Deal Law Wire


insight and perspectives on developments in mergers + acquisitions

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.

Facilitating cross-border M&A: the Canada-Korea free trade agreement

The end of last month saw the signing of the Canada-Korea Free Trade Agreement (CKFTA) following nearly ten years of negotiations. It marks Canada’s first major free trade deal in the Pacific Asia region.

The Canadian Department of Foreign Affairs, Trade and Development has highlighted benefits including job creation, increased access to Asian markets and the creation of a level playing field for Canadian businesses competing with other trade and investment partners of the South Korean peninsula. Specifically, the CKFTA will foster increased M&A activity across the Pacific by establishing and reinforcing rules that secure a transparent and stable investment milieu for companies and investors. 

The investment chapter

The investment chapter of the CKFTA includes provisions providing protection against discriminatory treatment, protection from expropriation without prompt and adequate compensation, and access to independent international investor-state dispute settlement. The agreement also offers temporary-entry provisions for Canadians, greater than those provided to South Korea’s other free trade agreement partners, which will facilitate the movement of business persons between the two countries. The CKFTA ensures that if South Korea reduces or eliminates restrictions pertaining to foreign investment, Canadian companies and investors will receive the same preferential treatment. 

Impact on M&A activity

It has been contended that a significant portion of foreign direct investment is applied to transactions involving cross-border acquisitions of existing assets (by way of M&A) as opposed to the establishment of new assets (“Greenfield” investments) For example, see World Bank Policy Research Working Paper 3192. Based on this model, as bilateral investment opportunities grow under the CKFTA, M&A activity should see a corresponding rise.

Incentives for firms contemplating M&A transactions include transfers of technology and managerial know-how as well as efficient means of enabling the flow of capital and labour. Canada could see increased foreign investment in the mining industry as well as strengthened cooperation in other key sectors including automotive parts, transportation, telecommunications, the Arctic, and financial services.

Although the CKFTA will not take effect until ratified by the legislatures of Seoul and Ottawa, the signing of the agreement symbolizes a significant step towards facilitating investment flows and, indirectly, M&A transactions between the two countries.

Webinar – M&A in 2014: optimizing after-tax returns in acquisitive transactions

Given that after-tax returns are critical in pricing most transactions, there is a premium on tax planning at the outset of negotiations. The goal should be to ensure tax-efficient structures in which neither the buyer nor seller learns after the fact that their targeted after-tax return was missed.

On September 4, 2014, William Paul Bowers, Partner, Fulbright & Jaworski LLP (Dallas, Texas) and Patrick L. O’Daniel, Partner, Fulbright & Jaworski LLP (Austin, Texas) gave a presentation on tax considerations relevant to optimizing after-tax returns in acquisitive transactions. Their discussion considered acquisitive corporate nontaxable reorganizations, taxable asset and stock acquisitions using Internal Revenue Code Sections 336 and Section 338(h)(10) and the unique considerations that arise when either the buyer or seller is an S corporation.

Consideration was given to the tax sections of the primary deal documents including the seller’s tax representations and tax indemnities and the importance to the buyer of tax due diligence on the target corporation.

Please check out the video above or download a copy of the presentation.

PWC predicts moderate growth in Canadian M&A

In its Q2 2014 Capital Markets Flash: Canadian M&A Deals Quarterly, PricewaterhouseCoopers forecasts moderate growth in Canadian economy in the next year and a half. It predicts the rate of real economic growth in 2015 to be 2.5% compared to 2.2% in 2014 and 2.0% in 2013; it projects that government spending will increase 1.5% in 2015, compared to 1.0% and 0.4% in 2014 and 2013, respectively; and it anticipates that the biggest change will be in business investment growth, which is anticipated to be a significant 4%, compared to 1.5% in 2014 and 1.4% in 2013. 

In the report, PWC explains this moderate pace of recovery by citing certain recent geopolitical changes, including a strong US economic recovery and the slowing down of the growth of China’s economy. It is instructive to see how these global trends impact the niche sectors most expected to be key factors propelling the growth of Canadian economy.

In the context of the Energy sector, PWC focuses on the British Columbia’s Liquefied Natural Gas (LNG) market, which heated up earlier this year due to an influx of sizable investments. Investors remained undeterred by the recently struck 30-year Russia-China supply deal, citing the fact that even a deal as big as this cannot satisfy China’s enormous need for energy.Another point of optimism is that Canadian LNG suppliers offer reliability over the long term, a valuable commodity in times of geopolitical uncertainty. PWC’s experts stress that if Canada wants to be a player in the international LNG market, it needs to move quickly, as the cost of transporting natural gas across long distances remains a significant obstacle to Canadian suppliers.However, this obstacle can be overcome by innovation and improving technology of liquefying natural gas.

