May 13 2009
As in other parts of the world, Canada has suffered the deleterious effects of sustained capital and liquidity constraints, resulting in a dramatic slowdown in the pace of foreign and domestic M&A activity.
A substantial number of the deals originating prior to the current market turmoil have faced considerable challenges. Some of these deals have been renegotiated or terminated. A relatively large number have resulted in litigation, often involving scrutiny of the actions of boards and management. Against this backdrop, a number of recent illustrative developments merit particular consideration and caution for bidders and targets and their directors, management and financial and legal advisers.
The Supreme Court of Canada's December 2008 decision in BCE provides useful guidance for directors regarding their duties when faced with a change of control transaction and clarifies the role of the court in approving plans of arrangement.
The court confirmed the duty of directors in change of control transactions to act honestly and in good faith with a view to the best interests of the corporation and not primarily in respect of its shareholders or any other group of stakeholders.(1) The court also strongly reaffirmed the 'business judgement rule' and confirmed that boards are not to be held to a standard of perfection. Courts will generally defer to and not substitute their views for or second-guess reasonable business judgements of the board when made in good faith on an informed and independent basis, having undergone a prudent process with the guidance of qualified advisers.
The decision related to a proposed C$52 billion acquisition of BCE by a consortium comprising a public sector pension fund and private equity investors. Troubled by the substantial debt to be incurred by BCE and its subsidiaries to finance its acquisition,(2) certain debenture holders of BCE's principal subsidiary opposed the proposed takeover and complained that their interests had not been fairly and properly considered by the board.
In the ensuing litigation the debenture holders undertook a two-pronged argument in challenging the transaction, involving: (i) a claim for relief under the oppression remedy(3) under the Canada Business Corporations Act based on their interests having been unduly prejudiced or unfairly disregarded;(4) and (ii) an appeal of the trial judge's decision that the acquisition by plan of arrangement(5) was "fair and reasonable" to BCE's stakeholders, given all of the circumstances and the resultant adverse impact on the economic interests of such debenture holders.
Since the arrangement had received overwhelming shareholder approval, the court concluded that, in the absence of unusual circumstances, an analysis of whether a plan of arrangement is fair and reasonable should focus on the interests of parties whose legal rights are affected by the plan. In this case, the debenture holders' legal rights were not affected by the transaction and the court concluded that the arrangement's impact on the trading value of the complainants' debentures was not the type of non-legal interest that should be protected.(6)
While important for its guidance on legal principles relevant to business acquisitions, this decision leaves a number of unanswered questions. For example, while reaffirming the business judgement rule, the court was not definitive on the manner of balancing conflicting stakeholder interests or in defining the concepts of 'fairness', 'best interests of the corporation' and 'responsible (good) corporate citizen', each as utilized in its decision.
In January 2009 the Ontario Securities Commission prohibited HudBay Minerals Inc from issuing shares in connection with its proposed C$550 million merger with Lundin Mining Corporation without first obtaining HudBay shareholders' approval for the transaction. In so doing the commission determined that the Toronto Stock Exchange should have exercised its discretion to require HudBay to seek shareholder approval.(7) The commission's decision was based on its evaluation of the effect that the transaction might have on the "quality of the marketplace", including:
The commission balanced all of this against the importance of deal certainty to the parties to a merger transaction.
In making its decision the commission concluded that fair treatment of shareholders is a key consideration to the integrity and quality of the marketplace and takes priority over deal certainty. In its view, permitting the proposed transaction to proceed without the prior approval of HudBay shareholders would undermine the quality of the capital markets and be contrary to the public interest.
Prior to this decision, the Toronto Stock Exchange rules did not specify a maximum level of dilution above which shareholder approval would be mandatory, similar to the requirements of other major stock exchanges such as London and New York. In response to this decision, the Toronto Stock Exchange has now published for comment a proposed change to its rules which would necessitate shareholder approval for issuances of shares in the context of an acquisition of a public company if resultant dilution to existing shareholders exceeds 50%.
The HudBay decision, together with the subsequent proposed Toronto Stock Exchange rule change, is significant as it is expected to alter significantly the landscape for Toronto Stock Exchange-listed issuers using their listed securities as currency in acquisition transactions.
Research In Motion (RIM) was enjoined by the Ontario Superior Court of Justice from proceeding with its hostile takeover bid earlier this year for Certicom Corp on the basis of the court's interpretation of two confidentiality agreements between the companies. Of significance was the fact that, notwithstanding the lapse of a standstill provision(8) in one of the confidentiality agreements, the court ruled that RIM's bid breached a broadly worded 'restricted use' provision in each of the confidentiality agreements which restricted the use of confidential information by RIM to certain limited purposes not including a hostile takeover bid. The court also held that the restricted use clause operated independently of the express standstill clause. Some implications of this decision are as follows:
There have been a number of recent takeover bids in Canada(9) where the bidder has varied the bid after commencement to reduce the price offered for the securities (for further details please see "Price Reductions in Takeover Bids"). While not expressly prohibited under Canadian law, such variances were previously uncommon and raise a number of considerations which are particularly relevant to unsupported bids, including the need for the acquirer to prepare for the following:
Significant amendments(12) have recently been introduced to the Competition Act and the Investment Canada Act, including the legislative changes highlighted below pertaining to mergers and acquisitions.
For transactions requiring pre-merger notification, during the first year of enactment, the target along with its affiliates must have assets in Canada that exceed C$70 million or annual gross revenues generated from those assets that exceed C$70 million (an increase from the previous C$50 million 'size of transaction' threshold). With respect to amalgamations, the C$70 million threshold must be exceeded by at least two of the amalgamating corporations. In addition, this newly introduced threshold is to be indexed annually to inflation.
