Corporate M&A 2023

Last Updated April 20, 2023

Canada

Law and Practice

Authors



SkyLaw is a premier corporate and securities firm in Canada. The SkyLaw team has an unparalleled practice in international M&A, governance and corporate finance. SkyLaw lawyers have worked at top-tier global law firms in Toronto, New York, London, Sydney and Dubai, providing the firm with a unique reach into major global financial centres. The firm excels in major acquisitions, bespoke equity and debt investments, joint ventures and reorganisations. The majority of SkyLaw’s M&A work involves acquirors based in the USA, the Middle East, Australia, China, Europe and elsewhere around the world. Recent engagements include high-profile private equity investments and strategic acquisitions by Fortune 500 companies. The firm has once again been voted as one of Canada’s Top 10 corporate law boutiques.

After a blockbuster year for M&A transactions in 2021, Canada saw a steady decline quarter after quarter throughout 2022 in deal count and volume, with a slight bounce back in Q4. The M&A climate in 2022 was significantly impacted by the extreme economic upheaval in Canada and globally, including significant inflation, rapid interest rate hikes and a looming recession. The twin shocks of pandemic and war have reshaped many aspects of the economy, including a movement towards “friend-shoring” as Canada implemented protectionist policies and invested in domestic supply chains, particularly for critical minerals required for the green economy.

While the total transaction count decreased from 2021 by 17% and the value decreased by 35%, some industries were more active than others. REITs were the busiest sector by volume throughout 2022, with CAD32.7 billion in M&A activity, whereas mining led 2022 with over 600 deals. 

Canada has started 2023 with new-found optimism, with expectations that activity should return to pre-pandemic levels, but the M&A market faces some significant risks. Investor confidence, a key driver for M&A activity, has been shaken by recent bank collapses, although Canadian banks are believed to be in a stronger position. Increasing government intervention in M&A transactions through foreign investment and competition reviews could add complexity and delay. Dealmakers are taking longer and scrutinizing deals more carefully in the current environment.

Key trends that affected M&A activity in Canada in 2022 included the following:

  • The Bank of Canada raised its key interest rate seven times since March 2022, from 0.75% to 4.75%, as inflation rose to above 6.3%. High interest rates, stubborn and increasing inflation, and a weakened exchange rate caused dramatic economic disruption.
  • The looming fears of a global recession impacted decisions to invest, purchase and divest, and made it difficult to value potential targets.
  • Federal and provincial governments announced plans for significant investment in critical minerals, technology and green energy.
  • The powers in national security legislation were broadened, including the establishment of a multi-step forfeiture process. The Canadian government blocked certain Chinese investments in the mining sector on national security grounds. The list of sanctioned entities and persons grew. 
  • Virtually all COVID restrictions were dropped in Canada and most government support programs have ended.
  • Market participants made it back to the office after working from home for two years.
  • Environmental, social and governance (ESG) considerations continue to be a driver of change as companies divest certain assets and investors avoid companies with poor ESG track records.

Many of these trends will continue to impact dealmaking in 2023:

  • While the Bank of Canada has not ruled out further rate increases in 2023, it became the first central bank across the G10 group of large economies to pause its rate-tightening cycle at the end of March 2023.
  • Canada is expected to enter a recession in 2023, albeit a mild one due to its strong labour market. As decision-makers plan for a recession and focus on their investments in core assets, there may be an uptick in divestment leading to some acquisition opportunities.
  • The vacancy rate for commercial real estate space is far above pre-pandemic levels in parts of the country as many employers are offering remote or hybrid work arrangements. The vacancy rate for industrial real estate, however, remains very low.
  • Corporate insolvencies are rising, and restructuring arrangements under corporate statutes are being used more frequently to recapitalize at an earlier stage in the process as compared to traditional insolvency proceedings.
  • The Canadian middle market is a significant contributor to the Canadian economy, and activity is expected to increase in late 2023 as retiring business owners look to sell their businesses. 
  • As buyers spend more time on due diligence and valuing target companies, earn-outs are more likely to be used as a tool in M&A transactions going forward.
  • Deals among closely-affiliated countries (friend-shoring transactions) are likely to continue increasing as a result of geopolitical tensions.
  • Canadian regulators continue to broaden enforcement powers to restrict foreign state-owned enterprises from acquiring critical minerals.
  • The technology, mining and financial sectors continue to gain momentum. Cybersecurity firm Magnet Forensics agreed to be acquired in January 2023 by private equity firm Thoma Bravo. Rio Tinto closed its acquisition of the shares of Turquoise Hill for CAD4.24 billion. One of the largest transactions in Canadian M&A history in the financial sector is set to close in 2023 – RBC’s CAD13.5 billion all-cash acquisition of HSBC Canada. 
  • The CAD20 billion acquisition of Shaw by Rogers received final government approval in March 2023 after two years of regulatory uncertainty. Dealmakers are concerned by the federal government’s imposition of unprecedented and legally binding commitments, adding greater political risk to transactions in politically sensitive industries.
  • Shareholder activists continue to be more involved in M&A decision-making, encouraging companies to pursue transactions to create value or to compel divestiture.
  • Despite increasing regulatory enforcement and shareholder activist pressure, coupled with the rising costs of borrowing and increased closing timelines, the strong demand for minerals, technology, alternative energy and financial services plus the rising middle market will likely lead to a steady M&A deal count in early 2023.

In March 2023, the dramatic failure of Silicon Valley Bank in the United States and the collapse of the 166-year-old global bank Credit Suisse have rattled markets and increased fears of a global recession. The Canadian banking industry is believed to be more resilient as it is dominated by six large national institutions that are well capitalized and diversified. The level of investor confidence following these shocks will be a key determining factor of economic activity in 2023.

Key industries for Canadian M&A in 2022 included mining, oil and gas, and information technology. 

Mining

Approximately 43% of all publicly traded mining companies in the world are listed on a Canadian stock exchange. In 2022, the mining sector experienced a reduction in deal volumes relative to 2021 but the outlook for this year is optimistic, particularly in light of the post-pandemic boom in commodity prices and the billions of investment dollars promised by Canadian governments for the mining industry. However, a global recession would naturally dampen demand and push some commodity prices downward.

Several notable transactions involved the gold sector. Demand for critical minerals and base metals is likely to be strong as industries increase their focus on the manufacture of environmentally friendly products, such as electric vehicles by the automotive sector.

Increased intervention by regulators owing to political tensions may have an adverse impact on this sector as well. In November 2022, the federal government announced that it had ordered three Chinese companies to sell their interests in Canadian essential mineral companies for national security reasons, even though none of the investments involved a controlling interest and none of the investors had publicly obvious Chinese state ownership. The orders were made in connection with Canada’s critical minerals strategy to protect mineral supply chains consistent with its friend-shoring policy.

Oil and Gas

The oil and gas sector is of significant importance to the Canadian economy (Canada is the world’s fourth-largest producer of oil).

Globally, the oil and gas sector experienced reduced activity in 2022 owing to volatile commodity prices and a resulting gap between buyer and seller valuations. Despite this global trend, Canada saw some high-value deals announced in late 2022.

Oil and gas prices were affected by numerous factors in 2022. The reopening of global economies, OPEC supply restrictions, and a period of reduced investment in new production led to increased prices and profitability for this sector. Oil and gas prices were expected to remain healthy in 2023 and, combined with the upcoming completion of the Trans Mountain pipeline expansion (expected to be mechanically completed in late 2023 and operational in early 2024) a positive outlook was created for investment in this sector. However, OPEC+ producers in early 2023, unexpectedly announced that they would cut output even further, causing a dramatic rise in prices on the heels of the lower prices that followed the collapse of Silicon Valley Bank. This could in turn exacerbate inflation and impede the ability of central banks to reign it in.

Since Russia’s invasion of Ukraine, numerous countries, including Canada, have banned imports of Russian oil and petroleum products. Recently, the G7 countries along with the EU and other allies also announced a price cap on Russian oil products. As a result of these measures, the EU will need to seek out the energy resources of other regions and European countries may look to Canada.

Technology

Canada has a solid presence within the technology sector. It is home to leading technology hubs and companies, such as Shopify Inc., as well as to market leaders in numerous sectors, including cleantech. 

While valuations of technology companies in 2022 did not remain at the record numbers seen in 2021, M&A activity in the technology sector remained strong.

Sector consolidation, desire for increased efficiency, productivity and automation continue to drive strong interest in information technology. The somewhat recent reduction of elevated valuations and stock prices in the technology sector may lead to continued activity in this sector in 2023, including in the area of going-private transactions.

Cannabis

Canada was one of the first countries to legalise the production and sale of cannabis. Following an initial frenzy, the cannabis market continues to underperform the broader stock market. Capital is increasingly difficult to raise, and many producers are distressed, resulting in consolidation and retrenching across the industry.

