Canadian M&A in 2013 - Part II

February 1, 2013

In the second of a two-part series looking at the state of M&A law in Canada, members of Stikeman Elliott’s national M&A group discuss 2013's top issues and trends from a variety of perspectives. Part Two includes reports on developments with respect to defensive measures (including the latest on poison pills), M&A activity by Canadian pension funds and banks, new developments in shareholder activism, trends in M&A financing and an energy-focused round-up of M&A news from Alberta.

(To read Part I of the article, click here.)

Developments re: Defensive Measures

John Ciardullo, Toronto, Steeve Robitaille, Montréal, and Simon Romano, Toronto

Developments in 2012 with respect to defensive measures in the M&A context highlight the tension that can exist between the corporate laws that a target board must comply with in the M&A context and the requirements of securities laws as administered by the securities regulators, who approach change of control transactions from a very specific policy orientation.

Regulation of Rights Plans

Since the implementation of Canada’s national securities regulatory policy on defensive tactics in the late 1980s (now our National Policy 62-202 – Take-Over Bids – Defensive Tactics), the prevailing approach to rights plans and other defensive tactics has been that they cannot be used to prevent shareholders from deciding for themselves whether to tender to a take-over bid. Any action that denies or limits their ability to do so is likely to result in action by our securities regulatory authorities. As such, it has generally been a question of “when” and not “if” a rights plan will be cease-traded by a securities regulator. This generally occurs after a target has had a period of time deemed ample to identify a better alternative transaction (usually 45-75 days).

However, in recent years, market participants have begun to question whether this “shareholder centric” approach is correct or whether target boards should be given greater powers, particularly in light of the contrasting approach adopted by Canadian courts, which have shown a willingness to defer to the business judgment of target boards in decisions like the 2008 decision of the Supreme Court of Canada in the BCE Inc. matter. This change in tide and sentiment was arguably reflected in two notable securities regulatory decisions – Pulse Data (Alberta Securities Commission, 2007) and Neo Materials (Ontario Securities Commission, 2009) – where target boards were permitted to maintain rights plans which received current, informed and overwhelming shareholder support of the company’s shareholders. Indeed, in Neo Materials, the Ontario Securities Commission panel found that the determination by a target board not to seek alternative offers at the time of a hostile bid, and to opt for the status quo, was valid, and that “a rights plan can be adopted for the broader purpose of protecting long-term interests of shareholders where, in the directors’ reasonable business judgment, the implementation of the rights plan would be in the best interests of the corporation”. However, more recent decisions such as Lions Gate (BCSC, 2010), Baffinland (OSC, 2011), Mosaid (OSC, 2011), Afexa (ASC, 2011) and Inmet Mining (BCSC, 2012) have reflected a reversion to the pre-Pulse Data/Neo status quo.

Nevertheless, questions concerning the appropriate approach persist, as do questions concerning the relevance and likely impact of recent, informed shareholder approval of a target rights plan. For these and other reasons, staff of the Canadian Securities Administrators have been working on a new approach to poison pills that they hope to publish for comment during 2013 [ed. note: subsequently published March 14, 2013]. Instead of a 45–75 day “it is time for the pill to go” approach, which has arguably made Canadian target companies some of the most defenseless in the world, the new approach would enable rights plans that have been recently approved by a majority of “disinterested” shareholders to remain in place so long as they are similarly terminable by a shareholder vote. The suggested approach thereby attempts to strike a balance between the historical Canadian approach and a U.S.-style approach that is prepared to defer to the decision of a target board, provided that such board can withstand enhanced judicial scrutiny of its actions.

However, the new proposal is complex, and it is unclear whether it will receive enough buy-in to ever see the light of day. Even if it does, there will certainly be a number of issues with respect to the proposal that will need to be addressed, which tends to beg the question as to whether there isn’t a more direct and efficient way to address the perceived issues with our current securities regulatory approach. For example, the restrictions on defensive tactics mandated by National Policy 62-202 could be removed, which would allow our Canadian courts, rather than securities tribunals, to evaluate whether the use of a defensive tactic is appropriate in the face of a particular bid. In Delaware, where over half of US listed issuers are incorporated, the conduct of boards in reaction to a hostile takeover bid is reviewed by courts alone, and a sophisticated body of jurisprudence has evolved to evaluate and address these situations. Adopting a similar approach in Canada would not only put the boards of directors of Canadian companies on the same footing as those of their U.S. counterparts, but it would also allow the evolution of the law and policy governing change of control transactions in Canada to continue on a harmonized basis.

