Deal Law Wire


insight and perspectives on developments in mergers + acquisitions

Asset divestitures: a transaction form that is gaining traction

A recent report put out by the Boston Consulting Group (BCG) indicates that companies are increasingly turning to asset divestures as a means of enhancing shareholder value. According to the report, divestitures have been steadily accounting for an increased share of total M&A activity in recent years, reaching a high of 48% of total global M&A deal activity in 2013. And if the headline-dominating deals of the past year are any indication, this trend has continued, and is likely to continue, throughout 2014 and into 2015.

Companies pursue divestitures for any number of reasons, but as the BCG report explores, some of the most common are to get a company re-focused on its core business and/or to generate cash. With respect to the first of these objectives, it is well known that bloated companies tend to trade at a discount if their size and diversification is seen by investors as an impediment to the company’s ability to operate efficiently and effectively. The divestiture of assets such as under-performing or peripheral business units can therefore free up a company to focus its attention on a core strategy or objective. Many of the headline-garnering divestitures of recent years have been undertaken by global behemoths for precisely this reason, particularly in the energy, technology, financial services and pharmaceutical sectors. With respect to the second rationale, companies may use an asset divestiture to generate cash that can be used to fund acquisitions, reduce debt, or return cash to shareholders.

Of course, the benefits that are ultimately derived from a divestiture are impacted not just by the company’s objectives for pursuing the sale, but also in how the transaction is structured and executed. Divestitures can take a number of forms – including asset sales, spin-offs, and carve-outs – each of which  offers its own advantages and drawbacks. Outright asset sales are private transactions that permit sellers to unlock capital and generate cash-flow, whereas both spin-offs and carve-outs involve the creation of a new, publicly-traded subsidiary of the parent company. Spin-offs tend to be an effective means of returning value to existing shareholders in the form of a dividend or other mechanism pursuant to a plan of arrangement, as the assets divested into the new subsidiary remain wholly-owned by the original shareholders.  Carve-outs involve the sale of some or all of the shares in the subsidiary to the public, and can therefore be advantageous for sellers wishing to generate cash and/or divest their interest in a business unit in stages. One potential drawback of carve-outs is that they impose enhanced disclosure obligations on the divesting company, due to the fact that some of the shares are being offered to the public. In the case of both asset sales and carve-outs, companies can choose to either bring in cash or return value to their shareholders in the form of a one-time special dividend, a fixed dividend increase, or a share buyback program. In selecting the appropriate form of divestiture, tax considerations are also likely to be a driving force.

The author would like to thank Bruce Sheiner, an Associate in Norton Rose Fulbright’s Toronto office, and Carole Gilbert, articling student, for their assistance in preparing this legal update.

Mid-market deals fueling increase in Canadian M&A activity

Bureau van Dijk, a private business intelligence advisory company, in conjunction with the Alliance of Merger & Acquisition Advisors, recently released its North America M&A Report for Q3 2014 which analyzed North American M&A activity valued at US$5 million to US$500 million for the period of July to September 2014. Data from the report shows that North American mid-market M&A activity for Q3 increased when compared to the same quarter of the previous year, with particularly substantial gains in Canada.

Mid-market M&A activity on the rise in Canada

Canadian mid-market M&A activity grew significantly in Q3 2014, with a 38% increase in value and a 26% increase in volume as compared to Q3 2013. These increases outpaced U.S. performance for the same period, which nonetheless displayed notable gains of its own, with a 36% increase in value and an 18% increase in volume.

The data from Bureau van Dijk is consistent with Ernst & Young’s October 2014 Canadian Capital Confidence Barometer, which projects that mid-market momentum will continue to drive gains in M&A activity, both in Canada and globally.

Notable increase in PE/VC activity

Canadian mid-market M&A growth is partly attributable to an uptick in private equity and venture capital activity (collectively, PE/VC activity). In the mid-market space, Canadian PE/VC activity increased by 74% in terms of volume, from 27 deals in Q3 2013 to 47 deals in Q3 2014, and almost doubled in terms of value, from US$324 million to US$637 million for the same period.

Driving forces behind increased mid-market M&A activity

KPMG attributes increased activity in Canadian mid-market M&As to the following five reasons:

  1. an aging population, which has caused owners of private businesses to assess succession plans, thus creating new M&A opportunities;
  2. strong debt capital markets, which has increased average available debt levels and held down interest rates;
  3. expansion of private equity fund raising, which is coming off a record year in 2013;
  4. strong public company valuations, which generally signifies increased economic confidence; and
  5. limited GDP growth, causing more companies to include M&As in their strategic growth plans.

Workshop: Doing deals in difficult jurisdictions

You are invited to join us for a half day workshop looking at the key issues that need to be considered when entering into an emerging market transaction. Doing deals in emerging market jurisdictions can involve a unique range of risks and complex issues, from legislative and regime change risk to dealing with difficult “local partner” issues, governments and state-owned entities. As a result, understanding the local operating environment as well as the legal and political regime is key, as is re-examining many of the assumptions you may normally make in the context of M&A or joint venture transactions.

