Canadian M&A Perspectives

Private and Public Mergers & Acquisitions | Private Equity

A Graceful Exit

Paying Out Credit Facilities in Connection with an M&A Transaction

By Ana Badour on Posted in Private Transactions

It is quite common that an existing credit facility has to be paid out in connection with the completion of an M&A transaction, as a result of, for example, a new credit facility being put in place to finance the acquisition which replaces the purchaser’s existing credit facility, or as a  result of both the purchaser and the target having separate credit facilities in place prior to the transaction, only one of which will be required going forward.

The process of paying out an existing credit facility should be quite straightforward as long as proper consideration is paid to the following five items:

  1. Payout letter – A payout letter should be obtained from the lender being paid out (or in the case of a syndicated credit facility, from the agent on behalf of the lender).  The payout letter should at a minimum state that, upon receipt of a specific payout amount (including applicable per diem amounts should closing be delayed) set out in the letter, the credit facility is repaid in full, and all guarantees and security are released.  If the credit facility being paid out includes a revolving facility (and especially a swingline facility), the final payout amount may not be available until the day of payout given the possibility of daily fluctuations, in which case you will need to ensure to follow up with the lender being paid out for the amount on the date of repayment.
  2. Letters of credit – Letters of credit issued under the existing credit facility will need to either be cancelled and re-issued to the beneficiary under the new facility, deemed to be issued under the new facility (if the prior lender is the same as the new lender or if it is a part of the syndicate of new lenders), cash collateralized (this is the more common approach where the prior lender is not part of the new credit facility, as it avoids the hassle of obtaining back the original letters of credit) or back-stopped by back-to-back letters of credit.  If letters of credit are to be cash collateralized, additional security documentation may be required and some of the security registrations will need to stay in place (with a more limited collateral description).
  3. Bankers’ acceptances – Advances by way of bankers’ acceptances cannot be repaid prior to their maturity, and as a result any outstanding bankers’ acceptances at the time of the payout will need to be cash collateralized by the borrower (triggering the requirement to deliver additional security and maintain existing registrations in place as described above).  To avoid this issue, if you are expecting to pay out credit facilities, you should consider converting bankers’ acceptances borrowings to prime borrowings as they mature prior to the date the credit facilities are to be repaid.
  4. Discharges of security – While security discharges will not be filed until the payout amount has been received, some discharge documents, such as for example real property discharges, require the signature of the lender that is being repaid and therefore it is preferable that such documentation be signed and delivered in escrow for closing of the M&A transaction so that you do not have to approach the lender again for these after it has been paid out.
  5. Return of pledged collateral – You should ensure that all share certificates and other original collateral pledged to the lenders is returned on payout of the credit facilities.  It is quite likely that such collateral will need to be pledged immediately to any new lender on closing.  In addition, any notes issued to lenders evidencing the loan should be returned on payout of the facilities, so that they can be cancelled.

Lenders which are to be paid out at closing should be approached early on in the transaction to avoid timing issues.  If this is done and the points above are considered in advance of closing, the payout process should then proceed quite smoothly at closing of the deal, permitting the parties to focus on the more substantive and important points of the M&A transaction instead of dealing with last minute hitches relating to a payout of credit facilities.

Doing Business in Canada – 2013 Edition

Buying a Canadian Business, eh? A look back.

By Robert Hansen and Heidi Gordon on Posted in Contractual Matters, Private Equity, Private Transactions, Public M&A, Shareholders, Strategy


Last Spring we announced a special series of blog posts aimed at addressing some of the most significant distinctions between Canadian and US law that ought to be considered in the early stages of the proposed acquisition of a Canadian target.


Following the launch of that series our team blogged about important topics like:

With the release of our 2013 publication of Doing Business in Canada, we are excited to update our US followers that this year we have launched a digital edition available for download to your tablet devices (CLICK HERE), which covers a range of topics about establishing or acquiring a business in Canada.

We look forward to continuing to provide you with coverage of cross-border M&A issues, but in the meantime, if there’s a particular topic you want us to blog about (or if you have questions about Canada more generally), we’d be happy to hear from you – just send us an e-mail: rhansen@mccarthy.ca and hgordon@mccarthy.ca.