Fading hopes that the USA federal government will legalize cannabis, together with supply gluts in Canada (which has issued over 900 cannabis licenses to date) and in some US states, have dragged down profitability and stock prices, both for Canadian licenseholders and for US multi-state operators listed on Canadian exchanges.

Most public company acquisitions in Canada will be conducted by way of:

  • a takeover bid, either hostile (unsolicited) or friendly (solicited and/or negotiated); or
  • a negotiated, court-approved plan of arrangement.

Companies can also be acquired by way of:

  • an asset or share purchase; or
  • an amalgamation or other corporate reorganisation.

M&A activity in Canada is primarily regulated by:

  • the Canadian federal government, particularly where the target is in a regulated industry or the acquiror is non-Canadian;
  • provincial securities regulators; and
  • stock exchanges.

Reporting issuers, which includes all issuers with securities listed on a Canadian stock exchange, must file continuous disclosure documents with the applicable provincial securities regulators on the System for Electronic Document Analysis and Retrieval (SEDAR). Reporting insiders – which includes directors, officers and 10% beneficial owners of a class of securities of a reporting issuer – must file trade reports on the System for Electronic Disclosure by Insiders (SEDI) unless an exemption is available.

There are 13 jurisdictions and securities regulators in Canada. Multiple attempts at creating a national securities regulator have failed, most recently, a cooperative model which was abandoned in 2021.

Investment Canada Act (ICA) and National Security Review

Consistent with the approach of most countries, the Canadian government may restrict the ability of a non-Canadian to acquire or start a business in Canada, in particular if the investment relates to a cultural business (for example, broadcasting and publishing) or raises national security concerns. The government may block proposed foreign investments, allow them to proceed with conditions, or order divestiture if an investment has already been made.

A transaction by a non-Canadian is reviewable if the enterprise value of the target business exceeds certain financial thresholds (for WTO investors that are not state-owned enterprises, the threshold is an enterprise value of CAD1.287 billion). If reviewable, the government will determine whether the transaction is of “net benefit” to Canada. If not reviewable, a notification under the ICA must be filed within 30 days after commencing a new business activity or acquiring control of an existing Canadian business.

The Canadian government may review any acquisition on national security grounds under the ICA, whether or not it is subject to net benefit review. There is no definition of “national security” in the ICA, nor are there specific monetary thresholds that automatically trigger a national security review.

The past year has brought a sea change in the government’s approach toward foreign investment and national security review. Investments by entities with ties to Russia and China, and any foreign investments into the critical minerals sector and certain other protected industries are expected to be subject to greater scrutiny. Proposed amendments would grant the Ministry new negotiation and enforcement powers.

Effective 2 August 2022, a new voluntary pre-closing filing mechanism came into force, permitting certain non-Canadian investors to confirm in advance whether a proposed investment would be subject to a national security review. If a pre-closing filing is not made, the government will have up to five years after becoming aware of a transaction (changed from 45 days) to initiate a national security review.

In addition, the government announced that it would initiate a national security review for all investors with ties to Russia and investors in critical minerals that are tied to Chinese state-owned enterprises. In November 2022, the government ordered three Chinese firms to divest their investments in Canadian lithium companies on national security grounds.

Furthermore, in December 2022 the government introduced Bill C-34, which would significantly amend the ICA and is expected to be passed in the summer of 2023. Among other things, the amendments include a new pre-closing filing requirement for certain investments in “prescribed businesses”; new powers for the Minister of Innovation, Science and Industry to extend the national security review of investments, impose interim conditions for investments and accept undertakings, and share information with foreign governments; and stronger penalties for non-compliance with the ICA.

Sanctions

Canada has sanctions and related measures in place against countries, individuals and entities which the government has identified as being responsible for or complicit in human rights violations, significant acts of corruption, or terrorist activities. Canada currently has imposed sanctions in relation to 23 countries.

Canada’s sanctions against Russia, originally implemented in 2014 following Russia’s attempted annexation of Crimea, were updated dozens of times throughout 2022 in response to its invasion of Ukraine. These broad-ranging sanctions target entities and individuals associated with Russia’s military, government, and financial and energy sectors. In recent months, hundreds of additional names have been added to the sanctioned list for their involvement with human rights violations and disinformation and propaganda campaigns.

The shifting landscape of sanctions regulations requires Canadian businesses and their stakeholders to keep a close eye on their compliance, including reviewing their shareholder base and disclosing, and in some cases divesting, assets in sanctioned jurisdictions.

Industries with Limits on Foreign Ownership

Ownership by non-Canadians is restricted in certain sectors, including the airline, banking, telecommunications and insurance industries.

Competition Act

Foreign investment is also subject to pre-merger notification under the Competition Act if it meets both of the size thresholds summarised below:

  • size of parties – the parties to the transaction, together with their affiliates, have combined assets in Canada or total annual gross revenues from sales in, from or into Canada with a value in excess of CAD400 million; and
  • size of transaction – the aggregate value of the Canadian assets or annual gross revenues from sales in or from Canada of the target exceed CAD93 million.

Regardless of whether notification is required, the Competition Bureau reserves the right to review any transaction for up to one-year post-closing to determine whether it is likely to lessen or prevent competition substantially. In addition, all business activity in Canada is subject to scrutiny for anti-competitive behaviour.

Significant amendments to the Canadian Competition Act came into force in June 2022. Among other things, these amendments expanded the factors that the Competition Tribunal may consider when reviewing a merger to determine whether it will substantially lessen or prevent competition, including the entrenchment of a leading incumbent’s market position, the effects of the transaction on quality, choice or consumer privacy and a change to innovation in the relevant market. These amendments also introduce an anti-avoidance provision in the context of notifiable transactions.

Employment legislation varies by jurisdiction in Canada. Minimum statutory employment standards, such as notice requirements on termination, generally cannot be contracted out of or waived. For example, an employment agreement providing for “termination at will” would not be enforceable.

Other legislation applies to the employment relationship, including the applicable human rights code, pay equity statute and occupational health and safety legislation.

Canada supports the principles of collective bargaining. Each jurisdiction in Canada has a labour code.

Ontario also prohibits non-competition provisions in employment agreements and requires certain employers to have a written policy with respect to “disconnecting from work”.

Acquirors should conduct detailed due diligence on a target’s employment arrangements to understand the potential severance costs associated with its key employees and consider whether any future plans (for example, the relocation of a plant) could be construed as constructive dismissal requiring payment of termination pay or severance.

In the context of M&A transactions, while there is no requirement to engage with employees or pension trustees, target company directors in discharging their fiduciary duties are encouraged to take the interests of these stakeholders into account.

See 2.3 Restrictions on Foreign Investments.

Rio Tinto Acquires Turquoise Hill

Rio Tinto owned 51% of the shares of Turquoise Hill (a TSX-listed mining company) and proposed a plan of arrangement to acquire the remaining shares for cash. Rio Tinto offered two dissenting shareholders unique deal terms with respect to dissent and dispute resolution processes, including immediate payment of 80% of the transaction price. Complaints were made to securities regulators that this deal violated the requirement for equal treatment of shareholders. Rio Tinto then made the same deal available to all dissenting shareholders and the transaction closed. The reasons of the chambers judge have not yet been released and it remains to be seen whether this will set a precedent in cases where in effect there could be a two-tiered system for determining price.

Rogers-Shaw Acquisition Appeal

One of the largest transactions announced in 2021 was a proposed transaction between two of the largest mobile phone providers in Canada, Rogers and Shaw. The Competition Tribunal allowed the transaction to proceed, and in January 2023, the Federal Court of Appeal agreed with the Tribunal. The Tribunal had determined that the transaction would not likely prevent or lessen competition substantially, and further that the transactions actually promote competition, but key to the decision was the proposed divestiture of the Freedom Mobile business.

Canada has some of the highest cell phone rates in the world, making the transaction politically sensitive. In March 2023, the federal government finally gave its approval to the transaction but imposed unprecedented and legally binding commitments. The two-year regulatory approval process and the uncertainty caused by political interference will add to deal execution risk.

Cineplex v Cineworld

In December 2021, in an important case arising out of the disruption from the pandemic, an Ontario court ruled that Cineplex could not be held in default of the ordinary course covenant under an arrangement agreement with Cineworld when Cineplex was prevented by government mandate from conducting normal day-to-day operations. The appeal has been postponed as a result of Cineworld’s bankruptcy filing in September 2022.

Taiga Gold Corp v Munday

A challenging aspect of a plan of arrangement is the determination of who gets to vote. Some types of securityholders will get a separate vote, others may vote together as a class, and some may not get a vote at all. In January 2023, the Alberta Court of Appeal determined that warrantholders should have had a vote on a plan of arrangement involving Taiga, but the transaction had already closed and could not be unwound. This decision further emphasises that, following the final court approval of a plan of arrangement, the parties should race to close before an application for a stay pending appeal can be filed. 

