Deal Law Wire


insight and perspectives on developments in mergers + acquisitions

The importance of post-merger integration

With M&A transactions, the typical focus is preparing for and executing the deal. However, as briefly highlighted in a recent posting on this blog, integrating two businesses once a transaction is complete is often quite challenging and requires extensive planning. This process, known as post-merger integration (PMI), is typically lengthy and resource intensive. Its importance cannot be understated, as successful PMI allows an acquiror to capture the long-term value sought from a transaction, whereas failed PMI leads to missed opportunities and under-performance.

A report recently published by Mergermarket and EY considers PMI-related issues further. Titled The Right Combination: Managing integration for deal success, the report is based on the worldwide feedback of senior corporate executives and data from large M&A transactions that have occurred in the past two years.

The report highlights five key takeaways for PMI success:

  1. The first takeaway is the need to initially concentrate on integrating core departments. This should be informed by the strategic rationale for the M&A transaction. For example, the report’s research indicates that growing scale and geographical expansion are the main drivers of M&A; accordingly, the majority of survey respondents’ PMI-focus was on integrating “front office” groups (such as sales and marketing) and operations. In contrast, “back office” groups such as finance, human resources and information technology (IT) were ranked as the lowest priorities, despite their important role in supporting all other groups.
  2. The second takeaway is the need to adequately budget resources for PMI. The report notes that on average, companies spent 14% of the total M&A transaction’s value on PMI. For 21% of survey respondents, looking back they would have budgeted more for PMI, whereas 14% would have budgeted less. Although the focus of PMI should be different for each transaction (as discussed above), the research also indicates that IT tends to be under-prioritized, leading to unexpected delays and expenditures.
  3. The third takeaway centers on the execution of PMI. More specifically, 80% of survey respondents indicated that looking back, they would have quickened the pace of PMI and then focused on running their core business. 62% of respondents also noted that they would have introduced a second-wave of PMI, to recalibrate around ignored issues and push for completion. Finally, 58% of respondents admitted that they could have done a better job communicating progress to stakeholders.
  4. The fourth takeaway is the need to regularly evaluate and learn from successes and failures during the PMI process, and again once PMI is finished and the transaction has been fully completed. This is an especially important learning opportunity for companies who may engage in future M&A transactions.
  5. The final takeaway highlights the importance of finding skilled managers to run the PMI process. Ideal candidates will typically have a diverse skill set and real operational experience. Moreover, although their job is challenging, the report’s research indicates that high-performers are often rewarded with positive career advancements.

When it comes to PMI, experience is the best teacher. However, relying on skilled advisors, established best-practices and research findings can make the job easier.

M&A litigation part 1: trends regarding M&A transactions valued over $100 million

Last month, Cornerstone Research published a report titled Shareholder Litigation Involving Mergers and Acquisitions – Review of 2013 M&A Litigation, the first report in a 2-part series aimed at assessing trends involving lawsuits filed by shareholders of public target companies which challenge M&A transactions valued over $100 million. The purpose of the report was to consider litigation (usually in the form of a class action) for the period from 2007 to 2013 wherein plaintiff’s counsel would challenge an M&A deal on the basis that the target’s board of directors conducted a flawed sales process which neglected to maximize shareholder value, thereby violating its fiduciary duties.

According to the report, for the fourth consecutive year, shareholder lawsuits are filed in over 90% of M&A deals valued in excess of $100 million: shareholders challenged 90% of deals in 2010, 93% of deals in both 2011 and 2012, and 94% of all M&A transactions announced in 2013. In 2013, most of the applicable transactions attracted multiple filings — an average of 5 lawsuits each — and over 62% of the litigation was multi-jurisdictional, with 54% of 2013 deals being litigated in 2 jurisdictions and 8% of 2013 deals being litigated in 3 jurisdictions. Interestingly, last year marked the first time that litigation filing rates were the same for transactions valued under $1 billion and those values in excess of $1 billion.