Good Faith in the Shadow of Contractual Rights

By Brandon Kain on Posted in Contractual Matters, Private Equity, Private Transactions, Public M&A, Strategy

Most M&A contracts contain provisions that confer discretionary contractual powers on one or both parties to the transaction (e.g., the right to withhold consent to an assignment).  One of the most pressing questions in modern contract law is whether the party in possession of such a power must exercise it in good faith. In Bhasin v. Hrynew, 2013 ABCA 98, the Alberta Court of Appeal recently addressed this issue, and held that parties are not under a duty of good faith in exercising a right of non-renewal when the term of an evergreen contract comes to an end. While Bhasin did not concern an M&A agreement, it is an important cautionary tale for those who would seek to use the duty of good faith to limit any discretionary contractual right, and may well prove important to future M&A litigation.

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The Spin on Spin-Offs (Part 1)

A Valuable Tool to Unlock Shareholder Value

By David Randell and Omar Soliman on Posted in Public M&A, Shareholders, Strategy

On March 6, 2013, Time Warner Inc. issued a press release announcing plans to implement, courtesy of a spin-off transaction, a “complete legal and structural separation of Time Inc. from Time Warner.”

The proposed spin-off highlights an increasing trend among public companies in the face of tough market conditions – the transformation of what are usually large corporations not by building up their assets, but by efficiently siphoning them out. Time Warner would know, too – in the past decade, the company has used the vehicle of the spin-off to divest several of its major divisions, including the spin-off of AOL in 2009, and before that, Time Warner Cable, Warner Music Group and Time Warner Book Group. Last year alone, according to Dealogic, there were 85 spin-offs worldwide worth a total of $109 billion.

Generally speaking, a spin-off occurs when a division of a company is separated into an independent business. It is a form of reorganization in which the parent company (the “Parent”) establishes a new entity (“Spinco”) and distributes shares in Spinco to the shareholders of the Parent on a pro rata basis. In the end, the Parent will have divested itself of Spinco, and the shareholders of the Parent will have retained their respective interests in both the Parent and Spinco.

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Proposed Changes to Early Warning Reporting System Address Market Transparency and Shareholder Activism in Canada

By Cristian Blidariu, Jonathan Grant, Ian C. Michael, Sean Sadler, Rene Sorell and Sonia J. Struthers on Posted in Public M&A, Shareholders, Strategy

Under Canada’s early warning reporting (EWR) system, investors holding 10% or more of a public company’s voting securities must publicly report their ownership levels, the purpose of the transaction and any future intention to accumulate more securities. Eligible institutional investors can report more slowly than EWR filers and provide less information by making use of the alternative monthly reporting system (AMR).

Proposals just published by Canadian securities administrators would lower the reporting threshold, thereby increasing the transparency to the market of significant investments. The proposals would also increase EWR disclosure obligations for investors who acquire derivatives or public company securities through securities lending arrangements and make the AMR system unavailable to institutional investors who engage in certain forms of shareholder activism.

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Shareholder Rights Plans – The CSA Proposal

By Graham Gow, Clemens Mayr, Ian C. Michael and Leslie Milroy on Posted in Public M&A, Shareholders, Strategy

On March 14, 2013, the Canadian Securities Administrators (otherwise known as the “CSA”) published a request and notice for comments regarding Proposal National Instrument 62-105 – Security Holder Rights Plans, the purpose of which is to introduce the CSA’s proposed regulatory regime for rights plans.

The proposed rule, which is discussed in more detail in our publication Securities Regulators Proposed New Rules for Shareholder Rights Plans, does not address other defensive tactics.

In addition, the Autorité des marchés financiers has published An Alternative Approach to Securities Regulators’ Intervention in Defensive Tactics, (the “AMF Proposal”), which will be the subject of a separate publication by McCarthy Tétrault. The AMF Proposal is more general and far reaching in that it applies not just to Rights Plans but to all defensive measures adopted by a board to fend off a hostile bid, and does not contemplate any shareholder approval or ratification requirement. The AMF approach in particular would bring the Canadian regime as regards defensive measures more in line with the US (Delaware) regime, where boards have generally been able to “just say no” to a hostile bid by implementing a rights plan or other defensive measures.