Sandpiper Real Estate Fund v First Capital

Shareholders have the right to requisition a shareholder meeting, but the board must determine when that meeting will actually be held. In February 2023, an Ontario court held that waiting five months was unreasonable and unjustified having regard to the process and reasons for the board’s decision.

Corporate Opportunity Waivers

Alberta recently became the first Canadian jurisdiction to permit corporations to include a corporate opportunity waiver in its articles or unanimous shareholder agreement, as is allowed in Delaware. The corporate opportunity doctrine was to prevent directors and officers from usurping business opportunities that otherwise rightfully belong to the corporation. Having the waiver will make investments by private equity firms and other active investors more attractive.

Porter Airlines v Nieuport Aviation

In October 2022, the Ontario Superior Court of Justice held that a force majeure clause did not excuse Porter Airlines from fulfilling its payment obligations to Nieuport, the owner and operator of the passenger terminal from which Porter operated. Although performance under its contract may have become commercially impractical or unreasonable for Porter, the decision to suspend operations was a commercial one and not one caused by an event of force majeure, such as a government order requiring Porter Airlines to take such action.

Boliden Mineral AB v FQM Kevitsa Sweden

In February 2023, the Ontario Court of Appeal upheld an application judge’s decision, agreeing that the purchaser could recover from the seller under a general indemnity provision in a share purchase agreement for losses relating to pre- and post-closing tax liabilities. These liabilities arose from a breach of an unqualified representation that all pre-closing tax filings had been made and there were no grounds for reassessment. While the representation as far as the seller knew was true at closing, the court held that due to a reassessment by Finnish tax authorities and because there was no knowledge qualifier included in the representation, there was a breach of representation. Further, the losses incurred by the purchaser relating to the pre- and post-closing tax liabilities flowing from this breach were reasonably foreseeable.

Takeover Bid Amendments

The last significant amendments to the takeover bid rules in Canada were implemented in 2016. These amendments included:

  • the extension of the minimum bid period from 35 days to 105 days (which may be shortened in certain circumstances) to allow target boards adequate time to respond to hostile bids;
  • the introduction of a mandatory 50% minimum tender condition (at least 50% of the shares not already owned by the acquiror and its joint actors must be tendered before any shares can be taken up by the acquiror); and
  • a mandatory ten-day extension to the bid period if, at the end of the initial deposit period, all terms and conditions of the bid have been complied with or waived and the minimum tender requirement has been met.

Securities regulators are inclined to strictly enforce these rules in order to promote predictability in the takeover bid regime. Exemptions or variations are rare.

It is common in Canada for prospective acquirors to accumulate shares of their target prior to launching a takeover bid or change of control transaction. An acquiror may establish a “toehold” through open market purchases or private transactions with other shareholders.

Acquirors may also seek support from other shareholders through accumulation of proxies or lock-up or voting agreements in support of a transaction.

An acquiror must publicly disclose its ownership of a reporting issuer once it directly or indirectly beneficially owns, or has control or direction over, 10% or more of a class of securities (in contrast to the USA, where the threshold is 5%). This threshold is reduced to 5% in Canada if a takeover bid for the relevant securities is outstanding.

Beneficial ownership of securities is calculated on a partially diluted basis by class and includes:

  • all securities of that class that could be acquired within 60 days upon the conversion or exercise of convertible securities; and
  • all securities of that class beneficially owned by any joint actors of the acquiror.

Control or direction generally is established by the ability to vote, or direct the voting of, shares or the ability to acquire or dispose of, or direct the acquisition or disposition of, shares.

Equity equivalent derivatives, such as equity swaps, generally are not included in determining whether the 10% ownership threshold has been crossed, although interests in these and other related financial instruments must be disclosed in reporting required once the 10% ownership threshold has been crossed.

Early Warning Disclosure

Upon crossing the 10% ownership threshold, the acquiror is subject to the early warning regime and must file a press release and an early warning report (similar to a Schedule 13D in the USA).

Eligible institutional investors – which includes financial institutions, pension funds, mutual funds, investment managers and SEC-registered investment advisers – may file a less onerous alternative monthly report (similar to a Schedule 13G in the USA).

Insider Reporting

Directors, officers, 10% beneficial owners and other “reporting insiders” of reporting issuers must file insider reports disclosing any change to their beneficial ownership of, or control or direction over, the reporting issuer’s securities or interest in a related financial instrument.

Unlike in the USA, structural defences to stakebuilding in constating documents or by-laws are not common in Canada because they are not required or would be ineffective under Canadian law.

Early Warning Standstill

An acquiror that is obligated to file an early warning report may not acquire any more securities of that class (or securities convertible into such securities) until the expiry of one business day after the early warning report is filed.

Takeover Bid Rules

Once an acquiror has beneficial ownership of, or control or direction over, 20% or more of the outstanding voting or equity securities of a class, any further acquisitions of outstanding securities of that class would constitute a takeover bid that requires an offer to be made to all security holders unless an exemption is available.

Rights Plans/Poison Pills

Before the 2016 takeover bid regime amendments, the primary structural defence mechanism for an issuer in Canada was a shareholder rights plan (commonly known as a “poison pill”). Rights plans are still in use since 2016, with some differences to pre-2016 plans. Typical features of a rights plan include the following:

  • upon an acquiror’s acquisition of, or announcement of its intent to acquire, beneficial ownership of a specified percentage (typically 20% or more) of the company’s shares, all other shareholders will be given the right to purchase shares at a significant discount to the market price, substantially diluting the acquiror; and
  • rights plans may allow for a “permitted bid”, which typically now means one that is required to stay open for at least 105 days and includes a minimum tender condition.

The primary value of a tactical rights plan adopted following the emergence of a bid traditionally has been to buy time for a board and shareholders to consider an offer and (where appropriate) seek alternatives to the bid.

Because amendments to the takeover bid rules in 2016 now require a takeover bid offer to remain open for at least 105 days (up from the previous minimum of 35 days), it is generally expected that regulators will cease-trade a rights plan after that timeframe. Even where a regulator permits a rights plan to remain in place, certain Canadian stock exchanges may refuse a plan if it does not receive shareholder approval within six months of being implemented, which often functions as a de facto termination date for tactical rights plans.

Other Hurdles to Stakebuilding

Acquisitions of shares generally cannot be made if a person is in a special relationship with an issuer and possesses inside information (information that has not been generally disclosed and could reasonably be expected to significantly affect the market price or value of a security of the issuer).

Most private companies have restrictions on share transfers in their articles or in unanimous shareholder agreements that would prevent a third party from acquiring shares without board or shareholder approval.

For reporting issuers with a public float, it would not be possible to restrict share transfers in the articles or by-laws, but individual shareholders may agree to a standstill as part of a negotiated transaction.

Dealings in derivatives are permitted in Canada.

Disclosure by 10% holders must be made of the material terms of any “related financial instrument” involving the issuer’s securities as well as any other “agreement, arrangement or understanding that has the effect of altering, directly or indirectly”, the investor’s economic exposure to the issuer’s securities. Disclosure is also required of any securities lending arrangements.

See 2.4 Antitrust Regulations for filing requirements under competition laws.

Early warning reports and alternative monthly reports require disclosure of any plans or future intentions that the investor and any joint actors may have relating to any changes in their security ownership, their voting intentions or any material transaction they may propose.

An eligible institutional investor will be disqualified from filing alternative monthly reports if the investor intends to propose a transaction that would result in it acquiring effective control.

Reporting issuers must immediately disclose all “material changes”. In the context of a proposed transaction, the threshold for a material change requiring disclosure is typically met when both parties have decided to proceed with a potential transaction and there is a substantial likelihood that the transaction will be completed. There is no bright-line test for this determination.

Issuers listed on certain Canadian stock exchanges must also immediately disclose all “material information”, which generally includes both material changes and material facts and may, in some cases, require earlier disclosure.

Confidential material change filings and trading halts may be made in certain circumstances.

The acquisition by a reporting issuer of a private company will require disclosure only if the transaction is a material change for the reporting issuer. A transaction between two private companies where neither has continuous disclosure obligations under securities laws carries no public disclosure obligation.

Most acquisitions are announced publicly only once definitive acquisition agreements are signed. Companies tend to avoid disclosing a potential transaction at the non-binding letter of intent stage because it could affect the share price or give potential competitors or stakeholders time to mobilise in opposition. If the transaction is announced before there is a definitive agreement and then it fails to be entered into, the target could suffer reputational harm or face questions from regulators.

