Acquisition Finance 2019 Comparisons

Last Updated November 07, 2019

Law and Practice


Blake, Cassels & Graydon LLP has one of the largest and most active mergers and acquisitions practices in Canada. Over the past ten years, the firm has been involved in more than 2,000 public and private M&A transactions with an aggregate value in excess of USD1.6 trillion. With a team of more than 100 M&A lawyers working across Canada, as well as representation in major international markets, the firm has the ability to execute M&A transactions involving Canadian companies around the world. Major domestic and international companies, financial institutions, private equity funds and leading international law firms regularly retain the firm to provide strategic counsel in M&A transactions. Advising on deals ranging from privately negotiated share or asset transactions to the largest public company mergers and acquisitions, the firm offers guidance regarding structuring considerations, acquisition financing, regulatory issues, stock exchange and securities law requirements, related-party rules, fiduciary obligations and takeover bids and bid/proxy defence.

Canadian acquisition finance is provided and/or arranged by Canadian and international commercial and investment banks and non-bank lenders, such as credit funds. In the mining space in particular, acquisition financing may be provided by streaming companies via metals purchase and sale agreements, or “streaming agreements” whereby a stream financing provider generally will provide a cash “deposit” or upfront payment in return for the right to purchase a fixed percentage of the future production of one or more metals produced by the applicable mining project.

US-style, private equity-led leveraged buyouts (LBOs) of privately held companies are relatively common in the Canadian market. LBOs of Canadian public companies are less common. Management-led leveraged buyouts (MBOs) are relatively common for smaller private companies, as a means to facilitate an exit for a founder or other significant shareholder.

Pre-financial crisis, the USD48.5 billion LBO of Bell Canada would then have been, if the deal had successfully closed, the largest LBO in history, in Canada or otherwise. The Ontario Teachers’ Pension Plan partnered with private equity firms Providence Equity Partners and Madison Dearborn to take Bell private with a CAD34 billion financing package. The Bell Canada deal was not completed, in large part because of credit market turmoil in the immediate aftermath of the Lehman Brothers bankruptcy filing in September 2008.

Canada is made up of ten provinces and three territories. Canadian contract law is, for the most part, a matter of provincial common law. Where the assets of the target company are solely or primarily located in Canada, generally the governing law of the acquisition finance contracts will be the law of the Canadian province where the company is headquartered and the federal laws of Canada that are applicable in that province.

Canada does not have an industry standard form of documentation for credit agreements similar to the Loan Market Association forms. Canadian lawyers are routinely engaged to review and comment on credit agreements on the LMA form where a borrower under the facility has Canadian assets and/or Canadian subsidiaries or affiliates, to ensure that relevant provisions sufficiently capture any “Canada-specific” matters.

In Canada, the main operative documents for an issuance of debt securities are typically an underwriting agreement, an indenture, a global note and, if required, an intercreditor agreement. There are no industry standard forms for these documents, and so documentation will typically be based on the lead dealer or its counsel’s form documents, or a document from a precedent transaction with similar structural features.

The province of Québec, as Canada’s only province whose majority population is French speaking, has adopted the Charter of the French Language making French the official language of Québec. These French language rules govern non-negotiable forms of contracts or provisions, and generally provide that such contracts may be drafted in a language other than French if the parties expressly agree to it. Since the characterisation of a contract as a non-negotiable form of contract or contract of adhesion is not always certain, and since, if there is any doubt, a court (i) may wish to characterise a contract as a “form” document and (ii) would interpret a form contract in favour of the party that had to accept the non-negotiable form, many contracting parties include French language provisions in all agreements to provide legal certainty. For acquisition financing by way of an offering of debt securities, these clauses often take the following form:

"Upon receipt of this document, the purchaser hereby confirms that he, she or it has expressly requested that all documents evidencing or relating in any way to the offer and/or sale of the securities (including for greater certainty any purchase confirmation or any notice) be drawn up in the English language only. Par la réception de ce document, l’acheteur confirme par les présentes qu’il a expressé ment exigé que tous les documents faisant foi ou se rapportant de quelque maniè re que ce soit à l’offre ou à la vente des valeurs mobiliè res dé crites aux pré sentes (incluant, pour plus de certitude, toute confirmation d’achat ou tout avis) soient ré digé s en anglais seulement."

Similar provisions will often be included in credit agreements.