Private Placements by Acquisition Targets

Another hot topic in Canadian M&A in 2012 was private placements in the M&A context in the wake of the AbitibiBowater v. Fibrek decision out of Quebec and the decision of the British Columbia Securities Commission in Petaquilla/Inmet Mining.

In Fibrek, the target board found itself in a situation where it was subject to a unsolicited bid by a party (Resolute) that had entered into hard lock-up agreements with Fibrek shareholders owning approximately 46% of the company (one of whom was also a large shareholder of Resolute). In response to the Resolute bid, the Fibrek board procured a valuation which valued the shares at a price that was a significant premium to the price per share offered by Resolute. Moreover, Fibrek canvassed for alternatives and ultimately managed to find a “white knight” (Mercer) which was prepared to make a friendly bid at a 30% premium to the Resolute bid (later increased to a 40% premium). In order to facilitate the Mercer transaction in the face of the hard lock-ups, Fibrek agreed to issue Mercer special warrants for 19.9% of its shares, thereby reducing the percentage of locked-up shares to the bid from 46% to about 37%. The special warrants could not be exercised for 21 days and the holder was required to tender all of its shares to any “superior proposal” accepted by 50.1% of the Fibrek shareholders. In such circumstances, the holder would have to surrender to Fibrek either the break fee or its profit on tendering to the superior proposal.

Resolute complained to the independent administrative tribunal of the Quebec securities regulator (the AMF) about the action taken by the Fibrek board, and in a decision that was surprising to many and against the opinion of the staff of the AMF, the tribunal exercised its “public interest” discretionary power to cease trade the issuance of shares by Fibrek to Mercer, concluding that the issuance of warrants in connection with a control contest should only be allowed where there is an immediate need for capital, and not to neutralize the effect of lock-up agreements, thereby depriving the minority shareholders of Fibrek of a 40% premium to the Resolute bid. The decision was upheld on appeal to the Quebec Court of Appeal, largely on the basis of deference to the expertise of the tribunal. Leave to appeal that ruling to the Supreme Court of Canada was denied.

Similarly, in response to an application by Inmet Mining for certain relief in connection with an unsolicited take-over bid it was making for Petaquilla Minerals, the British Columbia Securities Commission decided to issue an order (among other things) “cease trading” a proposed note offering by Petaquilla unless Inmet acquired none of Petaquilla’s shares under the bid. What was particularly surprising about the decision was the lack of evidence that the proposed financing was intended as a defensive mechanism. In fact, the proposed financing had been announced several weeks before the announcement of Inmet’s unsolicited bid, and the BCSC found that the financing “was in the ordinary course of business” and “no evidence that it was an artificial transaction created as a purely defensive measure”. Nevertheless, there were a number of details concerning the proposed note offering that had yet to be determined, and the BCSC determined that its order would not have a negative impact on Petaquilla during the short time frame to the expiry of Inmet’s bid. Moreover, there existed the possibility for warrants to be issued as part of the note offering, the exercise of which would have a dilutive effect on Inmet. In addition, in his testimony, Petaquilla’s Chief Executive Officer did not rule out the possibility of the financing being used as a defensive mechanism. Nevertheless, the primary impetus for the BCSC order appears to have been the potential for the proposed financing to disrupt the Inmet bid which was conditional upon it not proceeding, irrespective of the motivation of the Petaquilla Board. In this respect, the decision seems to go beyond the existing principles of our National Policy on defensive tactics, and creates the risk that actions taken by a board in good faith with the view to the best interests of the company prior to an unsolicited take-over bid can be subsequently successfully challenged should a hostile bid for the company conditional upon the failure of the proposed conduct in question emerge.

These controversial decisions are inconsistent with judicial decisions in similar contexts including the 2011 decision of the British Columbia Court of Appeal in Icahn Partners v. Lions Gate Entertainment Corp., where a willingness to give deference to the business judgement of the target board was expressed. Accordingly, they again highlight the discrepancy between the policy biases of the securities regulators, who use their “public interest” jurisdiction to intervene in board conduct in order to protect shareholder interests, and the approach taken by courts, who focus on the board’s conduct and whether they have complied with the duties imposed on them under corporate law, and make it clear that securities regulators can intervene on “public interest” grounds even where a board’s conduct complies with applicable fiduciary duties. The tension is exacerbated by the growing scope of the public interest powers of our securities regulators and their “right to be wrong” when their decisions are judicially reviewed. As such, the decisions give rise to important policy questions concerning the appropriate circumstances in which a securities regulator should legitimately be entitled to intervene, and more broadly concerning the appropriate balance of power between Canadian courts versus securities regulators in the M&A context and the extent to which it is necessary to reconcile varying approaches to ensure consistency and predictability for all market participants.