Significant business combinations usually involve a thorough scope of due diligence. Such diligence often includes searches of public registries and databases, including a corporate profile as well as business name, bankruptcy, lien and litigation searches, and a review of public filings on SEDAR, SEDI and other databases.

Searches would typically be run against the target company and its management and material subsidiaries; for privately held companies, they would also be run against the selling shareholders.

Diligence documents – such as financial statements, material contracts and licences or permits – will typically be supplied by the target to the buyer and its counsel via an electronic dataroom.

Common factors that can affect the scope of appropriate due diligence can include the nature of the target’s industry, the jurisdiction where assets are located, whether the target competes with the buyer, and the access to sensitive information the target is willing to grant.

Most letters of intent and acquisition agreements include exclusivity obligations on the target. Acquirors will usually want to know that the target has ceased all negotiations and is not shopping their deal to third parties.

Most targets will want a standstill arrangement in place with the acquiror.

Fiduciary Outs

For the acquisition of a reporting issuer, it is common for exclusivity obligations to contain a “fiduciary out” clause allowing the target to terminate the agreement and accept a superior proposal if to do so would be consistent with the target board’s fiduciary duties. The acquiror would typically have a right to match the superior proposal or would be entitled to be paid a break fee (as described in 6.7 Types of Deal Security Measures) if the agreement is terminated.

A “superior proposal” will typically need to satisfy very specific negotiated conditions, including that it is for all the target’s shares (or in some cases substantially all assets); that it is reasonably capable of being completed without undue delay with regard to all financial, legal, regulatory and other aspects of the competing transaction; that it is not subject to any financing condition; and that the target board make a determination that it is a more favourable transaction.

The existence of “hard” lock-up agreements (ie, the shareholder is not permitted to tender its shares to any other bid or vote in favour of any other transaction) with one or more target shareholders holding a significant percentage of shares could render an offer incapable of being a “superior proposal” because it is not reasonably capable of being completed.

The documentation used to set out the terms of a deal is determined by the nature of a transaction.

If the transaction is a takeover bid, the acquiror must publicly file a takeover bid circular that describes the terms of its offer and includes other required disclosure. If the terms of the takeover bid subsequently change, further notices must be filed. For friendly takeover bids, the acquiror would typically enter into a support agreement with the target prior to launching the bid setting out the process of the bid, conditions and certain deal protections.

If the transaction is a plan of arrangement or other negotiated business combination, the acquiror and the target would enter into an arrangement or combination agreement. The agreement would set out the process of the transaction (including shareholder, court and other approvals), conditions and certain deal protections.

Parties typically will first enter into a non-binding letter of intent setting out the proposed deal terms with binding provisions regarding exclusivity, expenses and confidentiality.

The parties then conduct due diligence and negotiate a definitive acquisition agreement over a period of 30–90 days. The time required varies greatly depending on the size and nature of the target and the involvement of third parties, such as lenders.

The timeline for a friendly takeover bid generally is 50–65 days beginning from the start of preparation of the takeover bid circular to the completion of the transaction, assuming the target waives the minimum bid period of 105 days (shortening it to no less than 35 days).

A hostile takeover bid must remain open for at least 105 days. The bid period may be shortened by the target or reduced to no less than 35 days if the target announces an alternative transaction. A mandatory ten-day extension period will apply if the bidder is required to take up securities that were tendered under the bid. Depending on the defensive tactics used by the target, once a target is “in play”, it is hard to predict how long it might take to successfully complete the bid.

Typically, following a successful takeover bid, the acquiror will conduct a second-step transaction to obtain 100% of the outstanding shares.

If the target is a private company, the parties may sign the definitive documents and close the transaction on the same day. Otherwise, closing may take 30–60 days or longer depending on the extent to which shareholder, court or regulatory approvals are required.

Complex transactions often will have outside dates that may be extended in some circumstances to accommodate regulatory approvals.

A shareholder cannot acquire any outstanding voting or equity securities of a reporting issuer if such acquisition would cause the shareholder to, together with any joint actors, have beneficial ownership of and/or control or direction over 20% or more of the outstanding securities (calculated on a partially diluted basis) unless:

  • the shareholder makes an offer to all shareholders of the same class by way of a takeover bid; or
  • an exemption from the takeover bid rules is available.

The takeover bid exemptions include:

  • certain purchases by private agreement from not more than five persons; and
  • normal course market purchases of no more than 5% of the outstanding securities in any 12-month period.

Both cash and shares of the acquiror are commonly used in Canada as consideration in M&A transactions.

The takeover bid rules require that identical consideration be provided to all target shareholders, with limited exceptions. Generally, no collateral benefits are allowed to be offered selectively to certain shareholders.

Plans of arrangement offer flexibility on consideration, so long as the arrangement overall is fair and reasonable.

In private M&A, particularly in industries with high valuation uncertainty, tools commonly used to bridge value gaps between parties include holdbacks and earn-outs.

  • With a “holdback”, an acquiror will hold on to some of the purchase price until after closing in order to satisfy indemnity or breach of warranty claims. This holdback amount may be provided to an escrow agent, particularly in cases where the seller has concerns about the creditworthiness of an acquiror.
  • With an “earn-out”, part of the purchase price will remain subject to performance requirements or other milestones that must be satisfied after closing and may also be used to set off indemnity or breach of warranty claims. The most common criterion is financial performance, but an earn-out may also be dependent on other performance-related criteria.

Some common conditions for takeover bids include the following:

  • there is no shareholder rights plan in effect or the rights plan will be waived;
  • regulatory approvals (including, where required, approvals under the Competition Act and the ICA) and third-party approvals or consents have been obtained;
  • there has not been a material adverse change;
  • there is no existing, pending or threatened litigation involving the target that would lead to a material adverse effect; and
  • there are no laws that would prevent the bidder from taking up or paying for the securities subject to the bid and there are no laws in effect or proposed that would have an adverse effect on the target.

Takeover bids cannot be subject to a financing condition as discussed in 6.6 Requirement to Obtain Financing.

Since 2016, the takeover bid rules in Canada require that all bids, even partial bids, must provide for a mandatory minimum tender condition that 50% of securities owned by security holders other than the bidder be tendered to the bid. This minimum tender requirement must be met before the bidder may acquire any of the securities subject to the bid.

Bids for all of the outstanding shares may include a higher minimum tender condition to ensure that the bidder, through a second-step business combination, can obtain the remaining shares that are not deposited. This condition will usually require a deposit of at least 66⅔% of the outstanding shares and sufficient shares to obtain approval of a majority of the minority shareholders for the second-step transaction. Canadian securities regulations allow securities that were obtained under a lock-up to be voted as part of the majority of the minority vote if the locked-up security holder is treated identically to all others under the offer.

If a bidder is only seeking control, it may include a minimum tender requirement of 51% of the outstanding shares instead. Parties may apply to Canadian securities regulators to waive or vary the minimum tender condition, although regulators will only allow such a waiver in rare cases.

In an arrangement, amalgamation and other business combinations, there is no regulatory requirement or restriction on financing conditions. However, the target will generally require that the acquiror show evidence that it will be able to fund the cash consideration.

In Canada, as in the UK but unlike in the USA, there is a fully financed rule for takeover bids that offer cash consideration. The bidder must have pre-arranged financing before launching the bid. The financing itself may be conditional at the time the bid is commenced, if the bidder reasonably believes that the possibility is remote that it will not be able to pay for securities deposited under the bid.

Acquirors may seek a wide variety of deal protection measures, examples of which are described below.

Support Agreements and Lock-Ups

In a friendly takeover, before launching the bid, the bidder and the target may enter into a support agreement whereby the target agrees to recommend that its shareholders tender to the bid and the bidder agrees to launch the bid on terms specified in the support agreement, subject to conditions such as a fiduciary out (as described below).

The directors, officers or significant shareholders of a target may also enter into lock-up or voting agreements with the acquiror to deposit their shares to the bid or vote their shares in favour of an arrangement. These agreements may be “hard” or “soft” (see 6.11 Irrevocable Commitments).

Stock exchange rules may require that disinterested securityholders approve of voting agreements requiring shareholders to vote their shares in accordance with management recommendations. Negative voting agreements (those requiring a shareholder to not vote against management’s recommendations), on the other hand, are not required to be approved by disinterested securityholders.

Break-Up/Break/Termination Fees

A common deal protection measure in Canada is a break-up fee paid by the target to the acquiror if an arrangement or other business combination is not completed. These types of fees usually range from 2% to 4% of the target’s equity value.

Reverse break fees requiring a payment by the acquiror to the target if the acquiror breaches the acquisition agreement or is not able to complete the sale may also be provided for.

No-Shop/Go-Shop Clauses

No-shop clauses prohibit a target from soliciting other takeover offers or providing information to other third parties that might be used to make an offer. These provisions will typically include a “fiduciary out” that allows directors (in so far as they are required by their fiduciary duties) to negotiate with a third-party offeror if the alternative offer in the good faith estimation of the directors represents a superior proposal.