Canadian legal opinions provided for acquisition financings will vary based on the form of financing (ie, whether the form of borrowing is securities, notes, pursuant to a credit agreement, or otherwise), but generally, where the borrower or a guarantor is a Canadian entity, opinions may be provided that:

  • the borrower or guarantor is validly existing under its governing corporate or other legislation;
  • the relevant deal documents have been duly authorised, executed and delivered by the borrower or guarantor;
  • the execution and delivery of the deal documents and the performance by the borrower or guarantor of its obligations under the deal documents in accordance with their respective terms will not result in a breach of the borrower's constating documents, applicable laws of general application and, in some cases, other material agreements of the borrower;
  • the borrower or guarantor has all necessary power to own its property and carry on its business as contemplated by the deal documents and to create, issue and/or deliver the notes or other securities or its guarantee, as applicable;
  • the offer, sale and issuance of acquisition financing instruments that are notes or other securities has been made in accordance with applicable Canadian securities laws;
  • certain main deal documents are enforceable against the borrower or guarantor in accordance with their terms subject to various standard exceptions, including in respect of specific provisions, including indemnities, and that enforceability may be limited by bankruptcy, insolvency or other similar laws affecting the rights and remedies of creditors generally and general principles of equity;
  • no consent, approval, order or authorisation of, or filing with, any governmental authority is required to be obtained or made by the borrower or guarantor under the applicable laws for the valid execution, delivery and performance of the deal documents;
  • the security documents create valid security interests in favour of the collateral agent (or other secured party) in any collateral to which the relevant personal property security legislation applies and in which the borrower or guarantor, as applicable, then has rights, and are sufficient to create valid security interests in favour of the collateral agent (or other secured party) in any collateral in which the borrower or guarantor, as applicable, subsequently acquires rights when those rights are acquired by that party, in each case, to secure payment and performance of the obligations described in security documents as being secured under those documents; and
  • the security interests created by the security documents in the collateral in favour of the collateral agent (or other secured party), to the extent capable of perfection by registration of financing statements under the relevant personal property security legislation, have been perfected by registration of a financing statement under the relevant personal property security legislation.

In Canada, the senior layer of an acquisition financing debt stack will generally consist of secured, first lien, term loan facilities and secured, first lien, revolving loan facilities. An acquisition financing structure can include loans secured by particular assets such as receivables or inventory (ie, asset-backed loans, or ABLs). Senior secured bank facilities generally include financial maintenance covenants that require the borrower to maintain certain financial ratios or metrics, including potentially debt-to-EBITDA ratios, debt-to-tangible net worth ratios, interest coverage metrics and other similar ratios/metrics. This is in contrast to bonds, which typically only include incurrence-based covenants.

Mezzanine debt, such as bonds or loans that are subordinated in right of payment to any senior debt, or preferred shares, can be included in Canadian acquisition financing structures. Preferred shareholders generally have a claim on the assets of the issuer after all debt claims and general liabilities are discharged, but before any payment or other distribution is made to common shareholders. Where an acquisition financing structure includes a layer of “senior subordinated” debt, the subordination provisions for the mezzanine tranche (or the “subordinated subordinated” tranche) could go beyond simply payment subordination and may include standstills on enforcement.

PIK or “pay-in-kind” debt may be included in Canadian acquisition finance structures. PIK debt can be in the form of loans or debt securities, and may be structured as “pay if you want”, which permits the issuer to elect whether and the extent to which interest payments will be made in cash or in kind, or “pay if you can”, which places constraints on whether, or provides that certain metrics be met before, interest payments can be PIK’ed. Dividends on preferred shares may often also be paid in kind.

Bridge loans for acquisition financings will typically be structured as senior loans documented under a bridge loan credit agreement that may be secured on a first or second lien basis by all assets of the borrower (subject to any negotiated carve-outs). The bridge facility acts as a temporary financing measure that typically serves as a “stopgap” until the borrower is able to access the bank lending or capital markets to put in place lower cost credit arrangements, either through a bank facility (whether syndicated or otherwise) or an offering of bonds or other capital markets instruments.

Canadian companies often finance acquisitions through bond offerings. Canadian bond offerings generally fall into one of three buckets: investment grade bonds, high-yield bonds or medium-term notes, or “MTNs.” MTNs are debt securities that have maturities between one and five years, are issued to the public by way of a prospectus and under a continuous distribution programme, and are traditionally used for normal-course, balance sheet management financings; that is, proceeds of MTN issuances are less often used for acquisition financing. MTNs are used by most issuers to fill the “maturity gap” between commercial paper, which typically carries a maturity of a year or less, and longer-term debt instruments.

By contrast, investment grade and high-yield bonds are often used for acquisition financing.