Potential Enactment of Anti-Takeover Laws in Quebec

A final interesting development in 2012 was the strong negative reaction that an unsolicited approach by U.S. hardware-chain Lowe’s Companies, Inc. attracted when it sought to acquire RONA Inc. just as the Province of Quebec was headed for an election. After RONA made the $1.8 billion unsolicited approach by Lowe’s public and rejected it in early July, Quebec’s then-Liberal finance minister released a statement opposing the proposed take-over due to the importance of RONA to the Province of Quebec, where half its +30,000 employees are based.

Election hyperbole aside, in November 2012, the new Quebec minority government formed by the Parti Québécois (PQ) reiterated its intention to preserve and strengthen Quebec companies. According to statements made by Nicolas Marceau, Quebec Finance Minister, part of the plan would give the board of directors of a Quebec company that is subject to a hostile take-over bid the power to consider not only the interests of its shareholders but also those of a broad range of stakeholders, including the host community and the company’s employees and retirees. Reports have also surfaced that another part of the plan would permit the board of directors of a Quebec company faced with a hostile take-over bid to use other defensive tactics, including the power to make the bid unavailable to the company’s shareholders if the board of directors believes that the bid is inadequate.

The government has not yet officially articulated the precise form these initiatives would take, and given the government’s expressed intention to consult the business community beforehand, no bill is expected to be introduced for several months. However, concern is already being expressed about the implementation of these potential plans. To some extent, these concerns may be exaggerated for a number of reasons. First, it is not clear that any legislation seeking to implement these plans would pass through the National Assembly where the PQ does not hold the majority of the seats. Second, these plans are assumed to be directed to corporations governed by Quebec’s Business Corporations Act, which represent less than 2.45% of the companies listed on the TSX as at December 7, 2012. Third, to some degree at least, these initiatives could merely amount to a codification of principles established by the 2008 decision of the Supreme Court of Canada in BCE Inc. v. 1976 Debentureholders. Moreover, in the United States, numerous states, such as New York and Massachusetts, have codified the power of directors to consider the interests of other stakeholders and to have a long term view of the company, including during a potential take-over of the company. Nevertheless, any firm action of this nature will clearly add a layer of complexity for any potential buyer of a Quebec-based company to address and contribute further to the unlevel M&A playing field in Canada. As such, query again whether it would be more advisable for the restrictions on defensive tactics mandated by National Policy 62-202 to be removed, and to allow Canadian courts, rather than securities tribunals, to examine whether the use of a defensive tactic is appropriate in the face of a particular bid.

Canadian Banks and Pension Funds Continued Trend of Investment

Curtis Cusinato, Toronto and Stewart Sutcliffe, Toronto

The “Big Six” banks

In 2012, Canada’s “big six” banks were fairly active on the M&A scene in transactions that included the TD Bank Group’s acquisition of MBNA’s credit card business from Bank of America, Scotiabank’s acquisition of ING Bank of Canada and National Bank’s acquisition of HSBC Canada’s full service investment advisory business, and several Canadian banks rumored to be former lending unit Ally Financial.

Underlying this behavior is two realities for leading Canadian banks which we expect to continue unabated in 2013: limited domestic growth opportunities and profitability of their domestic banking businesses and the well documented troubles of capital deficient U.S. and other foreign banks. The first of these will lead Canadian banks to enhance market share by continuing to complete acquisitions of assets domestically, where possible, while the second creates an opportunity to effect strategic acquisitions abroad to assist with global diversification and to enhance their global footprints abroad. Specifically, wealth management has become a priority for almost all of the big Canadian banks, and with a competitive Canadian market and a desire to align traditional Canadian banking with global wealth management, the trend of foreign acquisitions will likely continue in 2013 as these financial institutions look for opportunities for growth abroad.