Go-shop clauses, on the other hand, allow a target to negotiate or “shop” a transaction with third parties for a specific amount of time after the execution of the agreement. Go-shops are less common but may be desirable if the acquiror wants to publicly announce the deal before the target tests the market.

Matching Rights

While a fiduciary out for the target board to accept a superior proposal is commonly provided for in a friendly acquisition agreement, the acquiror may also be provided the right to match the superior proposal and hence complete the transaction.

Managing Risk During the Interim Period

Once a definitive acquisition agreement is signed or a takeover bid launched, the acquiror is bound to complete the transaction unless one of the expressly stated conditions is not satisfied. The pandemic has put the focus on a number of these conditions.

Definitive acquisition agreements now contain specific COVID-19 provisions, including representations about the impact of public health measures on the business and the extent to which government support has been relied on. Material adverse effect and ordinary course of business provisions have garnered greater attention in recent years.

If an acquiror is not seeking 100% ownership of a target, it may negotiate for additional governance rights with respect to a target outside its shareholdings. These may include:

  • the right to nominate individuals to the target’s board and/or to sit on board committees;
  • board observer rights;
  • the right to participate in, or require, a public offering of the target’s equity securities; and
  • the right to approve of change of control transactions, issuances of shares and other major decisions.

Shareholders are permitted to vote by proxy in Canada.

If an acquiror wishes to obtain 100% of the shares of a target and is not able to do so through the bid process, there are two other methods that can be used to acquire the remaining shares depending on the holdings of the acquiror after the bid is complete.

Second-Step Business Combination/Going-Private Transaction

A second-step business combination or a going-private transaction can be implemented if the bidder holds between 66⅔% and 90% of the outstanding shares after the bid is complete. Following the bid, the bidder will be able to take the company private through an amalgamation or a plan of arrangement.

Such a business combination will need to be approved by a special majority of the shareholders at a shareholder meeting and will be subject to certain minority shareholder protections. For instance, a majority of the minority of the shareholders will be required to approve of the business combination. However, as the majority shareholder, the bidder can participate and vote the shares that were acquired under the takeover bid. Thus, if the bidder acquires 66⅔% of the outstanding shares, in most cases, it will have sufficient votes to obtain the majority of the minority approval.

Compulsory Acquisition

Under corporate law, if a bidder obtains 90% of the outstanding shares subject to the bid within 120 days of the commencement of the bid, it can acquire all of the shares that remain outstanding for the same price as was offered under the bid. This compulsory acquisition procedure does not require a shareholder vote.

Shareholders that did not tender to the bid are provided with dissent rights that allow them to apply to a court to fix the fair value of their shares.

Before launching a bid, it is common for the bidder to enter into lock-up agreements with major target shareholders whereby the shareholders agree that they will tender to the bid. A “soft” lock-up allows a shareholder the right to withdraw and accept a higher offer, while a “hard” or irrevocable lock-up does not. Hard lock-ups are less common.

A takeover bid in Canada is launched by:

  • mailing the bid materials to the target shareholders directly; or
  • placing an advertisement in at least one daily newspaper in each applicable province in Canada and, concurrently with or prior to such publication, filing the bid documents and delivering them to the target.

The advertisement method is typically used in hostile bids when the acquiror does not have access to the shareholder lists to complete the mailing itself and does not want to request the list in advance for fear of tipping off the target. Once the advertisement is placed, the acquiror must request the shareholder list from the target and mail the circular to target shareholders.

In the context of an amalgamation, arrangement or other business combination, public companies in Canada are required to disclose material changes, which may include the decision to implement these kinds of transactions at the board level or by senior management if they believe board approval is probable.

If the consideration for a bid is to be shares or partly shares, the bidder must provide prospectus-level disclosure.

The target must publicly file a directors’ circular, prepared by its board, which includes the board’s recommendations regarding the bid and other information.

An acquiror providing share consideration must provide its audited financial statements for the past three years as well as interim financial statements if available, and pro forma financial statements that give effect to the acquisition.

The financials must include a statement of the financial position of the issuer as at the beginning of the earliest comparative period for which financial statements that are included comply with the International Financial Reporting Standards (IFRS) in certain cases. If the statements are the first IFRS financial statements prepared by the issuer, the issuer must include the opening IFRS statement of financial position at the date of transition to IFRS.

The pro forma financial statements must be those that would be required in a prospectus, assuming that the likelihood of the acquisition is high and that the acquisition is a significant acquisition for the acquiror.

If the acquiror is a reporting issuer, it may incorporate by reference its existing continuous disclosure.

More generally, securities laws in Canada require that annual and quarterly financial statements of reporting issuers be prepared in accordance with Canadian generally accepted accounting principles (GAAP). GAAP, in the context of Canadian securities regulation, must be determined in accordance with the Handbook of the Canadian Institute of Chartered Accountants.

In the context of a takeover bid, the following transaction documents are required to be disclosed in full:

  • the takeover bid circular, including prospectus-level disclosure, if required, and any documents incorporated by reference;
  • the directors’ circular;
  • any lock-up agreements; and
  • any support agreement.

In the context of a plan of arrangement or other business combination, the following documents are required to be disclosed in full:

  • the management information circular delivered with the meeting materials, including prospectus-level disclosure, if required, and any documents incorporated by reference;
  • any support agreements; and
  • the arrangement or business combination agreement.

Reporting issuers are also generally required to meet certain continuous disclosure obligations and file material contracts on SEDAR.

Directors’ duties in Canada include the following:

  • to act honestly and in good faith, with a view to the best interests of the corporation; and
  • to exercise the care, diligence and skill of a reasonably prudent person in comparable circumstances.

In discharging their fiduciary duties, directors must exercise their powers for the benefit of the corporation and not for an improper purpose.

These duties are owed to the corporation even in the context of a business combination or a hostile bid. However, the Supreme Court of Canada has confirmed that directors are permitted to consider the interests of a variety of stakeholders in fulfilling their responsibilities. This stakeholder-friendly corporate governance model has been codified in the Canadian federal corporate statute.

The common law provides guidance as to which stakeholders’ interests may be considered by directors, but does not provide guidance on whose interests, if any, should be prioritised. Although directors do not owe a fiduciary duty to shareholders and the “Revlon duty” (ie, when a break-up or change of control transaction is inevitable, the board's fiduciary duty is to maximise shareholder value) has not been upheld by Canadian courts, directors are not prohibited from taking steps to maximise shareholder value or prioritise shareholders over other stakeholders.

Special committees comprised of target directors who are independent of a proposed transaction are often established to evaluate and consider the terms of the transaction. Their mandate often also includes:

  • considering strategic alternatives;
  • negotiating the proposed transaction;
  • providing a recommendation to the rest of the board about the proposed transaction; and
  • if applicable, supervising a valuation or fairness opinion.

It is common for target boards to establish special committees in business combinations involving a related party. Special committees are required by MI 61-101 in certain circumstances when one or more directors have a conflict of interest. Members of the special committee must be free of real or perceived conflicts. Multilateral Instrument 61-101 (MI 61-101) also encourages the formation of a special committee in a broader range of circumstances than what is legally required.

Special committees and the timing of their formation are important ways to show that directors’ decisions have been made without conflicts. Courts will often consider whether and at what time in the process of a transaction a special committee was formed and the procedures it followed in evaluating the transaction. A special committee should be established as soon as possible and before the material terms of a transaction are in place.

Directors are provided a high level of deference at common law. Like in the USA, Canadian courts have recognised the “business judgement rule”. According to the business judgement rule, a court should not substitute its own decisions for those decisions made by directors, and deference should be accorded to business decisions of directors provided they are taken in good faith and within a range of reasonableness in the performance of the functions the directors were elected to perform by the shareholders.

If directors are acting independently, in good faith and on an informed basis in a way that they reasonably believe is in the best interests of the corporation, courts generally will defer to their judgement.

Independent outside advice is commonly given to directors in a business combination from:

  • investment bankers;
  • outside legal counsel;
  • financial and tax advisers;
  • public relations firms; and
  • proxy solicitation firms.

Corporate and Securities Laws

Both Canadian corporate statutes and securities laws contain conflict of interest provisions.

Under Canadian corporate law, if a director is a party to a transaction with the corporation, is a director or officer of a party to the transaction or has material interest in a party to transaction, the director must disclose the nature and extent of this interest and may be required to refrain from voting on the matter.

In securities law, MI 61-101 regulates transactions where potential conflicts of interest are present. This instrument provides procedural protections for minority shareholders. Depending on the type of transaction, the following may be required under MI 61-101:

  • a formal valuation by an independent valuator supervised by a special committee;
  • majority of the minority shareholder approval; and
  • enhanced disclosure, including disclosure of prior valuations prepared for, and offers received by, the target in the past two years.