Investment grade bonds typically (i) are unsecured; (ii) are offered to the public under a prospectus; (iii) have a maturity of five years or greater; (iv) are redeemable by paying a make whole premium that is calculated by reference to prevailing yields on debt securities issued by the Government of Canada; (v) can include a “par call” feature that will permit the issuer to redeem the bonds at par as final maturity approaches; (vi) may include a covenant that requires the issuer to redeem the bonds at a specified price (typically par or 101% of par) upon a change of control triggering event; and (vii) do not include significant covenants, with the exception that many investment grade bonds include a “negative pledge” covenant, which generally will restrict an issuer’s ability to pledge its assets as collateral unless the bonds are secured equally and rateably with the competing debt obligations.

High-yield bonds (i) can be secured or unsecured, but often are secured on a second lien basis; (ii) are offered via private placement to sophisticated institutional investors; (iii) most often have maturities of between five and seven years; (iv) typically will include a “non-call” period, during which bonds may only be redeemed by paying a make-whole premium, and after the “non-call” period will be redeemable at declining prices related to par plus the coupon on the bond; and (v) will include covenants, most of which will be incurrence-based (high-yield bonds do not typically include maintenance covenants), governing matters such as debt incurrence, restricted payments, liens, asset sales, transactions with affiliates, limitations on restricted subsidiaries, payments of dividends and other matters.

In addition to the main categories of debt securities discussed above (MTNs, HY bonds and IG bonds), there are certain other capital markets instruments that are of particular relevance to the acquisition finance space in Canada.

Instalment Receipts

Instalment receipts are capital markets instruments that are deployed almost exclusively for acquisition financing purposes in Canada.

Instalment receipts allow investors to pay for convertible unsecured debt securities on an instalment basis. Instalment receipts generally require an initial payment on closing with the balance of the purchase price being paid in one or two additional instalments over a period of up to two years.

In a typical instalment receipt financing, for each CAD1,000 aggregate principal amount of debt securities purchased, the investor will pay CAD333 upon the closing of the transaction and will commit to pay the balance of the purchase price of each debt security, or CAD667, upon satisfaction of the acquisition’s closing conditions. The investor’s interest in the underlying debt security typically is represented by a publicly listed and traded instalment receipt, and the investor’s obligation to pay the final instalment is secured by a pledge of the convertible debt security represented by the instalment receipt.

When the investor makes the final payment, the pledge is released and the investor is entitled to convert the debt security into common shares of the issuer at a predetermined conversion price. Investors are incentivised to convert into common shares because the interest rate on the debt security drops to 0% on the final instalment for the period until the debt security matures.

If the acquisition does not close, the instalment receipts are redeemed for the initial instalment amount plus accrued and unpaid interest.

Since investors only pay CAD333 per CAD1,000 aggregate principal amount of debt securities underlying the instalment receipts, but receive interest payments calculated based on the entire principal amount of the underlying debt securities, they receive significantly enhanced yield on an investment grade debt security. For example, if the debt security carries a coupon of 4.00%, the investor will earn an effective yield of approximately 12% until additional instalments are paid. This can be contrasted with some subscription receipts structures (described below) where investors may only receive a dividend equivalent payment upon the subscription receipts converting into common shares.

From the acquiring issuer’s perspective, closing a large, contingent capital raise when the acquisition is announced provides certainty of cost of capital and significantly mitigates capital markets risk. In addition, there is no dilution to the issuer’s equity capital structure unless and until the acquisition closes.

Recent examples of instalment receipt offerings include (i) Algonquin Power & Utilities Corp.’s CAD1,150,000,000 instalment receipt offering of 5.00% convertible unsecured subordinated debentures to finance the acquisition of The Empire District Electric Company and (ii) Hydro One Limited’s CAD1,540,000,000 instalment receipt offering of 4.00% convertible unsecured subordinated debentures to finance the proposed acquisition of Avista Corporation.

Subscription Receipts

Like instalment receipts, subscription receipts are capital markets instruments that are a prominent feature of the Canadian acquisition finance landscape.

Subscription receipts offerings are launched by the acquirer upon or shortly after the acquisition agreement is signed. Subscription receipts typically convert into common shares on a one-for-one basis when the acquisition closes. The proceeds of a subscription receipt offering are held in escrow and invested in investment grade money markets instruments by the escrow agent. The escrowed proceeds are released to the issuer when the acquisition closes. Prior to the acquisition closing, a subscription receipt holder may be entitled to receive “dividend equivalent payments” in respect of any dividend paid by the issuer during the escrow period. Any dividend equivalent payments are typically paid first out of any interest that has been paid on the escrowed funds, and then out of the escrowed funds. The issuer generally is required to make up any shortfall if the acquisition does not close and the escrowed funds returned to investors are less than the aggregate purchase price paid for the subscription receipts.