Recent examples include:

  • Royal Bank of Canada’s acquisition of the Latin American Caribbean and African international private banking business of Coutts in March 2012;
  • Royal Bank of Canada’s acquisition of Fortis Wealth Management Hong Kong Limited in November 2010;
  • Royal Bank of Canada’s acquisition of BlueBay Asset Management in October 2010; Bank of Nova Scotia’s acquisition of Five Continents Financial Ltd (Cayman Islands) in 2009;
  • Bank of Montreal’s acquisition of a 19.99% interest in COFCO Trust Co. (China) in August 2012;
  • Bank of Montreal’s acquisition of Lloyd George Management (Hong Kong) in April 2011;
  • Toronto Dominion Bank’s proposed acquisition of Epoch Investment Partners (United States);
  • Canadian Imperial Bank of Commerce’s acquisition of the private wealth division of MFS McLean Budden in August 2012; and
  • Canadian Imperial Bank of Commerce’s acquisition of a 41% equity interest in American Century Investments (United States) in August 2011.

The continuation of this activity is further supported by the fact that the big six Canadian banks are expected to remain well capitalized in 2013 with high levels of liquidity and readily accessible funding in the Canadian capital markets at extremely low rates as compared to global standards. With existing global economic uncertainty, continuing risks from financial markets and the European debt crisis – all coupled with the requirement of foreign financial institutions to sell non-core assets – the pace of deals by Canadian financial institutions, domestically and abroad, will remain robust in 2013.

Canada’s pension funds

Over the past few years, many of Canada’s largest pension funds have responded to the volatility of the global stock markets and continued low interest rates by broadening their investment approach which has resulted in increased activity outside of Canada. Canada’s pension funds will continue to venture outside the tradition of long-term conservative investments in 2013 with large scale and diversified investments. There will be an emphasis on alternative asset classes, including real estate, natural resources and infrastructure projects, the last of which may deserve special mention. In this period of debt-laden cities, states and countries, some argue large Canadian pension funds are uniquely situated to continue to realize on opportunities in the infrastructure space given their perceived “political independence” and the resulting competitive advantage this gives them over buyers such as sovereign wealth funds.

Recent examples include:

  • Ontario Teachers’ Pension Plan’s investment in the Sydney Desalination Plant (Australia), the High Speed 1 railway link (England), the Essbio and Esval water utilities (Chile) and in the Birmingham and Bristol Airports (UK), the Copenhagen Airport (Denmark) and the Brussels Airport (Belgium);
  • OMERS Private Equity’s investment in V.Group Limited (UK), and in United States Infrastructure Corporation, and Ontario Municipal Employees Retirement System’s investment in real estate assets like the Metro Toronto Convention Centre (Canada) and Green Park (UK) through Oxford Properties Group; and
  • CPP Investment Board’s investment in Gassled gas transport infrastructure (Norway), in AMP Capital Retail Trust (Australia) and its proposed investment in Kista Galleria Shopping Centre (Sweden).

We expect this trend of investment outside Canada to continue in 2013, with more direct investment abroad initiated by the leading Canadian pension funds, including through joint ventures with established local partners and in partnership with other leading private equity funds. We also expect to see a continuation of the trend towards consolidation, internalization and globalization of management functions at big pension funds in 2013.

Shareholder Activism

Brian Pukier, Toronto

In 2012, the business pages were replete with headlines describing high profile examples of shareholder activism upsetting the status quo in blue chip Canadian companies in the M&A context and otherwise. Most notable was Pershing Square Capital Management’s success in replacing the board of directors, and then the Chief Executive Officer, of Canadian Pacific Railway Limited in the largest proxy battle ever waged involving a Canadian company. Other important examples of shareholder activism in Canada last year include:

  • The ongoing attempts by JANA Partners LLC to encourage Agrium Inc. to sell its retail division, and more recently JANA’s proposal to replace certain directors of Agrium.
  • The replacement of the Chief Executive Officer of Talisman Energy Inc. days following an increase in stock ownership of Talisman by noted activist West Face Capital and Ontario Teachers’ Pension Plan Board.
  • The attempts by Mason Capital Management to block the proposed unwinding of the dual class capital structure of TELUS Corporation.
  • The announcement by Invesco Canada Ltd. that it would seek to launch a proxy contest to replace the board of RONA Inc., following that board’s resisting an unsolicited take-over approach by Lowe’s Companies, Inc. and the firing by that board of the RONA Chief Executive Officer in the wake of poor quarterly financial results.
  • A number of director “withhold” campaigns, which are a cost-effective way to replace directors of companies that have put in place majority voting policies.

While shareholder engagement and detailed discussions on these issues with institutional shareholders is not new in Canada, until recently, disagreements on these matters involving large-cap issuers with their shareholders were largely kept from public view. Now, with some shareholders being emboldened by the examples set over the last year and with additional regulatory changes afoot that will only encourage these types of actions, we can expect an increasing amount of this activity playing itself out publicly.