Another hot market is developing in the Food industry, as investors hop on the latest weight-loss fad for protein-rich diets. Unlike most other goods which may be produced more cost-effectively in Asia, meat production remains most profitable in developed markets, and especially in North America due to its highly regulated standardized farming industry. Players on the protein market are highly competitive and acquisition is a model favored by strategic players and private equity alike.

Transportation, a related sector, is experiencing a recent increase in M&A activity, which is most prominent in the trucking industry.  The recent spike in the number of deals — most of which are in the  middle market, ranging from $20 to 200 million — is explained by the competition for qualified drivers.  According to Mark Seymour, Chairman of the Canadian Trucking Alliance, companies are interested in safety, discipline and compliance.  Acquisition, as always, is a proven strategy, and there is a significant supply, as mid-size owner-operators who were putting off selling their companies during the recession are now looking to retire.  However, acquirers should be aware of the challenge of motivating the acquired companies to maintain and improve the excellence of their personnel in an industry where the importance of hands-on management cannot be overemphasized.

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

Webinar – M&A in 2014: recent M&A cases

Virtually every public company transaction is subject to shareholder litigation. While historically many such suits were resolved through disclosure-only settlements, courts are increasingly likely to scrutinize and, in some cases, reject such settlements. Further, the Delaware courts have awarded significant damages and attorneys’ fees in several recent high-profile cases, and claims involving certain conflicts of interest, and specifically financial adviser conflicts, appear to be gaining traction.

On August 21, 2014, Brian P. Fenske and Mark Thomas Oakes, Partners at Fulbright & Jaworski LLP, gave a presentation on recent M&A cases in 2014. The presentation focused on recent developments in M&A cases and offered practical tips on reducing legal risk in public company transactions. Discussion topics included recent deal characteristics that are garnering scrutiny from the Delaware courts, the success of mandatory venue provisions in company bylaws and charters, and the trend for significant financial investors to bring post-closing appraisal claims.

Please check out the video above or download a copy of the presentation.



The hazards of intellectual property issues in employment agreements


This blog post was co-written with Brian Chau, an Associate in Norton Rose Fulbright’s Toronto office.  

Businesses of all sizes are increasingly becoming aware of the strategic and commercial value of intellectual property (IP). Startups which are just getting off their feet; scaling businesses which are growing in both revenue and size; and mature, sophisticated ventures which have established positions in their respective markets all recognize that their IP and technology may be used for a variety of reasons, including: 

  • to attract investment or financing;
  • to be used as collateral for debt financing;
  • to obtain a competitive advantage in the market,
  • to be used as a defensive tool against competitors or non-practising entities; or
  • to be used as a piece of property which may be sold or licensed to directly generate revenue.

However, as businesses develop sophisticated strategies to achieve some or all of these objectives, it is critical to recognize and consider the relationship between the generation of IP and the employees who create it. This entails careful consideration of the intersection of employment law, contract law and IP law.

Accordingly, ventures of all types as well as their employees must be aware of potential risks arising from this relationship, and implement cohesive, forward thinking and enforceable strategies that accommodate and protect against these risks.

Take, for example, the relationship between founders in a startup.  As the founders develop their initial ideas into actual technology, patentable subject matter, copyrighted materials or trade-marks, it will be critical for the ongoing survival of the company to ensure that all ownership surrounding the IP and technology resides exclusively with the formed company. If ownership of IP, for example a patent application that is the foundation of the company, hasn’t been assigned to the company by virtue of an assignment agreement, and a fracture in the relationship between founders develops, a disagreement over who owns what may follow.  If a founder seeks to leave the company, will they take what they perceive to be their IP with them? If they do, would the company’s current or future products then be vulnerable to a suit for patent infringement? Would a competitor be able to acquire and use the technology? How would investors react to such a risk?

In another example, a scaling or mature business employs an individual or team of individuals who are involved in R&D.  If some or all of those inventors leave the company, only to begin working on products with a new employer that are closely tied to their duties for their former employer, what recourse does that first employer have? Could that second employer take steps to mitigate against any potential litigation arising from hiring these employees?

If the individuals’ respective employment agreements do not adequately delineate ownership, assignment obligations and even the scope and subject matter of the employer’s business, then both employers may find themselves in a very difficult situation.

Many more examples can also be readily brought to mind. What ties them all together, however, is that businesses who do not consider these issues up front are putting their significant R&D investments, product portfolios, investor appeal and perhaps survival at risk.