MI 61-101 encourages, but does not require, targets to form special committees and encourages the formation of a special committee in any transaction to which MI 61-101 applies.

Judicial and Regulatory Scrutiny

Conflicts of interest of directors, managers, shareholders or advisers have been the subject of judicial and regulatory scrutiny as well. Securities regulators in Canada have, in particular, examined the question of whether a party is a joint actor with the acquiror. This is a factual analysis, and its finding may have an impact on whether the transaction is an insider bid or related party transaction and hence subject to enhanced disclosure, formal valuation requirements and majority of the minority approval under MI 61-101.

Hostile takeover bids are permitted in Canada but have not been very common since the implementation of the 2016 takeover bid amendments, which made the takeover bid regime more target friendly.

Canadian securities laws allow directors to use measures to defend against hostile takeovers. Regulators may intervene when defensive measures are likely to deny or severely limit the ability of shareholders to respond to a takeover bid.

There does not appear to have been a change to the use of defensive measures during the pandemic, but some examples of defensive measures are as follows.

Shareholder Rights Plans/Poison Pills

Shareholder rights plans or poison pills are often used by target companies to defend against hostile bids. Many companies have continued to adopt poison pills even after the 2016 takeover bid amendments, despite speculation that the amendments might eliminate the use of poison pills in Canada because of the longer minimum bid period. Rights plans will not block hostile bids entirely but are instead a way to encourage the fair treatment of shareholders in connection with a bid and to allow the target board and shareholders to respond to and consider the bid. They also allow time for the target board to seek available alternatives and prevent creeping takeovers.

Crown Jewel/Scorched Earth

A target may attempt to restructure or recapitalise so as to provide shareholders with cash value, for instance, by selling a significant asset in order to become less attractive to a bidder. The directors must undertake a “crown jewel” transaction with a view to the best interests of the corporation, and the sale must have a demonstrable business purpose. The board of a target may also decide to substantially increase long-term debt and concurrently declare special dividends to distribute cash to its shareholders.

Defensive Private Placements

Private placements that have the effect of blocking a bid have been recognised by Canadian securities regulators as a possible defensive tactic, but they could be found to be inappropriate if they are abusive or frustrate the ability of shareholders to respond to a bid or competing bids.

Golden Parachutes

Golden parachutes for key employees may be triggered if such employees are terminated after a third-party acquisition.

White Knight

Targets may seek an alternative transaction with a friendly party or a “white knight” that might offer more value (or in some cases more preferential terms or deal certainty) to its shareholders than the original bidder.

Issuer Bid

If a target is unable to find a white knight, it may itself offer to repurchase its outstanding shares.

Pac-Man

A target might flip the script and make a bid for the shares of the hostile bidder.

Advance Notice By-Law

A target’s by-laws or other constating documents may be amended to require advance notice of shareholder nominations for members to the board of directors, thereby giving the target the time to strategically respond to a proxy fight in the context of a hostile bid.

Canadian directors owe the same duties when they are enacting defensive measures as in any other context. Boards in Canada owe a fiduciary duty to the corporation, not to the shareholders, and are not required to conduct an auction once a company is “in play”.

Canadian courts have held that the conduct of directors will be analysed on an objective standard of what a reasonably prudent person would do in comparable circumstances. A court generally will not replace the decisions of directors if they acted independently, in good faith and on an informed basis and such decisions were selected from a range of reasonable alternatives.

Target boards in Canada cannot “just say no” in the same way that this strategy is understood in the USA. Canadian directors of public companies, while they may implement defensive measures, are not able to indefinitely prevent a bid from being presented to the shareholders.

M&A litigation in Canada is not as prevalent as in other jurisdictions such as the USA. Class action securities litigation is relatively new in Canada. Parties involved in private acquisitions will often choose arbitration over litigation to provide them with greater efficiency and confidentiality.

Litigation can occur at any stage of a transaction. A plan of arrangement requires court approval, which provides a forum for aggrieved stakeholders. However, as discussed in 3.1 Significant Court Decisions or Legal Developments (Taiga Gold Corp v Munday), stakeholders should act quickly and follow the proper channels in Canadian courts for the best chance of obtaining a remedy. A party may seek a cease-trade order or other relief preventing the consummation of a takeover bid from a securities regulator.

In general, Canadian courts have not permitted acquirors to terminate acquisition agreements solely because of the occurrence of the pandemic where such completion risk has been allocated to the acquiror.

For instance, in Cineplex v Cineworld, the court ordered damages against Cineworld for failing to close the transaction, because, according to the judge, Cineplex, despite having to close down many of its theatres, was not offside its ordinary course covenant.

Further, as described in 3.1 Significant Court Decisions or Legal Developments (Porter Airlines v Nieuport Aviation), the court found that an airline that drastically reduced its flights as a result of the pandemic could not avoid its payment obligations under a contract because it was not legally or physically restrained from performing its obligations. The case may have turned out differently if the government had mandated that the airline suspend operations.

The outcome of each case will depend on the language used in the agreement and the facts of the case.

See 3.1 Significant Court Decisions or Legal Developments for further details.

Although Canada is seen by some as an activist-friendly jurisdiction, levels of shareholder activism tend to lag behind levels of activity in the USA and Europe, particularly among large-cap Canadian issuers.

Activist proposals are overwhelmingly focused on ESG. Companies in the mining and oil and gas sectors have represented some of the most noteworthy targets of recent Canadian shareholder activism.

Typically, an activist’s first step is to approach a board confidentially with their demands, with the implicit or explicit threat of a public battle if the requests are not met. From there, activism can take many forms.

Board activism and proxy fights are prominent forms of activism in Canada, in which shareholders seek to have their nominees put forward for election to the board.

Shareholder proposals also continue to be an important form of activism. While shareholder proposals on matters within the board’s purview are only advisory and not binding, the publicity they attract can create pressure for change.

Transactional activists sometimes demand strategic reviews, divestitures, share buy-backs or increased dividends. They might requisition a shareholder meeting, wage a public broadcast campaign in the media or on social media, or launch their own competing tender offer. Sometimes the goal is to see an alternative transaction implemented; other times, activists try to improve the terms of the original deal.

In transactional shareholder activism, announced transactions are frequently a target for campaigns. In some of the most notable recent examples, shareholders issued open letters advocating for higher values for their shares and engaged securities regulators to address claims of unequal treatment, called on a board to launch strategic reviews of fossil-fuel assets, and requisitioned a shareholder meeting in response to a REIT’s plan to sell off some real estate assets.

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Author Business Card

Trends and Developments


Authors



SkyLaw is a premier corporate and securities firm in Canada. The SkyLaw team has an unparalleled practice in international M&A, governance and corporate finance. SkyLaw lawyers have worked at top-tier global law firms in Toronto, New York, London, Sydney and Dubai, providing the firm with a unique reach into major global financial centres. The firm excels in major acquisitions, bespoke equity and debt investments, joint ventures and reorganisations. The majority of SkyLaw’s M&A work involves acquirors based in the USA, the Middle East, Australia, China, Europe and elsewhere around the world. Recent engagements include high-profile private equity investments and strategic acquisitions by Fortune 500 companies. The firm has once again been voted as one of Canada’s Top 10 corporate law boutiques.

Introduction

Each year, The Economist publishes its word of the year. The winner for 2022 was “hybrid work”, a pandemic-induced shift in work habits that is either a blessing or a scourge, depending on which side of the payroll ledger you sit on. A notable runner-up was the newish term “friend-shoring”, which first gained prominence when it was used by Janet Yellen, the US Treasury Secretary, in a speech in Toronto in April 2022. A term used by optimistic investors is “soft landing”, which would occur if a recession were avoided following the aggressive interest rate hikes over the past year, while some commentators are predicting a “rolling recession”, where only certain sectors of the economy are impacted. However, with the recent shocks to the banking system and continued economic uncertainty, there now seems to be a greater likelihood of a “hard landing”.

These terms capture the essence of some of the significant trends that have emerged as a result of the twin shocks of pandemic and war. In a speech in Washington, DC in October 2022, Chrystia Freeland, the Deputy Prime Minister and Minister of Finance of Canada, claimed: “This is a moment of extreme economic upheaval…”. Few would disagree.

Canada is well placed to manage the global economic turmoil through the strength of its labour market, banks and natural resources, as well as increased government investment in key industries. While M&A activity in Canada declined significantly in 2022 from the blockbuster activity of 2021, the volume of announced transactions began to increase in the fourth quarter and may exceed pre-pandemic levels in 2023. There have been a number of significant transactions announced recently, lending support to the view that market participants have adjusted to the current macro-economic challenges and valuations have reset in line with the current environment.