New TSX rules in place for this proxy season will also eliminate the ability to conduct slate voting and proposed rules for 2014 will require companies to institute majority voting policies (putting at risk directors of companies that are underperforming, and likely resulting in an increase in “withhold” campaigns). These changes should also contribute dramatically to a heightened level of shareholder engagement. Public company boards will want to carefully review their corporate governance and compensation policies to ensure that such policies hold up appropriately to scrutiny, and are properly tailored to their company’s particular circumstances. Directors and senior management should continue to familiarize themselves with the voting policies of their company’s institutional investors (where applicable) and proxy advisory firms such as Institutional Shareholder Services and Glass Lewis. More often than not, being prepared is a difference maker in the proxy battle arena so it will lastly be prudent to engage in readiness efforts and proactively consider defensive measures.

We would lastly note that to the extent activists continue to act as agents of institutional investors (either on spec or for hire), there will likely be a continuing shift of focus to governance and the responsibilities of such investors and their agents.

M&A Financing Trends

Peter Hamilton, Toronto

In 2012, a number of M&A transactions completed in 2006 – 2008 were re-financed and re-leveraged and we expect to see this trend of working through the refinancing “bulge” continue in 2013. In the case of many of such re-financings, sponsors sought to take some money off the table by re-financing and re-leveraging the acquired business after they had tested the market and were not content with what was on offer. In other cases, existing debt was simply re-financed and extended.

In the leveraged acquisitions space generally, the very significant level of cross-border participation on both the lender and the sponsor side has meant that developments in Canada have tended to generally follow developments elsewhere. The Canadian high yield market for leveraged acquisitions continues to mature, but is still constrained in size to mid-market transactions. Relatively robust flex provisions continue to be a feature of Canadian bank transactions, while “covenant lite” transactions are less common. Available leverage has again crept upwards and would appear to be approaching 2008 levels.

The market in Canada has also continued to evolve with specialty lenders increasing their presence and certain banks, particularly from Europe, reducing their presence. This has had an impact on the availability of longer maturities in the bank market.

The View from Calgary

Stephen Cooper, Calgary

Following the Federal Government’s December 7, 2012 pronouncement on foreign investment policy as it pertains to SOEs in the oil and gas industry (discussed in detail in our article “Competition and Foreign Investment Regulation”), 2013 should see refocused investment in Canadian resource plays. In relation to SOEs, we would expect to see few, if any, investments take the form of complete acquisitions of control (and none in relation to the oil sands), but on-going investments in the form of joint ventures, minority positions and similar arrangements. Such arrangements have become quite common in any event, with recent examples including China Investment Corporation’s acquisition of a minority stake in Teck Resources and a 45% stake in oil sands assets of Penn West, and CNOOC’s acquisition of a 14% stake in MEG Energy. Indeed, within less than one week of the issuance of the revised policy on foreign investment by SOEs, Encana and PetroChina announced the formation of a $2.2 billion joint venture (51%/49%) in respect of Encana’s natural gas assets in the Duvernay region of Alberta. It would appear that this arrangement will not be subject to the Investment Canada Act on the basis that control will remain with Encana. We expect to see similar arrangements in 2013 and beyond. In relation to foreign investments in the oil and gas industry by non- SOEs, we would not expect that the new government policy will significantly impact such investments. In this regard, ExxonMobil announced its $2.6 billion acquisition of Celtic Exploration at the height of the controversies surrounding Nexen and Progress.

Given the substantial amounts of uncommitted private equity capital in existing resource-based funds, we also expect to see their participation in the sector, particularly in opportunistic transactions on quicker timelines than public acquirors are typically able to achieve. Depressed natural gas prices and a dearth of working capital, particularly among junior resource issuers, are also expected to continue to provide conditions for M&A, as seen in the 2012 take-private acquisitions of Compton Petroleum Corp. and Skope Energy Inc. Last but not least, we expect to see an increased number of yield plays in 2013, or acquisitions of assets by purchasers able to balance cash flow and exploration costs. Strategic consolidations of natural gas and natural gas liquids reserves will continue by companies with patience for higher commodity prices or more clarity on the potential development of West Coast LNG terminals. This may also lead to strategic divestments of non-core assets by major players consolidating their resource positions.

Editor’s note: this article is part of what was originally published as our Canadian M&A Outlook for 2013. Omitted from the above is a section on the influence of U.S. developments in M&A practice, which appears as a separate article here.

DISCLAIMER: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such. Please read our full disclaimer at

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