A subscription receipt offering is an attractive acquisition financing vehicle because, while it provides certainty of financing and mitigates capital markets risk, the dilution of existing equity holders that would occur in a normal common share offering is contingent on closing of the acquisition. Subscription receipts are attractive to investors because they allow them to invest in a post-acquisition entity, without requiring them to invest in the issuer on a standalone basis.

A recent example of a subscription receipt deal is Intact Financial Corporation’s CAD461 million offering of subscription receipts issued in connection with its proposed acquisition of The Guarantee Company of North America and Frank Cowan Company Limited from Princeton Holdings Limited.

Extendible Convertible Debentures

Extendible convertible debentures, which are functionally similar to subscription receipts, are another financing option for strategic acquirers. Extendible convertible debentures have a relatively short initial maturity, often only several months from the issue date. Upon closing of the acquisition, the maturity date of the debentures automatically extends to what would be a normal maturity date for convertible bonds. If the acquisition fails to close, the debentures mature on the initial maturity date, and principal is repaid to investors along with accrued interest. The debentures are convertible into common shares of the issuer at a predetermined conversion price set at a level related to the market price of the common shares on the pricing date for the debenture offering.

Extendible convertible debentures provide the same advantage as subscription receipts in that they permit an acquirer to raise funds for its acquisition with the funds being returned to investors if the acquisition does not close. An advantage of extendible convertible debentures over a straight common share equity financing or a subscription receipt financing is that dilution is delayed until a future date when the acquirer’s stock price is greater than the conversion price. Debt acquisition financing may also be preferable to equity acquisition financing for an unsolicited takeover bid if the bid is being launched opportunistically or when management believes that the acquirer’s shares are undervalued.

Any acquisition financing instrument that is appropriately characterised as a “security” under Canadian securities legislation may be sold to investors via a private placement. In Canada, private placements of securities are typically made under the “accredited investor” exemption from Canada’s prospectus delivery requirement. The accredited investor category broadly encompasses banks, registered dealers and asset managers, certain other regulated entities and individuals and corporations that meet certain asset and income thresholds. Securities that are privately placed pursuant to the accredited investor (and many other) prospectus exemptions are subject to restrictions on resale, which typically only fall away once the issuer entity has been a public “reporting issuer” in Canada for more than four months or, if the issuing entity has already been a “reporting issuer” in Canada for more than four months, after four months and a day from the date the securities are issued.

Intercreditor agreements are typically used to establish (i) priorities between the claims of first lien creditors and the claims of second lien creditors to common collateral and (ii) limitations on the second lien creditors' ability to exercise their rights as secured creditors.

Where secured high-yield debt securities are issued, the intercreditor arrangements as between the noteholders (second lien) and the bank creditors (first lien) are generally included in a standalone intercreditor agreement that is described in the offering document for the debt securities. By contrast, for subordinated debt securities, the subordination provisions generally would be included in the trust indenture under which the subordinated debt securities are issued. For mezzanine financings, the practice varies, and the intercreditor/subordination provisions may be included in the main credit agreement or in a standalone intercreditor document.

Canadian bankruptcy courts generally will enforce intercreditor agreements (ie, contractual subordination agreements between creditors), although there may be circumstances where the enforceability of certain standstill provisions may be challenged.

Intercreditor agreements may also be used where two classes of creditors hold first lien interests in different pools of collateral, such as a term loan secured by certain assets and an asset-based loan secured by different assets, with each creditor class holding second lien interests in the other’s first lien collateral. An intercreditor agreement in this context may include agreements with respect to (i) the priorities of the two creditor classes' security interests; (ii) payment waterfalls for proceeds of enforcement; and (iii) first lien creditors' ability to control collateral enforcement steps/proceedings until the first lien creditors' claims are discharged.

See 4.1 Typical Elements. For a larger Canadian corporation, bank debt will be first lien debt and, if there is second lien debt, it is likely to be in the form of high-yield bonds, in which case a standalone intercreditor agreement with the provisions described above would be entered into.