It is yet to be seen if investor confidence will continue to be sustained or if the fear of another global shock or more bank failures will cause investors to stay on the sidelines.

Global Shocks, Inflation and Interest Rates

At the beginning of 2022, the world was still grappling with the ravages of the COVID-19 pandemic, which not only caused incalculable death and suffering, but also saw unprecedented government intervention with closed borders, lockdowns and massive handouts. The resulting disruption of global supply chains, combined with the sudden consumer demand surge supercharged by the wave of cash from governments, sparked rapid inflation and fears of a global recession. Then on 24 February 2022, Russia invaded Ukraine, creating a humanitarian disaster and disrupting essential trade in food, energy and resources. Supply chain issues were exacerbated as China stuck to its “zero-COVID” policy for much of 2022, the USA ratcheted up its “tech war” with China over chip production, and Canada’s relations with China turned frosty.

Central banks, including the Bank of Canada, responded with aggressive interest rate hikes in 2022 to tackle inflation. The sudden rise in interest rates, among other factors, put significant stress on the financial system and led to the dramatic failure in March 2023 of Silicon Valley Bank and, shortly thereafter, the 166-year-old Credit Suisse collapsed. The resulting tightening of credit markets and the fear of further bank failures make for eerie parallels to the 2008 global financial crisis.

The long-held view that globalisation would lead to peace through prosperity has been shattered. The war in Ukraine continues to rage. Tensions between China and Western countries continue to be strained, particularly in relation to trade and Taiwan. Canada and other countries have imposed increasingly tighter restrictions on foreign investment as they pursue friend-shoring policies and protect critical minerals, technologies, and supply chains. The risks of further economic upheaval still exist. A new shock could trigger a global recession.

The Outlook for M&A in Canada in 2023

The Canadian economy continues to grapple with rapidly rising interest rates, stubborn inflation and a lower Canadian dollar. The Governor of the Bank of Canada, Tiff Macklem, recently appeared before the House of Commons finance committee and confirmed that the Canadian economy is on track for a recession this year, but in his view, it should be mild primarily because of the continued healthy labour market.

The Bank of Canada raised its key policy rate seven times since the beginning of 2022, from 0.75% to 4.75%. While the Bank of Canada has not ruled out further rate increases in 2023, it became the first central bank across the G10 group of large economies to pause its rate-tightening cycle at the end of March 2023 as economic indicators are signaling a reduction in the rate of inflation in Canada.

The stated goal of the Bank of Canada is to prevent high inflation from becoming “entrenched”, which would occur if prices rise because other prices are rising and because the cost of labour is going up, making inflation self-fulfilling because households and businesses expect that it will stay high or keep rising, and they act accordingly. Similarly, one of the key drivers for M&A activity in Canada is confidence and the expectations of market participants. When there is, as now, “extreme economic upheaval”, decision-makers may choose to sit on the sidelines to see how things shake out. Financing an acquisition is more expensive; other uses of capital, such as share buy-backs, can be more compelling. Valuations are more difficult and complex as the spread between buyer and seller expectations widen when near-term economic prospects are hard to predict. Government intervention can further skew the markets and make planning difficult. Those factors, combined with increased activist pressure, particularly on environmental, social and governance (ESG) matters, tend to dampen the enthusiasm for deal-making and increase the time it takes to complete a transaction.

However, as with any crisis, there will be winners and losers. The best-placed companies in Canada are those with a strong balance sheet that are less impacted by rising financing costs. Restrictions on foreign investment increase opportunities for buyers from “friendly” shores. Distressed M&A opportunities should increase significantly, particularly in commercial real estate, retail, crypto-assets and cannabis. Rising interest rates and the end of government handouts have caused a dramatic increase in insolvencies; corporate insolvency filings are up over 55% in 2023 as compared to the same period in 2022. More private business owners are likely to sell as they near retirement and worry about the future. Companies that embrace hybrid work will find greater opportunities to hire the best and brightest without regard to geography.

Looking at the numbers, deal activity in Canada is down from the frenzied action of 2021, but it is not too far off pre-pandemic activity. If the Bank of Canada successfully reins in inflation this year and we return to a more predictable interest rate and inflationary environment, financial markets should stabilise. As markets conditions settle, the authors anticipate a renewed focus on deal-making with market participants adjusting to a “new normal” and demonstrating renewed confidence in investing for growth. The increase in deal activity so far this year suggests this is already beginning to happen. Barring any further global shocks, the authors anticipate that this trajectory will continue as confidence increases, and deal-making will be strong throughout 2023, albeit perhaps more complex and cautious.

The Pandemic, Three Years Later

Canada’s response to the COVID-19 crisis

All jurisdictions in Canada implemented to varying degrees public health measures to address the COVID-19 pandemic, ranging from masking and social distancing requirements to lockdowns and stay-at-home orders. The federal government closed the border to non-essential visitors and imposed vaccination, testing and mandatory quarantine requirements. Virtually all of these restrictions have now been lifted.

The pandemic’s impact on employment

The job market in Canada is close to full employment, with roughly as many people looking for work as there are available jobs. While the technology and cannabis sectors saw significant workforce lay-offs, many industries are struggling to fill positions, particularly in the service industry and in manufacturing.

The pandemic dramatically impacted employment practices in Canada. Canada was already facing a demographic shift upwards in the average age of its workforce, and many older workers are retiring earlier than usual. Many workers, particularly those laid off in the service industry, have moved on to other jobs, making it harder for employers to rehire.

According to Statistics Canada, at the beginning of 2021, 32% of Canadian employees worked from home, compared to only 4% in 2016. While most employers have since required employees to return to work, many businesses have adopted a hybrid work model, allowing some employees to work from home for some of the time, and other businesses have continued to be fully remote. While employees tend to claim to be just as efficient at home as they are at the office, many employers find productivity, quality and morale can suffer. This tension is likely to continue for some time.

Many businesses, particularly in the tech industry, have embraced remote working as it allows them to hire the best people regardless of geographic location. Canada is home to two of the top ten cities for tech talent professionals, and many US tech companies set up offices in Canada because of the talent and Canada’s more favourable immigration policies. Canada announced in late 2022 an aggressive plan to take in 500,000 immigrants a year by 2025 (roughly four times the number welcomed by the United States, despite Canada being one-tenth of the size).

Once a remote work policy is implemented, it may prove hard to unwind. Many of these employers are taking steps to address the shortcomings of remote work, including regular in-person group meetings. Some employers are using some of the money saved on office space to pay for travel to bring remote workers together.

While the ability to simply hire their workforce wherever they are located can attract top talent, there can be real challenges to the hybrid workforce in an M&A context. Employees are an integral asset that gets acquired in M&A transactions, and with companies implementing customised remote work practices, which inevitably look different across the map, a few issues can arise in an M&A context. Firstly, there may be a heightened risk that integration of workforces can be more difficult if they have different approaches to remote work. Without bringing employees together in person to have them buy-in to the vision of the merger, the success of integrating employees to work well together is threatened. Second, an acquiror needs to be extra cautious when pursuing changes in the work practice model post-merger as there can be legal and financial implications for changing a structure that employees have previously agreed to.

Trends in Activism

According to data from Laurel Hill Advisory Group, a leading North American shareholder communications and advisory firm, the overall number of activism cases was lower in 2022 relative to the blockbuster year of 2021, in which activists disrupted by the pandemic got back to business. However, targets were on average bigger, and included two companies with market capitalisations of over CAD10 billion for the first time in a decade. Other trends include:

  • Mining and oil & gas sector targets: As a global hub for publicly traded companies in these sectors, Canada also represents a prominent battleground for their activists. Some notable recent targets include Suncor Energy Inc. and Turquoise Hill Resources Ltd.
  • Majority voting: While shareholders can generally only vote “for” directors or withhold their vote (they cannot vote “against” directors), recent introductions of majority voting policies on major stock exchanges such as the TSX and in certain corporate statutes can effectively force directors to resign if more than 50% of votes are withheld from their re-election at a meeting. In August 2022, the Canada Business Corporations Act was amended to require shareholders of a public company to vote “for” or “against” directors at annual meetings, subject to certain conditions. A director must receive more “for” votes than “against” votes in order to be elected. This change does not apply where there are more nominees than board seats available. These changes have increasingly been put to use: seven nominees failed to gain at least 50% support last year (up from one nominee in 2020), and 41 found themselves with only 50-60% support (up from 13 in 2020).
  • Shareholder proposals: Changes to the Canadian federal corporate statute in 2022 allow shareholders to submit proposals later in the annual meeting cycle, giving companies less time to respond. Sixty-seven proposals were submitted to a vote, nearly twice the number from the prior year, but only two passed, roughly half of the typical proportion.
  • ESG: Shareholder proposals are overwhelmingly focused on environmental and social considerations. Environmental proposals which found the most support included calls to limit fossil fuel financing, strengthen environmental commitments, and establish a say-on-climate advisory vote. Social proposals that attracted the most votes focused on gender diversity and Indigenous community relations (the latter was supported by management and was one of the two proposals to be passed last year).