Through use of a case study the workshop aims to bring out the relevant themes and issues in a practical and interactive way, including:

  • understanding the local operating environment
  • conducting due diligence in difficult jurisdictions
  • approach to negotiations
  • the additional risks of joint ventures and dealing with local partners
  • the impact of sanctions and human rights and how this can be managed and financing issues and considerations


Wednesday, November 26, 2014


Registration: 08:00
Workshop: 08:30 – 13:00
Lunch: 13:00


Norton Rose Fulbright
3 More London Riverside


Please contact Hermione Cox or click here for further details about the workshop, or click here to register.

Post-deal litigation: what it is and how to avoid it

A recent article by PWC which appeared in Lexpert Magazine draws attention to a phenomenon that is pervasive in the United States and is becoming much more common in Canada: post-deal litigation. 

What is it?

Increasingly, shareholders are filing lawsuits to challenge M&A transactions. The litigation often takes the form of a class action, with plaintiff’s counsel alleging a breach of fiduciary duty on the part of the target’s board of directors resulting in a failure to maximize shareholder value. The specifics of the complaint are typically related to the process followed, the price agreed to, or insufficiency of disclosure.

In the U.S., post-deal litigation has become the rule, with roughly 96% of transactions post-2008 being accompanied by litigation, up from 53% pre-2008. Though this type of litigation is not nearly as common in Canada, it still occurs and is likely to increase in regularity, especially in tough markets.

How can dealmakers mitigate the risk of its occurrence?

Unfortunately, no matter how precisely crafted the agreements, the simple fact of having closed a large transaction will in some cases be enough to attract litigious shareholders (and counsel). Other times, however, it is the valuation process or the wording of the contracts which creates shareholder tension manifesting as post-closing litigation. Notwithstanding, some general areas for improvement include:

  • the proper definition of key terms, rather than defining a term by reference to another standard (such as GAAP, for example);
  • inserting explicit formulas and mechanisms into the agreements for valuation and adjustments; and
  • testing valuation and adjustment mechanisms alongside an expert to ensure they operate as intended.

Most importantly, when drafting a provision or creating a process or choosing a mechanism, consider how it could be challenged. If you had to defend it, could you? In the PWC article, Steve Tenai, a litigator here at Norton Rose Fulbright Canada LLP, put it well when he said, “That doesn’t mean perfection… but it does mean… you need to give some regard to what will happen if someone comes along later and challenges this deal.”

The author would like to thank Jad Debs, articling student, for his assistance in preparing this legal update.

Webinar – Norton Rose Fulbright’s M&A in 2014: mergers and acquisitions in China

Join us on Thursday, November 6, 2014 for a webinar on M&A in China.

Register now

Despite headwinds facing its dynamic economy, China continues to be one of the world’s leading targets for foreign direct investment and mergers and acquistitions activity. With the Chinese economy now at a critical inflection point, there are both new opportunities and new risks for mergers and acquisitions in China.

This webinar will focus on key factors to consider, including the regulatory approval environment, structural considerations, documentation, cultural and practical aspects of a typical cross-border M&A transaction in China. Although the focus will be primarily on inbound (to China) transactions, the program will also cover outbound (from China) transactional matters.

Topics will include:

  • common structural alternatives for foreign M&A transactions in China
  • China’s principal regulatory authorities and rules affecting foreign investment and M&A
  • recent, important legal and regulatory developments affecting foreign M&A transactions in China
  • issues commonly encountered
  • foreign exchange control, tax, antitrust, employment and other legal and regulatory matters
  • cultural and practical considerations and
  • outbound (from China) M&A developments and rules affecting Chinese companies buying businesses overseas


  • Jeff Blount - Partner, Norton Rose Fulbright & Jaworski LLP (on assignment to Hong Kong)
  • Jie Zhang - Partner, Norton Rose Fulbright & Jaworski LLP (Beijing and Hong Kong)


10:00 am – 11:00 am PST
11:00 am – 12:00 pm MST
12:00 pm – 1:00 pm CST
1:00 pm – 2:00 pm EST
6:00 pm – 7:00 pm GMT


For additional information, please contact Terra Worshek by e-mail or at +1 713 651 5109, or please click here to register.

Promising trends for Canada’s forestry industry

Mining and energy aren’t the only Canadian sectors showing promising signs in M&A activity of late. A recent Financial Post article reports that Canada’s forestry industry is also seeing a rise in sales and deal activity. The Post’s article highlights the U.S. housing market rebound and a shift towards Asian markets as key contributors to the upswing in Canadian forestry.