A relatively typical structure in the Canadian market is for the first lien credit agreement to provide a “permitted debt” basket for hedge agreements entered into with any of the lenders under the first lien credit facility or any or their affiliates. The second lien debt instrument will provide a “permitted debt” basket and a “permitted lien” basket for hedging obligations incurred in the ordinary course of business (ie, hedging obligations incurred for speculative purposes generally are explicitly excluded from these baskets). The intercreditor agreement between the first lien lenders and the second lien lenders will then provide that hedge agreements that are permitted under the first lien credit facility are “priority lien obligations” that are secured by the borrower’s assets equally and rateably with all other “priority lien obligations”, the most significant of which are the borrower’s obligations under the first lien credit facility.

Assets that may be pledged by a borrower as security for its obligations under an acquisition financing agreement include securities, inventory, accounts, receivables, intellectual property and other personal property, as well as real property.

The creation, perfection and priority of security interests in personal property are governed by the Personal Property Security Act (PPSA) of each of Canada’s common law provinces and territories. In Québec, secured transactions are governed by the Civil Code of Québec (CCQ). Although the regime under the CCQ is functionally similar to the PPSA regime, there are many important formal and substantive differences between the two.

The PPSA regimes generally are harmonised across Canada and apply to security interests in chattel paper, documents of title, goods, instruments, intangibles, money and investment property, and fixtures. The definitions of “personal property” under the PPSAs generally exclude “building materials that have been affixed to real property.”

The PPSA regimes are similar to Article 9 of the Uniform Commercial Code in the USA. Under the PPSAs, security interests in collateral are created through “attachment.” Subject to some variation for specific kinds of personal property, attachment generally occurs when (i) value is given, (ii) the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party and (iii) the debtor has signed a security agreement that contains a description of the collateral that is sufficient to enable it to be identified. Security interests are, depending on the type of collateral, perfected by registration, control or possession. Registration is the dominant method of perfection. Perfection by registration generally is achieved by filing a financing statement on the personal property registration system in the relevant province or territory. Possession of the collateral by the secured party may perfect a security interest in chattel paper, goods, instruments, negotiable documents of title and money. Perfection of a security interest in investment property (ie, stocks and bonds) may be perfected by control.

The general priority rules under the Ontario PPSA are as follows:

  • where priority between security interests perfected by registration is being determined, priority is determined by the order of registration regardless of the order of perfection;
  • where priority is being determined between a security interest perfected by registration and a security interest perfected other than by registration, (i) the security interest perfected by registration has priority over the other security interest if the registration occurred before the perfection of the other security interest, and (ii) the security interest perfected other than by registration has priority over the other security interest, if the security interest perfected other than by registration was perfected before the registration of a financing statement related to the other security interest;
  • where priority is being determined between security interests perfected other than by registration, priority is determined by the order of perfection; and
  • where priority is being determined between unperfected security interests, priority is determined by the order of attachment.

One interesting difference between the UCC regime and Canada’s PPSA regimes is that, under the PPSA regimes, a security interest in cash collateral held in a deposit account may not be perfected by control, and thus generally is perfected by registering a financing statement. Although this fact is not of particular relevance to the main acquisition financing arrangements for a Canadian deal, it may be relevant to hedging arrangements that are entered into in connection with the acquisition financing. The general market approach that has been developed in Canada for margining hedge agreements with cash is to provide that title to the cash is transferred to the secured party under the hedge agreement, subject to an obligation to return the cash at such time as the collateral provider’s obligations under the hedge agreement are over-collateralised or extinguished. The secured party may then (and on this point there is some divergence in current market practice) make a “precautionary” PPSA filing, which will state that, in the event that the title transfer provisions in the hedge agreement are recharacterised (by a court) as being a pledge of security, the filing is made to perfect that security interest.

The form of PPSA financing statement required to be filed in order to perfect a security interest in personal property is generally similar across the Canadian jurisdictions, with the exception of Québec. Each common-law province’s form will require inclusion of the name of the secured party, the name of the debtor, the address of the debtor, the address of the secured party, the term of the registration and a collateral description. There are some differences in the forms. Most notably, Ontario uses a “check the box” system for the collateral description component of the form, meaning that including a written description of the relevant collateral is not required. In Québec the relevant form is a “Form RG.” The Form RG is largely a copy of the underlying security document, which in Québec would generally be a deed of hypothec.

With certain limited exceptions (eg, Section 43(1) of New Brunswick’s corporate statute, and similar provisions under the Corporate statutes of Newfoundland & Labrador, the Northwest Territories and Nunavut) a Canadian incorporated subsidiary generally would not be restricted in its ability to pledge its assets in support of a guarantee of its parent’s obligation, subject to the subsidiary’s board of directors satisfying their fiduciary duties to act in the best interests of the corporation. Canadian corporations can provide guarantees without any requirement to receive a generally equivalent reciprocal benefit.