One of the reasons shareholder activism may be popular in Canada is that certain aspects of the corporate and securities framework can be advantageous to activist shareholders, such as:

  • shareholders holding 5% of a company’s shares can requisition a meeting, and only 1% ownership is required to submit most proposals;
  • no disclosure of a shareholder’s identity, holdings or intentions is required until the shareholder beneficially owns 10% or more of a reporting issuer’s shares;
  • shareholders are entitled to their company’s shareholder list, and may be reimbursed for costs associated with proxy contests;
  • shareholders can communicate with up to 15 other shareholders without needing to issue a dissident proxy circular;
  • securities regulators are typically less deferential to corporate defensive tactics such as shareholder rights plans; and
  • broad remedial provisions such as the oppression remedy are available to stakeholders in corporate law if a corporation has unfairly disregarded their interests.

Friend-Shoring and Canada’s Increased Regulatory Hurdles

In her speech in Toronto, Secretary Yellen was highly critical of those countries that were “sitting on the fence” and refusing to take action against Russia for its abhorrent invasion of Ukraine on 24 February 2022. Secretary Yellen stated: “The future of our international order, both for peaceful security and economic prosperity, is at stake.” She directed her most poignant criticism at China for having affirmed its special relationship with Russia.

In response to Russia’s invasion of Ukraine, the federal government of Canada, in concert with its allies, imposed wide-ranging economic sanctions on Russia. Sanctions were already in place following Russia’s disputed annexation of Crimea in 2014. The additional sanctions imposed following the invasion of Ukraine in 2022 have been severe.

Many countries, including Canada and the United States, are increasingly protectionist and providing generous subsidies to keep industries located at home. Europe heavily relied on Russian gas before the invasion of Ukraine; the United States frets about dependence on other countries, particularly China, for batteries and semiconductors. These interdependent relationships are being fractured as governments pour significant subsidies into domestic businesses. There is a fear that these protectionist measures will corrode global security, hold back growth, skew markets and raise the cost of innovation, particularly in the green economy.

Stricter Requirements for Acquisitions by Non-Canadians

The past year has brought a sea change in the federal government’s approach toward foreign investment and national security review. Investments by entities with ties to Russia and China, and any foreign investments into the critical minerals sector and certain other protected industries, will now be scrutinised on national security grounds. Proposed amendments would grant the relevant Ministry new negotiation and enforcement powers.

Under the Investment Canada Act, the acquisition of control of a Canadian business by a non-Canadian, depending on its value and structure, is either notifiable or reviewable. The establishment of a new Canadian business by a non-Canadian, regardless of its value or structure, is subject to mandatory notification.

In 2022, the government implemented two significant new foreign investment policies in respect of Russia and Canadian critical minerals as follows: 

  • net benefit reviews – the Minister of Innovation, Science and Industry will only find the acquisition of control by Russian investors to be of “net benefit to Canada” on an exceptional basis; and
  • national security reviews – if it is determined that an investment, regardless of its value, has ties, direct or indirect, to an individual or entity associated with, controlled by or subject to influence by the Russian state, or if the investment is made in Canada’s critical minerals sector by any foreign state-owned or state-influenced actor, this will support a finding by the Minister that there are reasonable grounds to believe that the investment could be injurious to Canada’s national security.

The government introduced Bill C-34 in December 2022 which, if passed, would significantly amend the Investment Canada Act. The amendments would include a new pre-closing filing requirement for certain investments in prescribed businesses and extend the period from 45 days to five years to initiate a national security review if the pre-closing filing is not made, among other changes.

The Potential for Greater Regulatory and Political Interference

One of the largest transactions announced in 2021 was the proposed CAD20 billion transaction between two of the largest mobile phone providers in Canada, Rogers and Shaw. After lengthy hearings, the Competition Tribunal allowed the transaction to proceed, and in January 2023, the Federal Court of Appeal agreed with the Tribunal. The Tribunal had determined that the transaction would not likely prevent or lessen competition substantially, and further that the transactions actually promote competition, but key to the decision was the proposed divestiture of the Freedom Mobile business.

Canada has some of the highest cell phone rates in the world, making the transaction politically sensitive. In March 2023, the federal government finally gave its approval to the transaction but imposed unprecedented and legally binding commitments. The two-year regulatory approval process and the uncertainty caused by political interference will add to deal execution risk.

What Should Potential Acquirors Consider in 2023?

There have been some key developments that potential acquirors should keep in mind.

  • Foreign acquirors need to carefully consider the recent changes to the Investment Canada Act and determine whether the new voluntary pre-closing filing mechanism should be used.
  • Canada’s move to “friend-shoring” will impact acquisitions and trade. Many Canadian businesses are dependent on cross-border trade. Rising protectionism in the United States and other trading parties, exacerbated by geopolitical tensions, can limit the growth potential of Canadian businesses.
  • There may be greater political risk to transactions in politically sensitive industries, as witnessed by the unprecedented commitments required by the federal government in connection with the Rogers/Shaw transaction.
  • Inflation may continue to rise and the Bank of Canada may continue to raise interest rates in 2023, making financing transactions more costly and exacerbating the current disconnect between buyers and sellers in determining valuations. Soaring inflation and rising interest rates make companies whose profits lie in the distant future look less attractive, pushing down valuations and slowing the rate of investment, particularly in tech companies and start-ups.
  • Expect greater use of alternative payment mechanisms such as earn-out provisions to mitigate the risk of a target underperforming post-closing.
  • With the government’s COVID supports at an end, insolvencies are expected to continue to rise, making buyers more cautious but also creating an opportunity to acquire attractive distressed assets.
  • ESG considerations will continue to increase in importance at all stages of the transaction process.
  • Canadian businesses are increasingly restructuring under the arrangement provisions of corporate statues instead of the traditional insolvency proceedings, providing more flexibility to recapitalise at an earlier stage in the process.
  • Who bears the risk of a pandemic or war? The relevant transaction document should make clear how the risk of a future shock should be allocated. Canadian courts have generally found that buyers cannot escape their obligations by pointing to the impact of COVID-19 on the target business, but in each case, it turns on the language used in the purchase agreement.
  • The importance of planning and assessing risk will continue to be a renewed focus in corporate transactions. Parties should take time to perform detailed due diligence on counterparties to ensure compliance with sanctions and anti-money laundering legislation. Buyers are expected to more closely scrutinise potential targets, leading to a longer and more complex transaction process.

Looking Forward

The authors believe that while the risks to the economy remain high and markets continue to anticipate a possible recession, continued deal-making in early 2023 is a harbinger of a better economic environment for Canadian businesses and M&A. Barring another global shock, the interest rate and inflationary environment should steady and provide market participants with more confidence to engage in growth opportunities. With full employment, Canada is expected to avoid a serious downturn. Whether employees return to the office or not is yet to be seen.

SkyLaw Professional Corporation

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Toronto, Ontario M5R 3V4
Canada

+1 416 759 5299

+1 866 832 0623

kevin.west@skylaw.ca www.skylaw.ca
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Law and Practice

Authors



SkyLaw is a premier corporate and securities firm in Canada. The SkyLaw team has an unparalleled practice in international M&A, governance and corporate finance. SkyLaw lawyers have worked at top-tier global law firms in Toronto, New York, London, Sydney and Dubai, providing the firm with a unique reach into major global financial centres. The firm excels in major acquisitions, bespoke equity and debt investments, joint ventures and reorganisations. The majority of SkyLaw’s M&A work involves acquirors based in the USA, the Middle East, Australia, China, Europe and elsewhere around the world. Recent engagements include high-profile private equity investments and strategic acquisitions by Fortune 500 companies. The firm has once again been voted as one of Canada’s Top 10 corporate law boutiques.

Trends and Development

Authors



SkyLaw is a premier corporate and securities firm in Canada. The SkyLaw team has an unparalleled practice in international M&A, governance and corporate finance. SkyLaw lawyers have worked at top-tier global law firms in Toronto, New York, London, Sydney and Dubai, providing the firm with a unique reach into major global financial centres. The firm excels in major acquisitions, bespoke equity and debt investments, joint ventures and reorganisations. The majority of SkyLaw’s M&A work involves acquirors based in the USA, the Middle East, Australia, China, Europe and elsewhere around the world. Recent engagements include high-profile private equity investments and strategic acquisitions by Fortune 500 companies. The firm has once again been voted as one of Canada’s Top 10 corporate law boutiques.

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