Canada’s lumber companies struggled following the 2008 crisis as the U.S. housing market hit a standstill. With its main market stalled, the industry was forced to turn to new customers, pivoting to China, and increasingly to India and Japan, to diversify its market reach and tap alternative sources of revenue. The U.S. economy has since improved, and the rise in U.S. housing starts has been another positive development for Canadian lumber corporations.

Increased sales and revenue have lead Canada’s lumber companies to seek new acquisition opportunities below the border, primarily in the southern U.S. Although domestic acquisitions have not seen the same jump, the trend is positive nonetheless. Interestingly, the article explains that the industry’s increased focus on U.S. acquisitions is related to the need to diversify supply sources. This southward shift in M&A activity is a way of ensuring market access to the U.S. in the face of uncertain circumstances here at home, including the ambiguity surrounding Aboriginal Title and its potentially dramatic effect on lumber operations in Canada, a pine beetle epidemic in B.C., and continuing tensions surrounding U.S. import barriers on softwood lumber.

While things are picking up on the lumber side of the forest industry, the pulp and paper market has not seen the same level of growth. Instead, a decreasing demand for paper, due to the ever-growing reliance on electronics, has led many Canadian paper corporations to divest their non-core businesses.  According to the report, many of the buyers appear to be U.S.-based private equity firms.

In general, the developments in the industry have been positive. The ability of lumber companies to adapt and seek out new markets not only for sales, but also supply, is encouraging. Industry watchers will be on the lookout for continued activity in this second half of 2014.

Numbers show healthy growth in M&A activity in Q3 2014

Global M&A is strong

In its recently released Mergers & Acquisitions Review for Q3 of 2014, Thomson Reuters proclaims this year’s first three quarters to be the “strongest first nine months for worldwide deal making since 2007.”

The volume of global M&A activity since the beginning of the year surpassed the volume for the same period in 2013 by nearly 60%. Despite a 22% decrease in deal volume compared with Q2, the value of Q3 M&A deals was $888 billion, making it still the highest third quarter in seven years, according to Bloomberg’sGlobal M&A Market Review Financial Rankings, up 29% compared to a year ago. 

Canadian market in an upswing

The Bloomberg and Thomson Reuters numbers also show that the Canadian market is in an upswing. The value of 1,256 Canadian M&A deals announced over the first nine month of the year is US$ 82,540.5 million, versus US$ 67,198.6 million in 1,235 deals announced in the first three quarters of 2013. This translates into an increase of 22.8% in volume with the increase of less than 2% in the number of announced deals.

These results seem to support the view of analysts who predicted that despite a rather tepid start to 2014,  in part due to volatility in global commodity prices, the Canadian M&A market would see the increase of the value of the businesses being offered for sale.

A sellers’ market

In an article published in the Canadian Business Journal at the beginning of Q3 2014, the managing directors at KPMG Corporate Finance observed that conditions are favorable for a sellers’ market in the private mid-size business segment. Authors predicted that even with a healthy supply of private companies offered for sale, the demand for quality targets would not be matched and this would drive the value of businesses on the selling block higher.  

According to the authors of the article, however, the market also has plenty to offer to byers, as many private companies that weathered the recession and are attractive due to their proven ability to manage costs and mitigate the impact of the strong U.S. dollar though the downturn are for sale. One source of acquisition targets comes from owners of the baby-boomers generation who are engaged in estate planning and are seeking to monetize their successes. Another source of companies for sale comes from corporations that are looking to shed non-core operations in order to focus on their core businesses.

Regardless, the Canadian Business Journal article predicted that the demand for quality private companies would continue to surpass the supply, as both public companies and private equity are eager to grow or invest, as the case may be, through acquisition.

The numbers reported by Bloomberg and Thomson Reuters are consistent with the predicted sellers’ market characterized by a higher rate of growth in volume than in the number of deals. However, the overall high level of activity allows to view this not as  indication of a lack of supply, but as a mark of a normal cycle in the life of a healthy, breathing, and growing market.

The author would like to thank Andrey Shamis, articling student, for his assistance in preparing this legal update.

Golden opportunity: mining sector drives Canadian M&A revival

The latest M&A trends indicate a renaissance in the mining sector with gold activity placing Canada at the forefront, both as a top acquirer and a top target. According to a recent KPMG Mining M&A Quarterly Newsletter, global M&A activity in the mining sector soared in Q2 2014, up significantly in both deal volume and value from Q1 2014. Australia, China, and Indonesia are among the top contributors to M&A activity in the iron ore, mineral sands, and copper sectors, but Canada takes the top spot for the quarter by a large margin, owing primarily to gold deals.

Global M&A soars

At the global level, M&A transaction value in the mining sector rose by over 300% in Q2 2014 to $9.8 billion, up from $2.9 billion in Q1 2014. Of the 23 transactions announced in Q2, three exceeded $1 billion in value.