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Defensive Tactics – The AMF Alternative Approach

By Clemens Mayr and Benjamin Silver on Posted in Public M&A, Shareholders, Strategy

On March 14, 2013, the Autorité des marchés financiers has published a consultation paper regarding An Alternative Approach to Securities Regulators’ Intervention in Defensive Tactics (the “AMF Approach”). Concurrently, the Canadian Securities Administrators (otherwise known as the “CSA”) published a request and notice for comments regarding Proposal National Instrument 62-105 – Security Holder Rights Plans, the purpose of which is to introduce the CSA’s proposed regulatory regime for rights plans.

The AMF Approach is more general and far reaching in that it applies not just to rights plans but to all defensive measures adopted by a board to fend off a hostile bid, and does not contemplate any shareholder approval or ratification requirement. It has two major components:

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OfficeMax and Office Depot Merger of Equals – Who Will Sit Behind the CEO’s Desk?

A Difficult Governance Issue Deferred.

By Robert Hansen on Posted in Public M&A, Strategy

One of the more interesting governance issues in any merger of equals transaction is determining which Chief Executive Officer will take the helm of the combined company.  OfficeMax and Office Depot announced the signing of a definitive merger agreement on February 20, 2013 under which the two companies agreed to combine in an all-stock merger of equals transaction. In most merger of equals transactions, the parties agree in advance on who will head up the combined company as CEO.  However, the parties in the OfficeMax and Office Depot merger deferred this decision to a Selection Committee.

The Selection Committee will be created and co-chaired by an independent director designated by Office Depot and an independent director designated by OfficeMax and will be comprised of equal numbers of other independent directors as the co-chairs mutually agree.  The Selection Committee’s mandate is to engage an independent search firm to identify and recommend CEO candidates with the terms of engagement and search criteria to be established by the Selection Committee.  The parties agreed that the Selection Committee will require the search firm to consider the current CEOs of OfficeMax and Office Depot as potential candidates.  Based on a majority vote, the Selection Committee will then make a recommendation to both boards (if the recommendation is made before closing) or to the Office Depot board (if the recommendation is made after closing).  If the recommended candidate is the current CEO of either OfficeMax or Office Depot, the appointment of that candidate to the CEO position will require the affirmative vote of two-thirds of the independent directors.  The appointment of any other candidate as CEO will only require the affirmative vote of a majority of the independent directors.  Generally speaking, if one party’s CEO is selected to serve as CEO of the combined entity, the other party will be entitled to select the chairperson and lead director of the combined entity.

It will be interesting to watch how this creative, and to our knowledge, unique approach unfolds. Perhaps it will serve as an incentive to management of both merger parties to achieve a successful integration.

Defined Contribution Pension Plans: Uncovering the Wolf in Sheep’s Clothing?

By Mark Firman on Posted in Contractual Matters, Private Equity, Private Transactions, Public M&A, Strategy

In my last post, I briefly canvassed the differences between defined benefit (DB) and defined contribution (DC) pension plans.  I cautioned that, due to their perceived financial predictability and apparent straightforward nature, DC plans don’t always get the attention that they deserve from buyers undergoing the due diligence review of a target.

While DB plans give rise to greater financial risk, most practitioners agree that DC plans give rise to greater legal risk. For all their complexity, the rules governing DB plans are at least predictable (even if not necessarily “employer-friendly”). The rules governing DC plans in each Canadian jurisdiction are vaguer, and there are more potential avenues for employer error. In fact, a slew of recent, high-profile U.S. litigation involving DC plans (with some employee groups winning millions or even tens of millions from their employers) suggests that buyers ignore DC plans at their peril.

As with DB plans, due diligence by the buyer remains the strongest defence against inadvertently assuming many of these liabilities. Scratching below the surface of a target’s DC plans should not wait until the deal is done.

The following is a sampling of potentially significant liability for the buyer that careful due diligence of a target’s DC plans can uncover in advance:

  • History Matters.  Plans that the seller represents as “DC” may actually have once been “DB” plans that converted their benefit structure at some point in the past. Any restrictions affecting the employer under the old DB structure could, as a matter of trust law, carry through to the DC structure. In fact, there could still be legacy DB funding and benefit obligations.
  • Member Communications Count.  Incomplete member communications, including booklets and retirement income projections, may lead members to expect rich benefits from their DC plans based on unrealistic assumed investment returns. Members could have strong claims for the difference between what the brochures promised and what they actually receive when they retire with benefits that are less than expected.
  • Fees Can Lead to Trouble.  Uncompetitive fees (including, in some cases, “retail” rates) charged to plan members’ DC accounts could lead to class actions down the road. The U.S. has seen a number of successful class actions against employers for excessive fees charged by service providers. There is no reason these claims could not also be brought in Canada.