Ownership and assignments

One of the larger concerns facing businesses may be summarized simply as “who owns the IP?” Employment agreements must address this issue by definitively requiring employees to assign IP created during employment, and also defining other specific matters:

  • The employment agreement should set out the nature, subject matter and related fields of the business, and require that IP and technology created related to the existing or even future operations or business of the employer are assigned and owned by the employer.
  • Ensuring, where appropriate, that prior inventions related to the existing or future business of the employer are also assigned, if those rights are indeed still owned by the employee. This is critical in the case of a founder or inventor joining a startup if technology or IP was created before joining the company or before the company’s inception.
  • Prohibit employees from signing any IP assignments or agreements incorporating IP assignments with third parties in the course of the employment without first obtaining the consent of the employer. This is particularly relevant in the case of the startup community, where individuals may work with a host of companies.
  • Addressing moral rights of employees by waiver. Moral rights are rights of the initial author of copyrighted works, for example program code, or potentially APIs, that grant to the author the right to be attributed as author, and the right to stop or prevent any modification, mutilation, distortion or use of the work in association with a product/service/institution that is prejudicial to the honour or reputation of the author. Moral rights cannot be assigned, however, at least in Canada, they may be permanently waived by the author.

Future assistance for examination

In order to obtain an IP right, it is often required that the business owning the rights to the IP go through an application and/or examination process conducted by an intellectual property office, for example the Canadian Intellectual Property Office (CIPO) or the United States Patents and Trademarks Office (USPTO).

The examination process usually comprises back and forth correspondence, resembling in many ways a negotiation, between the applicant and the respective intellectual property office, ensuring that the rights being granted comply with statutory requirements. This process therefore requires of the applicant an intimate knowledge of the right being sought and the underlying value to the applicant, such that arguments may be put forward ensuring the right granted is broad, covers the applicant’s current or future products/services, and is of potential commercial or strategic value to the applicant.  This therefore entails strong evidence pertaining to the IP right. In the case of a patent, this may, as an example, take the form of documents, experimental data, statements of the inventor(s), original drawings speaking to the novelty, inventiveness and subject matter of the alleged invention. Further, various documents of an administrative nature are often required during examination, including evidence of a formal assignment from the inventor (i.e., an employee) to the applicant (i.e.,  the employer).

For patents, the examination process can take anywhere from 3 to 10 years, or more. It is therefore critical to ensure that:

  • Employers own and have access to all work product (i.e., notebooks, drawings, experimental data, code, mockups, prototypes) created by employees.
  • Employers have in place, and consistently enforce, policies requiring employees to document, record and retain their work relating to IP, for example: innovative ideas, meeting notes between members of an inventive or research orientated team, or brainstorming sessions or documents on potential inventive concepts.

Prior inventions

There are circumstances where a business is seeking to employ an individual who, either individually or during employment with another business, has previously created IP or technology in the same field or industry as that business. In such situations, the employee may have already assigned their previously created IP or technology to an earlier employer, and consequently the business now seeking to employ that individual may face the risk that this new employee knowingly or unknowingly incorporates that technology or IP into the products of that later employer.  In some cases, this could lead to potential infringement suits that result in damage awards or even an injunction against the sale of products or services incorporating that expropriated IP.

There are mechanisms to mitigate these risks. For example, obligations may be drafted into the agreement requiring that the inventor disclose any previously created IP, also accompanied by representations and warranties that the inventor will refrain from incorporating any such IP into their work product or technology in the course of employment with the new employer.

Being able to consider the prior technology or IP of the employee (perhaps created while working for a competitor) will enable businesses to manage the employee’s work such that the prior IP doesn’t infect the business of the new employer with potential IP infringement or ownership concerns. This may be achieved through specifically managing the projects that the employee is involved with to avoid those overtly similar to the subject matter of their prior IP/technology, or erecting information barriers between that employee and other teams working on projects that may be similar to the prior IP/technology.


Employment agreements must also address the confidentiality of the IP, work product, or technology created, such that the risks of intentional or unintentional public disclosures is mitigated. Public disclosures may in some situations risk patentability, notify competitors of market or technology strategies, or disclose trade-secrets among other concerns. A strong non-disclosure obligation, extending past termination of employment, must therefore be included in such employment agreements.

Interaction with contract law

As with all agreements, an employment agreement must also be mindful of general principles of contract law, for example the need for consideration. Therefore, these agreements must be carefully drafted to ensure they remain enforceable in the future by ensuring that they meet the requirements of both provincial/state laws and federal law. Highlighting this point is the increasing amount of litigation wherein former employees contest the validity of employment and assignment agreements executed with former employers on the basis of a lack of consideration. This can inflict serious damage to a business through the loss of rights to use or otherwise commercialize key IP or technology.

Solutions to the issues presented above, as well as the multitude of other challenges that may arise, vary greatly from circumstance to circumstance. Therefore, when faced with some of these obstacles, businesses should consult  our professionals to obtain comprehensive, personalized advice.