Canada is expected to have a robust M&A market this year, driven primarily by a pent-up demand for deals.

After a blockbuster year for M&A transactions in 2021, Canada saw a steady decline in activity throughout 2022. This past year the number of M&A transactions remained low as markets grappled with the post-pandemic, inflationary environment.

More recently, however, investor confidence has recovered, driven by the expectation that interest rates and inflation will not climb further. Stock markets have leapt each time there has been a hint of an interest rate cut from a central banker.

2024 should bring more deals involving private equity firms and pension plans, as they execute long-awaited plans to deploy capital or exit their portfolio companies. Canada is also experiencing a massive intergenerational wealth transfer as the baby boomer generation retires and firms change hands. Canada has started the year with new-found optimism and deal-making is expected to be strong throughout 2024, albeit perhaps more complex and cautious as compared to the heady days of 2021.

Key trends that are affecting M&A activity in Canada include the following:

• High interest rates, stubborn inflation, and a weakened exchange rate caused dramatic economic disruption, but these factors are expected to ease in 2024. The Bank of Canada was the first central bank across the G10 group of large economies to pause its rate-tightening cycle in 2023, and stated in March 2024 that if the economy and inflation evolve as expected, it will be able to cut interest rates sometime this year.
• Looming fears of a global recession have abated, with new expectations of a “soft landing” or “no landing”. For the most part, investors and businesses have adjusted to the post-pandemic world and confidence has been significantly restored.
• With soaring stock market valuations, buyers and sellers will be better able to bridge the valuation gap, while we expect to see continued use of tools such as earn-outs.
• Retiring business owners are increasingly looking for ways to sell their firms.
• On 16 April 2024, the Canadian federal government announced a significant change to the capital gains inclusion rate from 50% to 66.6% effective 25 June 2024, potentially creating an urgency to close deals before the deadline and increasing the potential uncertainty and increased complexity for tax planning.
• Canada has announced significant investments in domestic initiatives, particularly for the green economy. The Canadian government continues to invest in, and take steps to protect, critical minerals firms as global demand for electric vehicles and batteries continues to grow.
• Canada continues to showcase its AI leadership, with the world’s first national AI strategy, CAN2 billion invested in the industry since 2017, and CAN2.4 billion in new federal funding announced in April 2024.
• Canadian regulators continue to be wary of certain foreign states and actors. The list of sanctioned entities and persons grew.
• Corporate insolvencies persist, especially in the retail sector. Restructuring provisions under corporate statutes are being used to recapitalise at an earlier stage in the process.
• Shareholder activism has roared back from pandemic lulls. Regulators continue to look for ways to support shareholder participation, including encouraging hybrid shareholder meetings over fully virtual events.
• The strong demand for minerals, technology, alternative energy and financial services plus the pent-up interest in deals from private equity and pension funds will likely lead to a higher M&A deal count in 2024.

Key industries for Canadian M&A include mining, oil and gas, and information technology. 

Mining

Approximately 40% of all publicly traded mining companies in the world are listed on a Canadian stock exchange. In 2023, the materials sector led M&A activity by sheer number of transactions. However, Canadian mining companies continue to face unique challenges such as increased government scrutiny on foreign investment, geopolitical risks, and environmental hurdles.

Canada is a key producer of copper, nickel, cobalt, lithium, graphite and vanadium. As global demand increases for critical minerals used in batteries and other clean technology, Canada continues to look for ways to invest in, and protect, this key resource.

The deal outlook for 2024 is optimistic. A few notable headlines in the sector include Canada Nickel Co Inc.’s announcement of its CAN1 billion Ontario project to develop North America’s largest nickel processing plant and Glencore group’s CAN9 billion acquisition of Canadian coal mining company Teck Resources, which is expected to close in Q3 of 2024.

Oil and Gas

The oil and gas sector accounts for approximately 4% of Canada’s real gross domestic product. Canada is the world’s third-largest producer of oil and sixth-largest producer of natural gas, and is expected to set a global record for crude oil production with an increase of 300,000 to 500,000 barrels per day mainly due to the (near) completion of the Trans Mountain Pipeline.