Despite their straightforward reputation and appearance, many DC plans raise their own legal issues. Always remember: At a distance, a wolf in sheep’s clothing looks like a sheep.

Advance Notice By-Laws & Defending Against a Surprise Attack

By David Randell and Graeme Norwood on Posted in Public M&A, Shareholders, Strategy

Shareholders typically have three options available to them when looking to nominate directors different than those put forth by the company’s management, (i) a shareholder proposal that is added to the management proxy circular for the applicable shareholder meeting, (ii) the more popular and publicized proxy contest, which generally requires that the shareholder(s) soliciting proxies prepare and mail to shareholders a dissident proxy circular that both identifies the nominees in question and contains certain prescribed disclosure, and (iii) nominating directors from the floor at the company’s annual general meeting (either as a registered shareholder(s) or by way of proxies), usually providing the company with no or very little advance warning.

In August of 2011 our colleague, Matthew Cumming, wrote a blog entry entitled “Dissident Ambush of a Shareholder’s Meeting” which discussed option (iii) and the tactics to consider in taking such an approach. As shareholders of Canadian companies have become increasingly active, this type of behavior has become more common. In response, boards have found a way to defend against being subject to such an unwanted surprise and one that appears to be garnering support – advance notice by-laws.

The typical response when it becomes apparent that the company’s shareholders will face a surprise vote on the election of directors has been to postpone the scheduled shareholder meeting. Canadian courts have proven sympathetic to such a response provided the board of directors, in postponing the meeting, does so in good faith. In allowing the postponement of such meetings, the courts have pointed to the importance of enabling all shareholders to meaningfully participate in the voting process for the election of directors as doing so is good corporate governance.

Despite having jurisprudence on their side, rather than wait to be surprised, boards of companies in Canada have started taking proactive steps to defend against this sort of shareholder behaviour by adopting an “advance notice” by-law. Broadly, the result of adopting such a by-law is that the company’s shareholders are precluded from nominating directors at a meeting of shareholders unless the company receives advance notice of the nomination within a prescribed time period, usually not less than 30 days and not more than 65 days prior to the scheduled meeting, as well as certain particulars regarding the proposed nominees.

Advance notice by-laws have long been a tool of corporate governance in the United States (having been adopted by the likes of JPMorgan Chase and Citigroup), but are gaining popularity north of the 49th. Just recently, Institutional Shareholder’s Services Inc. (“ISS”) released its Canadian Corporate Governance Policy 2013 Updates, which, for the first time, included consideration of advance notice requirements. ISS stated that it would evaluate each proposed advance notice by-law on a case-by-case basis but would likely support advance notice requirements which “provide a reasonable framework for shareholders to nominate directors by allowing shareholders to submit director nominations as close to the meeting date as reasonably possible and within the broadest window possible, recognizing the need to allow sufficient notice, regulatory, and shareholder review”. Specifically, ISS recommends a deadline for notice of a shareholders’ director nomination between 30 and 65 days prior to the meeting date. ISS is not alone in its views as Glass Lewis & Co. (“Glass Lewis”) released its Proxy Paper Guidelines for the 2013 Proxy Season and has also indicated it would generally support these advance notice policies (effectively the same as a by-law).

In addition to the support of proxy voting firms, advance notice policies have recently found support in the courts. In Northern Minerals Investment Corp. v. Mundoro Capital Inc., 2012 BCSC 1090 (CanLII), the court was asked by a shareholder to declare an advance notice policy unenforceable. The court found in favour of Mundoro’s board and went on to state that the policy in question ensured an orderly nomination process and that the company’s shareholders should be fully informed in advance of an annual general meeting.

To date only a handful of small and mid-cap companies in Canada have adopted advance notice by-laws but it’s time for Canadian corporations of all sizes to consider whether following suit makes sense. With AGM season right around the corner, directors may have an opportunity to adopt such a by-law and ask their shareholders to ratify it at the upcoming annual general meeting. We would recommend consulting with counsel before taking any action.

No-one likes to be surprised – and more than ever there is a path to preventing such an unwanted event from occurring.