There are no generally applicable “financial assistance” restrictions under Canadian law that would impede a Canadian entity from accepting the benefit of a guarantee. Subject to the restrictions in Section 43(1) of New Brunswick’s corporate statute, and similar provisions under the corporate statutes of Newfoundland & Labrador, the Northwest Territories and Nunavut, which generally provide that the corporation can only guarantee or provide other financial assistance in respect of the obligations of an affiliate if the guarantee or other financial assistance would not render it insolvent, corporations can guarantee third-party obligations, essentially without restriction except that in certain circumstances notices may be required to be provided to affected parties.

Except for the limited exceptions noted above under the corporate statutes of New Brunswick, Newfoundland & Labrador, the Northwest Territories and Nunavut, there are no generally applicable restrictions on providing or receiving guarantees.

In Canada, lenders may enforce the applicable loan, guarantee or security interest in accordance with the terms and conditions agreed between the lender and the relevant obligor. Enforcement rights generally are tied to defined events of default and are subject to requirements with respect to notice and cure periods. Where a secured lender is seeking to enforce against collateral, notice periods may be prescribed by statute, including (i) under the Bankruptcy and Insolvency Act, ten days' notice may be required before enforcing on a demand and commencing realisation efforts; and (ii) under the PPSAs and the CCQ, generally 15 days' notice is required before the sale of assets that are personal property.

Under the PPSAs and CCQ, security interests in personal property are enforced by providing notice as to whether the lender seeks to either (i) seize and sell the assets or (ii) take possession and effective ownership of the assets in satisfaction of the debt. The specific notice periods that must be satisfied in order to take either of these actions are set by, as applicable, the relevant PPSA or the CCQ.

The most common method of enforcing against collateral is an asset sale. The relationship between the lender and the obligor in respect of any realisation proceedings typically will be set out in the terms of the security agreement and may include the appointment of a receiver or other third party to facilitate the asset sale. The asset sale can be by private or public sale. While the PPSAs and CCQ generally provide default rights to pledgors in respect of realisation proceedings, these rights will typically be modified by the security agreement to meet the lender's requirements.

Guarantees that are provided in the context of Canadian commercial transactions typically (i) are guarantees of payment (as opposed to guarantees of performance), (ii) are full and unconditional, and (iii) will include language that waives all “suretyship defences”; that is, in general, any defences to enforcement of the guarantee obligation that the guarantor may have on the basis that the underlying primary obligation was altered without notice to the guarantor.

There are no specific restrictions on providing or receiving guarantees in Canada. Alberta has certain formal requirements for guarantees that may apply if the guarantor is an individual.

There is no requirement for guarantee fees in Canada.

Equitable subordination is an American doctrine, codified in Section 510(c) of the US Bankruptcy Code, that permits a bankruptcy court to determine that a secured creditor is not entitled to its normal priority position in an insolvency proceeding under that statute. Whether equitable subordination is available under Canadian law is a question of some uncertainty. In US Steel Canada (Re), 2016 ONCA 662 the Ontario Court of Appeal considered whether equitable subordination is a remedy available to a Canadian court in a proceeding brought under the Companies’ Creditors Arrangements Act (CCAA). The CCAA is one of Canada’s main insolvency statutes, and it allows insolvent corporations owing their creditors in excess of CAD5 million to restructure their business and financial affairs. The court held that, while the CCAA gives a bankruptcy court broad and flexible powers, there are no express or implied powers under the CCAA for the court to apply the doctrine of equitable subordination. Leave to appeal the Ontario Court of Appeal’s decision in this case was granted by the Supreme Court of Canada; however, US Steel was subsequently successfully restructured and so the appeal was never heard.

Under Canadian law, improper asset transfers generally can be categorised as either (i) a transfer that is intended to defeat creditors or (ii) a transfer that is intended to prefer one group of creditors over another. There are a number of provincial and federal statutes that may provide remedies for creditors in respect of an improper asset transfer.

Under the Fraudulent Conveyance Act (FCA) in Ontario and its analogous statutes in other provinces, creditors and others may pursue remedies against a debtor who transfers property with “intent to defeat, hinder, delay or defraud creditors or others.” There is no requirement to demonstrate that the transferor was insolvent at the time of the transfer to access remedies under this legislation. Once a fraudulent conveyance has been established, the transaction is deemed void as to the creditor or person whom the conveyance was meant to harm. As such, the recipient of the fraudulent transfer may face the execution or seizure of the subject matter at issue by the aggrieved party. It is important to note, however, that the FCA provides an exception protecting bona fide purchasers for value without notice.