A two-stage merger review procedure has been implemented. The previous statutory waiting periods for a short-form filing (14 days) and a long-form filing (42 days) have each been replaced with an initial waiting period of 30 days, following which the parties may close their transaction, provided that the commissioner of competition has not exercised her discretion to issue a notice (second request). The commissioner can waive or truncate the waiting period. Upon receipt of the response to a second request, a further 30-day period is initiated after which the parties are entitled to close their transaction. Nonetheless, the commissioner maintains a right to challenge the transaction up to one year after closing (reduced from three years).(13)
Investment Canada Act
The amendments made to the Investment Canada Act apply to attempts made by foreign investors to start or acquire Canadian businesses. There have been increases in the minimum threshold for ministerial review and approval of direct acquisitions of control of Canadian businesses by investors from World Trade Organization members. The threshold has been set at C$600 million in respect of the 'enterprise value' of the assets of the Canadian business (as compared to the previous C$312 million of book value), with further increases to C$1 billion to occur over the next four years; thereafter, the threshold is to be determined by the minister according to statute.
The lower C$5 million review threshold for direct acquisitions (and the C$50 million threshold for review of indirect acquisitions) of Canadian businesses engaged in the sensitive sector activities of financial services, transportation services and uranium production has now been eliminated. Only 'cultural businesses' remain subject to this lower threshold, as well as review and approval by the minister of Canadian heritage.
Finally, a 'national security test' has been introduced allowing the federal Cabinet to block investments threatening national security. The legislation does not define 'national security'. In this regard, the guidelines published by the US Treasury Department on the types of transaction that have presented national security issues may provide some direction in Canada.
For further information on this topic please contact Anthony Milazzo or Nicholas Cartel at Borden Ladner Gervais LLP by telephone (+1 416 367 6000) or by fax (+1 416 367 6749) or by email (firstname.lastname@example.org or email@example.com).
(1) Contrast this Supreme Court of Canada decision with US jurisprudence and the prevailing 'Revlon duty' under Delaware law, which requires the target board to maximize shareholder value and obtain the best deal/price possible in a change of control transaction once the board has determined that a sale of the target is certain. BCE disaffirms Revlon in Canada and instead stands for a broader approach to the actions, considerations, process and oversight to be undertaken by or permitted of the board in comparison to the prioritized shareholder interest maximization by auction approach expected of a target board from Revlon Inc v MacAndrews & Forbes Holdings and, most recently, Ryan v Lyondell Chemical Co. That said, Canadian and US courts have generally been consistent in adhering to the business judgement rule and not providing for any blueprint of the process to be followed by the board in fulfilling their duties.
(2) The proposed acquisition was by way of a plan of arrangement, under which a consortium of purchasers led by Teachers' Private Capital, Providence Equity Partners and Madison Dearborn Partners Inc would acquire all of the outstanding common shares of BCE. Under this arrangement, Bell Canada Inc, a wholly owned subsidiary of BCE, would have been required to provide a guarantee of approximately C$30 billion of new BCE debt.
(3) Of particular significance in its decision as to whether oppression had been established by the debenture holders was the court's analysis of the reasonable expectations of the debenture holders concerning the board's exercise of its fiduciary duties in considering and resolving the conflicting interests of the company's corporate stakeholders. The court concluded that the debenture holders had a reasonable expectation that the board would consider their interests; however, they did not have a reasonable expectation that the investment grade rating of the debentures would be maintained. In having determined that the board had considered the interests of the debenture holders and confirmed the satisfaction of the contractual terms of the debentures, the court held that the debenture holders' interests were not unfairly disregarded by the board and, accordingly, that their claim of oppression must fail.
(4) Their debentures suffered a downgrade below investment grade rating due to the pending substantial increase in leverage on Bell Canada, which resulted in the market value of such debentures dropping significantly.
(5) A plan of arrangement is a common alternative to takeover bids for implementation of M&A transactions and involves a court's approval of the transaction. For an arrangement to be 'fair and reasonable', a court must be satisfied that the arrangement has a valid business purpose and the objections of those whose legal rights are being arranged are being resolved in a fair and balanced manner.
(6) The BCE transaction ultimately failed to close as a result of a mutual closing condition having not been satisfied.
(7) The Toronto Stock Exchange rules require shareholder approval of transactions involving the issuance of 25% or more of a company's outstanding shares. An exception to this rule is where a listed company is acquiring a public target, provided that the transaction does not materially affect control of the listed company.
(8) A standstill provision prevents the recipient of confidential information from making a hostile bid or similar unsolicited initiative for the ownership or control of the disclosing party, usually for a specified time period.
(9) Examples include reductions in bid price by:
(10) There is potential for the bid variation to conflict with (i) the relevant pre-bid integration rules, and (ii) the combined effect of the identical consideration requirement (ie, once a bidder has taken up securities under a bid) and the obligation to take up and pay for securities deposited to the bid and not withdrawn.
(11) Compare the minimum deposit period of 35 days for a takeover bid with the minimum additional deposit period of 10 days following a variation that reduces the bid price, unless such period is extended by the bidder. As a result, the target may argue for more time to engage other potential bidders that may be willing to compete at the reduced price.
(12) On March 12 2009 Bill C-10, the Budget Implementation Act 2009 received royal assent and became Canadian law.
(13) An advance ruling certificate may be issued by the commissioner to a party or parties to a proposed merger transaction if the commissioner is satisfied that there are insufficient grounds on which to apply to the Competition Tribunal for an order against the proposed merger. The new amendments have not changed the advance ruling certificate request procedure.
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