in sectors including securities, financial services, product liability, competition, healthcare and other areas of business. It also comments on the impact of class actions on Canadian businesses and the legal landscape, and shares our insights on specific class actions in Canada, related developments and cross-border influences
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There are important lessons in a recent Ontario Superior Court decision examining defensive tactics taken by a board in the context of a contested shareholders’ meeting.
In Concept Capital Management Ltd. v. Oremex Silver Inc., 2013 ONSC 7820, the board of Oremex – during a contested election — postponed a shareholders’ meeting and issued shares to a third party, GRIT, in a financing transaction that closed in escrow on the same date as the revised record date for the meeting. Oremex took the view that the new shares could be voted at the contested meeting.
On January 13, 2014, Institutional Shareholder Services Inc. (“ISS”) issued FAQs explaining its views on by-laws designed to prohibit so-called “Golden Leash” arrangements. As discussed in our post last month, such arrangements arise when a shareholder activist privately offers to compensate its nominee directors in connection with such nominees’ service as a director of the target corporation.
ISS’ view is that, absent a shareholder vote, a by-law precluding a nominee director from being compensated by a third party “may be considered a material failure of governance”. Consequently, in such circumstances, ISS may “recommend a vote against or withhold from director nominees for material failures of governance, stewardship, risk oversight, or fiduciary responsibilities.”
ISS takes no issue with a by-law precluding a director nominee for failing to disclose a third-party compensatory arrangement. ISS’ view is that such by-laws promote transparency and better-informed voting decisions.
ISS’ rationale appears to be that a by-law should not infringe on a shareholder’s fundamental right to vote for an otherwise qualified director without a compelling reason. Recently, after Provident Financial Holdings, Inc. (a U.S. bank holding company) enacted a by-law prohibiting nominee directors from receiving third-party compensation without seeking shareholder approval, ISS recommended that Provident’s shareholders withhold their vote for the incumbent directors that were up for election at Provident’s annual meeting (and who earlier in the year had approved the amendment to the Provident by-law prohibiting such third-party compensation).
Even where a by-law is put to a shareholder vote, ISS will apply a “case-by-case analytical framework”, taking into consideration the board’s rationale for adopting the by-law, whether the by-law materially impairs or improves shareholder rights, and “any market-specific practices or views on the underlying issue.”
ISS’ FAQ is also significant for what it does not say. ISS has not drawn a bright line on the appropriateness of third-party compensation for nominee directors provided such arrangements are disclosed. Therefore, in a proxy battle involving “Golden Leashes”, ISS will likely apply a “case-by-case analytical framework” to assess whether a third-party compensation arrangement poses any risk to “governance, stewardship, risk oversight, or fiduciary responsibilities.”
Industry Canada has announced that the Investment Canada Act (Act) threshold for 2014 that applies to most direct acquisitions of Canadian businesses by non-Canadian investors from World Trade Organization (WTO) member countries is $354 million (an increase from last year’s $344 million threshold). The threshold applies to the gross book value of the target’s assets. Note that under the Act, a non-Canadian includes a Canadian-incorporated entity that is ultimately controlled outside of Canada.
The lower threshold of $5 million continues to apply to direct investments that relate to cultural businesses or where none of the non-Canadian parties comes from a WTO member country.
On a date still to be fixed, new regulations under the Act will come into force, dramatically increasing the $354 million threshold for investors (other than state owned enterprises) from WTO member states to $600 million, $800 million and $1 billion over the next six years, with further increases based on a prescribed formula. When the new regulations come into force, the threshold calculation will be based on ‘enterprise value’, a term still to be finalized.
It is worthwhile to remember that the government is also permitted to review any investment by non-Canadians on the basis of “national security” concerns. No financial threshold applies and the government has up to 50 days, following either notification or the filing of an application for review/approval, to issue notice of a potential national security review. Therefore, if a proposed transaction that is not otherwise subject to approval raises national security concerns, parties should consider filing a notification as early as possible in order to obtain pre-merger clearance (or at least trigger the review period prior to closing).