Under the Assignment and Preferences Act (APA), a court may set aside a transaction that prefers one creditor to another. Unlike the FCA, however, the APA only applies in situations where the debtor is insolvent or approaching insolvency. Further, relief under the APA is only available to those parties who were creditors at the time of the preferential transfer. Establishing an unjust preference under the APA requires (i) a transfer by the debtor, (ii) when the debtor is approaching insolvency, and with intent to give a creditor an unjust preference. Again, the most difficult element to establish is often the requisite intent to injure or prejudice a creditor through an unjust preference. However, when a creditor brings proceedings within 60 days of a transfer, such intent is presumed. Like the FCA, the APA also addresses transfers intended to defeat creditors and, in both situations of fraudulent transfers and unjust preferences, relief under the APA is sought against the recipient, not the transferor. Again, protection is provided to bona fide purchasers meeting certain criteria.

The Bankruptcy and Insolvency Act (BIA) is the primary federal statute governing bankruptcies and insolvencies in Canada. Its purposes are to preserve the assets of the debtor for creditors and if possible rehabilitate the debtor through debt forgiveness. The BIA regulates fraudulent preferences. An asset transfer made by the bankruptcy debtor in favour of an arm's-length creditor, with intent to give that creditor preference over others, is void as against the trustee in bankruptcy when made less than three months before bankruptcy. Where the effect of the transfer is preferential, there is a rebuttable presumption that such effect was intended. Where the transfer is made in favour of a non-arm's length creditor, such as related parties, proof of intent is not required. A non-arm's length transfer is void as against the bankruptcy trustee when made within 12 months of the bankruptcy. The BIA also regulates transfers at undervalue. The statute permits the bankruptcy trustee to challenge an asset transfer made for conspicuously less than fair market value, or for no consideration. A transfer at undervalue to an arm's-length creditor is void where (i) the debtor was insolvent at the time of the transfer, (ii) the transfer occurred within 12 months of the bankruptcy, and (iii) the debtor had intent to defraud or delay a creditor. A transfer to a non-arm's length creditor is automatically void where the transfer occurred within 12 months of the bankruptcy. Proof of insolvency or intent to defraud is not required. If the transfer occurred between one and five years before bankruptcy, and was made to a non-arm's length party, either intent or insolvency must be established.

The CCAA adopts by reference the fraudulent preferences and transfers at undervalue provisions of the BIA. Asset transfers therefore will be subject to the same scrutiny whether the client is insolvent under the CCAA or bankrupt under the BIA.

Subject to limited exceptions in the case of certain listed debt securities, there are no statutory or regulatory rules in Canada that apply to a tender offer or buy-back programme for non-convertible debt securities. This is in contrast to the USA, where tender offers for debt securities are subject to rules that prescribe minimum periods with respect to, among other things, how long debt tender offers are required to remain open, how long after the offer consideration is varied that the offer must remain open and communicating with bondholders. In Canada, however, the “issuer bid” rules, which generally prescribe the terms and conditions on which an issuer of securities may offer to repurchase such securities, explicitly exclude from their application “debt securities that are not convertible into securities other than debt securities” and, therefore, terms and conditions with respect to minimum open periods for bids and communicating with bondholders are dictated by business needs and prevailing market practice in the particular market segment.

There are no stamp tax issues to note in connection with Canadian acquisition financings.

Non-Canadian banks have made loans cross-border to borrowers located in Canada for many years, but the practice became much more prevalent after 2008 when the government of Canada eliminated the withholding tax on arm’s-length outbound interest payments made by Canadian borrowers to non-resident lenders. The purpose of the elimination of the withholding tax, as Canada’s Department of Finance put it, was to “increase access to foreign capital markets and reduce costs for Canadians and Canadian businesses that borrow from foreign lenders.”

The so-called thin-capitalisation rules under the Income Tax Act (Canada) (the “Tax Act”) restrict the ability of Canadian companies to deduct interest expense on debt owing to certain affiliated or related non-residents, known as “specified non-resident shareholders.” These rules also apply to Canadian branches of non-Canadian companies. These rules generally apply if the specified non-resident shareholder owns 25% or more of the shares of the borrowing entity. Interest deductibility will be limited proportionally if the borrowing entities' debt obligations to affiliated or related non-residents exceeds 1.5 times the borrowing entity’s equity.