Gold leads the pack

Gold deals represented 58% of global M&A deal value in the mining sector in Q2. Copper and coal trailed by a wide margin, coming in second and third at 14% and 10%, respectively. Domestically, gold represented an even larger percentage of transactions, coming at 85% of all mining M&A deals in Q2 2014. Second and third in Canada went to copper at 15% and uranium at 1%. On the basis of relatively constant gold extraction costs, analysts are forecasting an imminent increase in the price of gold, creating even more buzz for the mining sector.

Canada goes for gold

Canada’s domination of gold activity in Q2 2014 is undeniable: twelve Canadian gold transactions valued at $4.6 billion were announced, accounting for nearly half of the global mining deal value in this period. Additionally, every global gold deal above $200 million was Canadian. According to Financial Post Data, 2014 has seen over 40 Canadian mining deals to date valued at over $7 billion.

Golden opportunity

The significant climb in mining equity indices and gold and copper prices at quarter-end, combined with energetic levels of Canadian M&A activity in the mining sector, as well as the emergence of China as a global deal participant, indicate a significant uptick in this sector and the potential lead-in to a genuine revival.

The author would like to thank Marta Jankovic, articling student, for her assistance in preparing this legal update.

The effect of government privatization on global M&A

RR Donnelly released the August edition of its Venue Market Spotlight, entitled Government Privatizations and M&A. In the report, a high-level summary of a survey of experts, RR Donnelly speaks to the effect that government asset sales and other forms of privatization are having on global M&A activity. The report forecasts that government privatization will become a key driver in the next 12 months and beyond.

This post will survey a number of aspects of this burgeoning phenomenon as summarised in the RR Donnelly report.

Growth, generally and by sector

Not surprisingly, 86% of respondents project a rise in M&A resulting from government privatizations and partnerships. As governments respond to financial pressures, they will continue to move away from direct ownership and operation of capital-hungry businesses. Instead, they will look to private sector firms to step forward into the role of owner/operator while governments step back into a regulatory role. The upshot of government privatization plans? Quality assets entering the market at reasonable if not discounted rates.

The industries which are most likely to see significant growth are those whose businesses require large amounts of capital to sustain operations: energy, TMT and transportation. Cash-strapped governments are finding it difficult to maintain, let alone upgrade and expand, infrastructure in these sectors and are frequently turning to private firms for solutions, whether by way of partnership or full-scale privatization.

Regional trends and deal types

Europe is projected to see the largest government privatization M&A boost. The recent economic crisis has driven European governments to the private market where they are selling burdensome assets at very attractive rates. Asia-Pacific is projected to see the next-largest rise in activity, with the growing private market there eager to expand by way of government asset purchases.

The majority of respondents forecast that public-private partnerships (PPPs) will be the most popular form of government privatization. PPPs, a partnership of government and one or more private sector companies which is created to complete a medium to long-term project, represent one significant advantage for governments over full privatization: these partnerships, unlike asset sales, do not require the government to step back and completely relinquish control over asset management.

Catalysts and challenges

Respondents reported asset use maximization, infrastructure improvement, and economic growth as the top three motivations of governments seeking privatization of assets. Governments looking to stabilize their economies and promote efficiency in the operation of their assets are turning to the private sector where they are finding the necessary capital, as well as abundant amounts of expertise and motivation.

As do all good reports, this one canvasses the challenges that privatization transactions might present to private sector firms. The majority of respondents stated that the process itself and regulatory compliance are the two most significant challenges facing companies seeking to take advantage of government privatization. Others noted that the transaction may result in the creation of legislative and regulatory regimes which would require time and expertise to put together and follow.

These challenges aside, the opportunities are significant. Private firms would do well to consider this growing market when contemplating their next transaction.

The author would like to thank Jad Debs, articling student, for his assistance in preparing this legal update.

Webinar – Norton Rose Fulbright’s M&A in 2014: poison pills

Shareholder rights plans, more popularly known as “poison pills,” remain one of the most powerful and storied of modern anti-takeover defenses. Developed in the 1980s, poison pills have seen their popularity soar and then wane, but now may be on the verge of a renaissance as they become adapted to defend corporations from newly emerging threats.

On October 2, 2014, Glen J. Hettinger, Partner, Fulbright & Jaworski LLP (Dallas, Texas) and Bryan Caleb Wittman, Partner, Fulbright & Jaworski LLP (San Antonio, Texas) gave a presentation providing an introduction to poison pills – how they function, their key terms and optional features – and discussed recent developments in the design and utilization of poison pills.  Discussion topics included Institutional Shareholder Services guidelines, the “shelf” pill, the net operating loss pill, bifurcated ownership thresholds and the use of “wolfpack” provisions to fend off shareholder activists.  Recent Delaware cases reaffirming the validity and utility of poison pills were also reviewed.

Check out presentation by viewing the video above.