Oil industry M&A remained active in 2023 with notable transactions such as the ConocoPhillips purchase of Surmont for approximately CAN2.7 billion; the Crescent Point Energy acquisition of Hammerhead Energy for CAN2.5 billion; and the recent acquisition of East Ohio Gas Company by Enbridge for CAN19 billion.

Looking ahead, M&A in the oil and gas sector appears promising. Deals already underway include Tourmaline Oil’s purchase of Bonavista Energy for CAN1.45 billion and Suncor Energy’s acquisition of TotalEnergies Canada for CAN1.5 billion.

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.  The federal government recently introduced five new cleantech tax credits to further support the sector.

Technology companies have lost a lot of their value from the stock market highs of 2021, and more going-private transactions are expected, such as the recent announcement by Montreal-based Nuvei Corp. that it will be taken private by a US private equity firm, valuing the company at USD6.3 billion.

Telecommunications experienced a significant jump in enterprise value in 2023 with the CAN26 billion Rogers acquisition of Shaw Communications.

In 2024, we expect to see Canada maintain a leading position in the AI space and continue focusing on cybersecurity, as the global threat of cyber-attacks continues to increase.

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, including all issuers with securities listed on a Canadian stock exchange, must file continuous disclosure documents on SEDAR+, a web-based platform for electronic filing and public data access for Canada’s capital markets. Reporting insiders – including 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 is no single national securities regulator in Canada and multiple attempts at creating one have failed. At present, there are 13 securities regulators in Canada, across its ten provinces and three territories.

Investment Canada Act (ICA) and National Security Review

Canada has traditionally welcomed foreign investment and has a reputation as an attractive and trusted destination for investors. However, like 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 CAN1.326 billion). If a transaction is reviewable, the foreign investor must prove to the Canadian government that 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.

Separately, the Canadian government may review any acquisition on national security grounds under the ICA, whether or not it is subject to a 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. Any foreign investments in businesses involved in the Canadian oil sands, the critical minerals sector, and certain other protected industries are likely to be subject to greater scrutiny. In particular, the government has stated that any investment (regardless of size or industry) into a Canadian business from an investor with direct or indirect ties to Russia, and any investment by a foreign state-owned enterprise into Canada’s critical minerals sector, will trigger a national security analysis.

Effective 2 August 2022, a new voluntary pre-closing filing mechanism came into force, permitting certain 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 March 2024, significant amendments to the ICA were passed that include a new pre-closing filing requirement for certain investments in “prescribed businesses” (not yet defined) and stronger penalties for non-compliance. The amendments provide that the national security review provisions can apply to acquisitions even where there is a limited connection to Canada.  New policies have also been announced affecting the interactive digital media sector.

Sanctions

Canada has sanctioned countries, individuals and entities that it considers to be connected to human rights violations, corruption, or terrorist activities. Canada currently has sanctions in place against 25 countries and has enacted measures to freeze or restrain the property of certain politically exposed foreign persons. Sanctions can require, among other things, restrictions on trade, and disclosure and/or divestiture of 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. In 2022, the federal government imposed a temporary ban (with some exceptions) on foreign ownership of Canadian non-recreational residential property, which was recently extended until 1 January 2027.

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 CAN400 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 CAN93 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 have been made in recent years, although some of them are not yet in effect. Among other things, these amendments expanded the non-exhaustive list of acts that may be considered an abuse of dominant position and increased the applicable penalties. The amendments also removed the efficiency defence for anti-competitive collaborations and in merger reviews.

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 due diligence to understand the potential severance costs associated with a target’s key employees and consider whether any future plans (for example, a return-to-office policy) could be construed as constructive dismissal requiring severance payments.

In the context of M&A transactions, while there is no requirement to engage with employees (eg, Canada does not have the equivalent of a “works council” such as in Germany) or pension trustees, target company directors in discharging their fiduciary duties are encouraged to take the interests of these stakeholders into account. In addition, if a target business is unionised or about to become unionised, a potential acquiror may wish to learn more about the current collective bargaining agreement and any negotiation process that is underway.

See 2.3 Restrictions on Foreign Investments.

NorthWest Copper Corp.