The numerator of the 1.5:1 debt-equity ratio calculation is the debt that is the average of the greatest amount of the Canadian entity’s outstanding debt to specified non-resident shareholders in each month of the year. The denominator (equity) is calculated by taking the Canadian entity's unconsolidated retained earnings at the beginning of the year, not including the retained earnings of another entity; the average of the Canadian entity's contributed surplus from specified non-resident shareholders at the beginning of each month of the year; and the average of the Canadian entity's paid-up capital on shares owned by specified non-resident shareholders at the beginning of each month of the year.

Non-deductible “excess” interest is treated as a dividend for Canadian withholding tax purposes, and triggers withholding tax at a rate of 25% (subject to the potential for reduction under any applicable tax treaty). The Tax Act sets out special rules to address back-to-back loans and partnership borrowings, among other things.

Canadian regulated targets will be subject to specific rules depending on the nature of their business and the applicable regulatory regime. For example, in the financial services space, Canadian registered securities dealers and asset managers are subject to regulatory approval requirements for any new owner of 10% or more of the dealer or manager. The requirements do not speak to, and the approval process generally would not be significantly impacted by, the existence or form of any financing for the acquisition. This is, broadly speaking, true of most regulated industries in Canada (that is, that any industry-specific notification or approval requirements will not be overly concerned with the acquisition financing).

Under Canadian securities legislation, an acquirer that launches a tender offer (or "takeover bid" to use the Canadian terminology) is required, whether the offer is hostile or supported, to have made adequate arrangements before launch to ensure that the required funds will be available to make full payment for the subject securities. These financing arrangements may be subject to conditions only “if, at the time the take-over bid... is commenced, the [acquirer] reasonably believes the possibility to be remote that, if the conditions of the bid are satisfied or waived, the [acquirer] will be unable to pay for the securities deposited under the bid due to a financing condition not being satisfied.”

The practical impact of this rule is that a take-over bid for a publicly listed Canadian target may not be subject to any financing condition. This has meant that, as a practical matter, an acquirer making an all-cash or partial cash offer directly to target shareholders is required to secure financing commitment letters that are subject only to very limited conditions precedent to funding, which generally will consist of conditions that (i) mirror the conditions of the tender offer and (ii) are within the acquirer’s control.

Significant amendments to Canada’s take-over bid rules were implemented in 2016. The amendments have had knock-on effects for Canadian acquisition financing. The amendments require that all formal take-over bids:

  • remain open for a minimum of 105 days (the prior minimum period was 35 days), subject to a reduction of the minimum period (i) to no less than 35 days with the consent of the target board, provided that when there are multiple contemporaneous bids, each bid shall be permitted to have that same minimum period, or (ii) if the target enters into or determines to effect a board-supported change of control transaction, such as a plan of arrangement, to a minimum period for any contemporaneous take-over bid of 35 days;
  • be subject to a minimum tender condition of more than 50% of the outstanding securities of the class subject to the offer, excluding target securities held by the acquirer and its joint actors; and
  • be extended for at least ten days after the acquirer first takes up securities under the offer (with partial take-over bids requiring an extension of exactly ten days).

The longer potential offer period has meant that financing commitments are required to be outstanding longer, and generally for six months, which has meant the cost of financing unsolicited take-over bids has increased. Commitment fees generally are higher due to the longer commitment period and “ticking fees” (which compensate lenders for their commitment from the date the commitment letter is signed until the earlier of closing or commitment expiry) must generally be paid for a longer period. The longer commitment periods have also caused lenders to insist on increased flexibility to permit them to vary the terms of the definitive documents for the financing upon closing if any such variation is necessary to complete a successful syndication of the acquisition financing.

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Law and Practice in Canada


Blake, Cassels & Graydon LLP has one of the largest and most active mergers and acquisitions practices in Canada. Over the past ten years, the firm has been involved in more than 2,000 public and private M&A transactions with an aggregate value in excess of USD1.6 trillion. With a team of more than 100 M&A lawyers working across Canada, as well as representation in major international markets, the firm has the ability to execute M&A transactions involving Canadian companies around the world. Major domestic and international companies, financial institutions, private equity funds and leading international law firms regularly retain the firm to provide strategic counsel in M&A transactions. Advising on deals ranging from privately negotiated share or asset transactions to the largest public company mergers and acquisitions, the firm offers guidance regarding structuring considerations, acquisition financing, regulatory issues, stock exchange and securities law requirements, related-party rules, fiduciary obligations and takeover bids and bid/proxy defence.