The report noted that the most common allegations made by shareholders included:

  • failure to conduct a sufficiently competitive sale
  • the existence of restrictive deal protections that discouraged additional bids
  • perceived conflicts of interest, such as executive retention or change-of control payments to executives
  • failure to disclose enough information about the sale process and the financial advisor’s valuation

No matter the nature of the allegations, the report set out the following key litigation outcomes for the period from 2007 to 2013:

  • Litigation was resolved before the transaction closed in the vast majority of cases, ranging from 60% of the time (in 2006) to 79% (in 2012)
  • Litigation resolved at a rate of 75% in 2013 and, of such resolved suits, 88% were settled, 9% were withdrawn by the plaintiffs, and 3% were dismissed by the courts
  • Although the majority of M&A litigation settled, suits that were not resolved before the transaction closed remained pending for as long as 4 years
  • Based on the data available to Cornerstone, none of the litigation went to trial, and all judgments were granted in favour of the defendants

M&A in 2014: Recent developments in M&A

On March 6, 2014, Glen Hettinger and Scarlet McNellie, Partners in Norton Rose Fulbright’s Dallas office, and Mark Stachiw, Managing Partner and General Counsel & Secretary of NxGen Partners, LLC, gave a presentation on recent developments in M&A and considered how best to approach M&A going forward.

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





Biotech and pharma: next on the patent troll hit list?

Patent trolls, alternatively known as non-practising entities (NPEs) or patent monetizers, have been dominating discussion relating to patent reform for quite some time. For example, the White House, the FTC, Congress, individual U.S. states and the U.S. Patent and Trademark Office have each conducted their own investigations and proposed guidelines and legislation aimed at curbing the threats posed by patent monetizers to businesses and consumers.

All this attention is not without good reason. Over the last 12 years, median damage awards in litigation for NPEs in the U.S. have significantly outpaced those of practicing entities. A 2013 study conducted by PWC shows the continuation of a trend that started in 2001: a wide premium (almost double in the last 12 years) in the damages awarded to NPEs compared to those awarded to practicing entities.  Studies have also shown that litigation in the patent space is increasingly a result of companies that do not develop, manufacture or sell their own products. Indeed, the proportion of patent litigation by entities that do not make products has increased from roughly 25% in 2007 to almost 60% in 2012, meaning more than half of patent litigation in the U.S. is initiated by entities whose sole business model is the assertion of patents. While there is debate regarding the actual damage caused by such activity to businesses and consumers, there is nonetheless a general consensus that such activity should be minimized, and in some cases, stopped. While the numbers in Canada are not quite as dramatic, there are  signs that monetizers have begun to increase their activity here.

Conventional thinking typically confines the activities of patent monetizers to the high-tech space. Indeed, the highest profile cases generally relate to software, business methods, smartphones and computers (see, for example, our previous coverage of the Rockstar Consortium’s recently filed infringement action against Samsung, Google, HTC, ZTE, ASUSTeK, Huawei, LG, and ZTE, the line of cases involving Soverain Software LLC and Newegg, as well as RIM’s battle with NTP, Inc.).

Until recently, the pharmaceutical and biotech space, an area wherein patent infringement actions are already common, has been perceived as being isolated from the problems posed by NPEs. Biotechnology and pharmaceutical research involves a greater investment of time, money and expertise, resulting in fewer patents for monetizers to purchase and assert, fewer targets, and a longer lead time for problems to emerge. Biotech and pharmaceutical products tend to have fewer components, and patents in the field tend to be less broad than the software and business method patents that proliferate in the technology industry. All of this is said to disincentivize, or make outright impossible, the entry of monetizers into the space. Or so the thinking goes.

This perception may prove to be unfounded if a recent study conducted by Robin Feldman and Nicholson Price II is to be believed. The study, titled Patent Trolling: Why Bio and Pharmaceuticals are at Risk, investigates whether NPEs are primed to enter the biotech and pharma space, concluding that the space is ripe for the picking.

Feldman and Price point out that in contrast to high-tech patents, it is extremely expensive and time consuming to invent around a patent in the biotech and pharmaceutical space. ‘Invent around’ speaks to the ability of an inventor to change a product or production method to avoid infringing a patented technology. Since the cost to invent around is so high, biotech and pharma companies will be incentivized to settle any patent suit brought by a monetizer in order to avoid an injunction or heavy damages award and then having to invent around the asserted patent. This is particularly true when the biotech or pharma company has a drug product at stake with anywhere from $700 million to $1.3 billion in R&D and clinical testing costs behind it. With such a high degree of potential leverage, NPEs will increasingly look to pharma and biotech companies as a means of revenue, particularly as the ‘low hanging fruit’ of the high-tech space is consumed.

With incentives to enter the biotech and pharmaceutical space being so significant, patent monetizers may also begin looking for targets, but not before obtaining a portfolio of patents to enforce. Conventional wisdom suggests that finding such patents in the biotech and pharmaceutical space is difficult, if not impossible, but Feldman and Price demonstrate the weaknesses of such an argument.

Patent brokers are increasingly being contacted by pharmaceutical companies who are looking for monetizers that might be interested in buying their non-core patents. