Are private placements the next poison pill?

The recent amendments to Canada’s takeover bid regime may have rendered the shareholder rights plan or “poison pill” – traditionally the most powerful weapon in a board’s arsenal of defensive tactics – obsolete. The new amendments, which became effective on May 9, 2016, require a majority of shareholders to tender their shares before an unsolicited offer can be successful, thereby giving shareholders an effective veto over any hostile bid. The amendments also greatly extend the time a bid must remain open, eliminating the standard rationale for adopting a rights plan. With the poison pill out of play, could the tactical private placement take its place?

When defending against a hostile takeover bid, a board can use a tactical private placement to unilaterally assign a significant percentage of a company’s outstanding equity to a party or parties that will not tender to the bidder. A recent article for The M&A Lawyer titled “The Role of Private Placements in Canada’s New Takeover Bid Regime” canvassed the available case law on the issue, concluding that regulators express far more hesitation to intervene in private placements on public interest grounds. While poison pills are used only as a takeover defence, a private placement can be pursued for any number of reasons and may not be “tactical.”

The tactical private placement can take advantage of the long lead time offered by the minimum tender period enshrined by the new amendments. It takes time to find interested investors, negotiate terms, and seek approval from the stock exchanges (in the case of any sale of listed securities).

Now that bidders have to keep their offer open for at least 105 days, target companies have the leeway to pursue a private placement as an alternative. Furthermore, the considerable length of the minimum tender period creates a degree of uncertainty that might make more readily available options attractive to boards.

For a private placement to be a viable defensive tactic, a target company must have or be able to find investors  willing to accept such a deal on reasonable terms. On a separate but related note, the tactic will be most effective when a relatively small proportion of the total outstanding equity is required to block the hostile bid. If neither of these conditions are present, a target company might end up striking a bargain that would be deleterious for the company and thus a breach of their legal duty.

Companies considering or negotiating merger transactions should inform themselves of appropriate defensive tactics once they are in play. Now that the poison pill has far more limited utility, new mechanisms such as the tactical private placement must fill the void to counteract unwanted and unattractive bids.

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Cultural compatibility: predictor of a transaction’s potential success

We have previously reported on human capital considerations in M&A transactions; in this post we consider how corporate culture affects a deal’s possibility of success. While qualitative considerations often sit on the backburner in the lead up to a deal, compatibility of corporate cultures can be an important factor in determining whether a merger or acquisition will be successful. According to a survey by Bain & Co., executives have indicated that the number one cause for a deal’s failure to achieve promised value is due to clashes in corporate culture.

Corporate culture is multifaceted and can include behavioural norms and characteristics, the operating model of the company, including the organization’s structure and governance mechanism, the method by which employees are incentivized and rewarded, and the workflow process.

A proper, in-depth assessment of the compatibility of the corporate cultures should be conducted before an M&A deal is finalized. Depending on the stage of the transaction, different methods can be used to assess the corporate culture of the two businesses. At early stages, public information may provide a general overview of a potential target’s business strategy and business model. At more advanced stages, methods for obtaining the required information can include interviews with management, customer and employee interviews and surveys regarding behaviours, attitudes, and priorities.

Depending on differences in corporate culture, a transaction can be structured in a way to take advantage of differences and maximize synergies. Perhaps complete assimilation in an acquisition is not the best approach; a better approach may be to allow the target company to operate independently. Each transaction will be unique, in some cases implementing structured strategies across both companies will drive growth; in other cases, structure may actually hinder growth by limiting the entrepreneurial spirit of one company.

While traditional considerations in an M&A deal are important, another factor companies need to consider when structuring a transaction is cultural compatibility. In some cases culture may trump strategy.

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

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Corporate residency for tax purposes

A corporation that is resident in Canada for Canadian income tax purposes is subject to Canadian income tax on its worldwide income. On the other hand, corporations that are not resident in Canada are only subject to Canadian income tax on their Canadian-source income. Accordingly, residency is an important factor in determining which Canadian income tax regime applies.

Generally, a corporation will be deemed to be a resident in Canada if it has been incorporated in Canada. Absent a deeming provision, a corporation can also be resident in Canada based on common law principles. The common law test for corporate tax residency is the place where the corporation’s central management and control is exercised. This test is a question of fact. Some of the factors that courts have looked to in concluding the tax residency of a corporation include:

  • the place where directors meet (this has been a particularly important factor);
  • the principal place where business is conducted;
  • the residency of the directors;
  • the influence that foreign directors have in comparison with Canadian directors;
  • the location of corporate books and records; and
  • the location of the corporation’s bank accounts.

The application of income tax treaties may also affect the residency of a corporation for Canadian income tax purposes. Businesses should keep these factors in mind when selecting corporate directors and developing policies that govern how a corporation’s management should be undertaken (for example, maintaining a majority of Canadian resident directors if Canadian residency is desired). With increased business travel, ensuring that the desired corporate residency is maintained has become more difficult, but it can still be effectively managed with the appropriate protocols.

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M&A update in the global metals industry

In the past, we reported on PwC’s ongoing analysis on M&A activity in the global metals industry. PwC released its most recent report in the series, entitled “Forging Ahead: First-quarter 2016 global metals industry mergers and acquisitions analysis” which breaks down the latest trends in the global metals industry, and provides insights into what the industry may expect going forward.

The major news coming out of the report is that deal volume declined to 14 deals valued at $50 million or more in the first quarter of 2016; however, deal value increased to $8.7 billion. The report concludes that the primary cause of this trend is the increase in megadeals, which are deals valued at $1 billion or more. Specifically, two Chinese based transactions made up 66% of the total deal value: CRED Holdings’ plans to acquire the share capital of Liaoning Zhongwang Group, a manufacturer and wholesaler of aluminum products for $4.7 billion; and the acquisition of Shandong Yili Electric Power by Shandong Nanshan Aluminum for $1.1 billion.

The deals in Q1 of 2016 were driven mainly by the steel and aluminum segments of the metals industry. Aluminum deals increased, and accounted for 36% of the quarter’s deal volume, compared to just 12% in the last quarter of 2015. Additionally, both of the megadeals mentioned above were in the aluminum segment of the industry. The report provides that producers are using consolidation to increase efficiencies, which in turn lower average costs, in order to compete more effectively on the basis of cost, an advantage the report cites as being traditionally needed by commodity producers.

In terms of the geography of the deals, the report found that Asia and Oceania were the two leading acquirer regions with 86% of the deals being located there. In particular China was a strong driver of deals, with it making up 8 of the 12 deals in the region. The 8 deals in China were local-market based, as producers are trying to increase scale and decrease pollution by closing inefficient plants.

The authors of the report see room to be optimistic about the industry going forward. The report states that continued growth in the United States’ economy, coupled with improvements for the automotive and construction industries should lead to an increase in demand for metals. Additionally, the report believes that commodity prices will see an increase in 2016, and that there will be an increase in demand from the Chinese and Indian economies for metals such as steel and aluminum. As a result, the report concludes that there will likely be a modest increase in deal activity in the short term.

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

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Britain without the EU: how will Brexit affect dealmaking?

DLW_680x220On June 23, 2016, Britons will be heading to the polls to determine whether or not the UK should remain a member of the EU. Given the stakes involved, the referendum is likely to have an impact on M&A activity in the UK, both before and after the vote.

The referendum

This is not the first time the UK has held a referendum on this question. In 1975, the British electorate voted in favour of the UK remaining a member of the European Economic Community (the predecessor of the EU) by a majority of 67%.

However, this time the results are expected to be much closer. Recent opinion polls suggest that both sides are neck and neck, with those in favour of a British exit from the EU (commonly referred to as “Brexit”) taking the lead for the first time on June 6th.

Impact on M&A

The referendum will likely impact the timing of deals in the short-mid term. For example, some prospective buyers of UK targets may be holding off on M&A activity until after the vote or, in the event of the UK voting in favour of Brexit, after the terms of the new relationship with the EU are finalized (negotiations with the EU are predicted to last several years). In the meantime, economic and political uncertainty could create a hostile deal environment for UK M&A.

This uncertainty is exacerbated by the high stakes involved, as Brexit would mark a major change from the status quo. Laws and regulations will need to be amended. Prime Minister Cameron could resign. London could lose its role as a hub for European deal-making. Most significantly, the British economy will likely be impacted – according to a recent major survey, nine out of ten of UK’s top economists believe that the British economy will be harmed by Brexit.

In addition, some analysts believe that sterling is at risk of falling 15-20% in the event the UK votes in favour of Brexit. The expected movement of that sterling is supported by its recent volatility – it dropped on June 6th when the Brexit camp first took the lead in the opinion polls. While a weakened sterling could potentially present bargain M&A opportunities to foreign buyers of UK targets, such currency swings could significantly change the economics of the deal if the risks are not properly hedged.

In fact, the uncertainty surrounding the referendum and Brexit is reflected in the recent slowdown of UK M&A. According to a recent report by Intralinks, early-stage M&A activity in the UK only grew by 3% in the first quarter of 2016. In comparison, the previous quarter (which was prior to a date being set for the referendum) saw M&A grow by 15%.

This slowdown is consistent with the Scottish experience during Scotland’s referendum for independence from the UK in September 2014. In the quarter leading up to the vote, the total value of UK M&A deals was 60% lower than the previous quarter.

It is important to keep in mind, however, that businesses are attracted to the UK because of the country’s stable financial, regulatory and legal systems, and low corporate tax rates, and not because of its membership in the EU. Assuming that the UK is able to successfully adapt to a post-Brexit environment, any impact on M&A caused by Brexit is likely to be limited to the short-mid term while the UK irons out the details of its new relationship with the EU.

For more information on Brexit and its potential consequences, please see here.

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M&A in the life sciences sector remains healthy

In December 2015, we reported on the record-setting M&A activity in the life sciences sector in 2015. In a post last month, we also reported on a recent surge in M&A deals in the pharmaceutical industry, including $40 billion worth of deals announced in one day. Now, a recent report by EY suggests that while the flurry of M&A activity may be tapering off, company expectations remain high with respect to future deals in the life sciences industry.

In particular, the report notes that 45% of life sciences executives surveyed are still expecting to pursue acquisitions over the next year, while 50% currently have three or more deals on the go. Further, 58% of executives surveyed indicated that M&A opportunities have increased in priority on their boardroom agendas. Overall, the report cites that the majority of executives have a positive outlook towards M&A in the life sciences sector, with 94% of those surveyed saying that they see the market as stable or improving.

Despite the optimistic outlook, the report notes that the number of deals called off increased from 71% six months ago to 91%. Many of those surveyed pointed to due diligence and valuation gaps as the primary reasons that planned acquisitions were cancelled, while regulatory reviews also remained a common concern.

The report also noted that the U.S. Treasury’s announcement of changes to the tax rules affecting cross-border transactions could suppress the frequency of deals in the life sciences sector, as one major pharmaceutical deal has already been called off this year as a result of this shift in tax policy. However, the ultimate impact of these regulations remains to be seen.

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

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M&A as a strategic priority in media and entertainment

EY has released the 14th edition of the Media and Entertainment (M&E) Global Capital Confidence Barometer (the Report) which concludes that M&A activity will become an important piece to value creation strategies given the current subdued economic environment. The survey canvassed a panel of more than 1,700 executives in 45 countries of which 75 respondents represented the M&E industry.

Zero percent of the respondents expect strong growth in the economy, down 23% from six months ago. In this context, M&E companies are expected to proactively explore growth options by pursuing bolder and more novel strategies such as cross-sector moves and larger deal values.

Cross-sector deals are attractive sources of accessing new technologies and business models. The Report, however, cautioned that ineffective integration and post-transaction alignment of cross-sector businesses can result in failed synergies and ongoing cultural differences within the organization.

Thirty-two percent of respondents reported targeting deal sizes of more than USD $250 million, up more than 10% from six months ago. Relatedly, M&E executives are maintaining robust deal pipelines with 45% of respondents evaluating more than three deals and 76% evaluating at least two.

Corporate strategy is concentrated on developing competitive advantages through a focus on “relevant” markets – as opposed to the traditional binary approach of “developed” versus “emerging” markets. Seventy-eight percent of the respondents noted that they are looking to pursue cross-border acquisitions in the next twelve months. The top investment destinations for M&E companies are the United Kingdom, United States, France, Canada and China. Stability in the economy was cited in the Report as a primary factor drawing investment to Canada.

The digital realm continues to dominate the boardroom agenda as companies seek to leverage new technologies and data, while balancing risk of increased cyber security threats and attacks. Previous posts discuss the regulatory framework in Canada in respect of cyber risks and cyber security insurance as a tool for managing such risks.

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Boards with women, M&A activity and social identity theory: a call for more diversity on boards

In an earlier post we commented on the importance of improving a company’s risk profile and performance by implementing methods and practices to ensure the success of gender diversification policies. Citing an academic study on management diversity entitled “Do Women Stay Out of Trouble,” we pointed out that gender diversification has a financial benefit because, according to the study, women in management are usually more risk-averse and law abiding, thereby protecting firms from various types of lawsuits. But does this mean that all women are risk-averse, or that the presence of women ensure that boards make their decisions in a more comprehensive manner?

A recent study entitled “Female Board Representation and Corporate Acquisition Intensity” has been publicized purely for its results, as opposed to its analytical methods. In a nutshell, the study found that the proportion of women on the boards of U.S. public companies was inversely related to the number of acquisitions by the company. The unfortunate, short-sighted take away from this is that more women in leadership leads to lower M&A activity.

But this study revealed something much more important and helpful to underpin the long-held goal of enhancing diversity on corporate boards. Instead of categorizing women as risk averse, the study uses social identity theory to convey how individuals interact with one another based on how they categorize their individual identity. The authors of the study contend that a board will act differently when it is comprised of individuals who exemplify multiple identity categories than if the board is comprised of a singular category. When there are different types of people making decisions there’s a lower risk of groupthink and a greater chance that decisions will be made in a more comprehensive manner. One of the consequences of more comprehensive decision-making processes is that there is a decrease in the number and dollar-volume of acquisitions – a more scrupulous board will not take up every possible acquisition target.

Hopefully this study will be followed by others that will assess whether a decrease in acquisition activity due to a more diverse board leads to better financial outcomes for firms. Until then, studies such as this one should challenge companies to make their boards more diverse to enhance their decision-making processes.

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

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Growing M&A in the agrochemical sector

According to a recently published report by MarketsandMarkets Research, the global agrochemical market has grown significantly between 2000 and 2016. This growth has been matched by a flurry of M&A activity. In particular, the report highlights that:

  • the global agrochemical market grew from $28.78 billion in 2007 to $41.12 billion in 2013. This represents a growth of 43% over six years;
  • intense competition between the top players in the agrochemicals market has caused extensive consolidation over the previous decade. The top six companies now dominate more than 80% of the industry’s market share;
  • crop protection chemicals and herbicides were the most active areas for M&A activity and investment over this time period; and
  • there is a trend of assets being acquired by companies for use in emerging markets with large agricultural potential. The largest number of deals (by acquirer) were witnessed by companies headquartered in the Asia-Pacific region as a result of extensive crop cultivation potential in India, China and Japan. The largest number of deals (by target) were witnessed by companies headquartered in Europe and North America. The most active companies were Monsanto (U.S.), Bayer AgroSciences (Germany) and Syngenta AG (Switzerland).

The report concludes that M&A activity is expected to continue as a result of an increased focus on research and development, increased emphasis on intellectual property rights, and the growth of international agricultural markets. The transaction between Dow Chemicals and DuPont announced in Q4 of last year is proof positive that significant market consolidation is still underway in the fertile agrochemical industry.

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

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Protecting buyers in M&A transactions: trends in the use of indemnification provisions

Allocating liability between buyers and sellers for the business and operating risks of a target company in M&A transactions is key to assessing what might be an appropriate purchase price for the transaction. As a result, the indemnification provisions in a purchase agreement are heavily negotiated with buyers seeking to limit their post-closing damages and sellers seeking to limit their liability for uncertain risks.

Recent trends in the use of indemnities are revealed in the 2016 SRS Acquiom M&A Deal Terms Study (the SRS Acquiom Study) which analyzed 735 private-target acquisitions that closed in 2012 through 2015.

Separate indemnities

Where a specific risk is identified in the course of the purchaser’s due diligence, it is often advisable to specifically address that risk in the form of a separate indemnity in the purchase agreement, as opposed to relying on the standard indemnities for the seller’s breach of representations and warranties and covenants. The SRS Acquiom Study reveals that separate indemnities are most commonly used to protect purchasers from (i) taxation liability (78% of the deals reviewed in 2015), (ii) payments to dissenting shareholders (72%), (iii) the accuracy of closing certificates (69%), (iv) transaction expenses (43%), (v) litigation (35%), (vi) fraud and wilful misrepresentation (33%) and (vii) purchase price adjustments (33%).


There may be circumstances where the purchaser learns of a seller’s breach of a representation, warranty or covenant prior to closing but says nothing about it until the transaction has closed, in order to bring about an indemnity claim at a later stage. The SRS Acquiom Study reveals that “pro-sandbagging provisions”, which permit the purchaser to pursue this course of action, have reduced in prevalence over the course of the past few years, from a high of 64% in 2012 down to 52% in 2015. The prevalence of “anti-sandbagging” provisions, which limit the seller’s liability for such losses, has correspondingly increased from only 34% in 2012 to 45% in 2015, indicating that sellers have improved their bargaining position in this respect. Not surprisingly, very few purchase agreements are silent on the issue.

Materiality scrape

Sellers often seek to qualify the representations and warranties in a purchase agreement in terms of materiality, in order to limit their liability. Purchasers can reduce the impact of these qualifiers by including an indemnification provision that expressly states that these materiality qualifiers do not apply for the purpose of indemnification. This materiality scrape can apply for the broad purpose of determining whether any breach of representation or warranty has occurred, or it can be reduced in scope to be only relevant for the purpose of calculating losses. The SRS Acquiom Study indicates that in both 2014 and 2015, most ( i.e., 55-58%) materiality scrapes negotiated applied only for the purpose of assessing damages. The remainder were split roughly equally between (i) applying to assess whether there has been a breach and (ii) applying both to assess whether there has been a breach and for the purpose of assessing damages, with the latter use being most advantageous for purchasers.

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