In a win for shareholder democracy, three shareholders were not “acting jointly or in concert” merely by having a common goal or concern; not even the payment by one of the legal bills of the others met this threshold. The bar for a joint actor relationship, which can trigger disclosure obligations, is set “appropriately high”, and requires a plan of action or a mutual understanding about how shareholders will vote their shares. The British Columbia Securities Commission determined it would rather take the chance that some shareholder groups would fly under the radar than stifle the free flow of information and opinion among public company shareholders.

Kraft (Re)

The “necessary course of business” exemption to the securities law prohibition on “tipping” (sharing material non-public information by a person who is in a “special relationship” with an issuer) requires that the disclosure be “essential”, “indispensable”, or “requisite” to the business. It is helpful if the issuer’s board or management can show that it considered the need for disclosure and took protective steps, such as documenting the issuer’s engagement of the recipient, and putting a confidentiality agreement in place.

1843208 Ontario Inc. v. Baffinland Iron Mines Corporation

Real markets are better than theoretical markets: deal price is strong evidence of fair value of a company’s shares, even if potential future cash flows would suggest the firm is worth much more. Dissenting shareholders of each company who had hoped for a higher price per share were reminded that valuation based on discounted cash flow analyses is an inherently frail technique, especially when the company could not tackle the logistics of developing its resources alone.

Leeder Automotive Inc. v. Warwick

A minority shareholder could not be forced to sell his shares under a buy-sell provision (also known as a “shotgun” provision) by the company when it did not follow the requirements of the valuation provisions of the shareholder agreement.

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 and 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 include 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, albeit 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 forthwith disclose all “material information”, which generally includes both material changes and material facts. 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 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 prematurely, 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 bankruptcy, lien and litigation registries, obtaining a corporate profile, and a review of public filings on SEDAR+, SEDI and other databases.

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

Diligence documents, such as financial statements and material contracts, 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.

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 doing 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 withdraw and tender its shares to, or vote in favour of, any other competing transaction) with 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. 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, such as a plan of arrangement, requiring approval by the target’s shareholders. A mandatory ten-day extension period will apply if the bidder satisfies the minimum tender condition and 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 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.

Sellers may also provide some or all of the financing, or reinvest proceeds in the purchaser, to facilitate the closing.

Common conditions for takeover bids include:

• 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 more than 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, for example, 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 Multilateral Instrument 61-101 (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. 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.

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.

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 the additional requirements under MI 61-101 set forth above. See the NorthWest Copper Corp. decision in 3.1 Significant Court Decisions or Legal Developments.

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 in 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. See 4.3 Hurdles to Stakebuilding.

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 offer to repurchase its outstanding shares itself.

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.

Other remedial avenues for stakeholders include a cease-trade order or other relief preventing the consummation of a takeover bid from a securities regulator.

Canadian courts have reinforced that signed documents may not be necessary to enforce a proposed transaction. In a 2023 decision in favour of Lithium Royalty Corporation, the court held that an email response “OK, sounds good” to an offer to purchase an 85% royalty interest in a mine for USD18.7 million was enforceable.

However, in Frye v. Sylvestre, an Ontario court held that where all essential deal terms of a transaction, such as the method of payment, are not agreed upon, a binding agreement for the sale of shares was not reached.

In Ponce v Société d’investissements Rhéaume ltée, the directors entered into an incentive agreement with the majority shareholders to sell the shares of the company. Subsequently, the directors entered into a confidentiality agreement with a buyer that prevented them from disclosing the potential acquisition to other majority shareholders. The directors purchased the shares of the majority shareholders without disclosing the acquisition, and resold the shares to the buyer for a profit of CAN24 million.

The Supreme Court of Canada found that the duty of good faith under Quebec civil law may include a positive obligation to inform (and under common law this might fall under the obligation of honest contractual performance), which includes that contracting parties not omit critical details. Further, the court held that the duty of good faith requires a minimum level of honest conduct.

In Bhatnagar v. Cresco Labs Inc., the Ontario Court of Appeal held that a seller that became aware of a potential acquisition of the buyer had to prove its loss, and that the breach of the contractual duty of honest performance does not create an automatic presumption of loss.

As arbitration continues to be an increasingly favoured option for M&A disputes, we may expect to see less jurisprudence in Canadian courts and look to case law in Delaware (a jurisdiction that Canadian corporate law tends to follow).

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.

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.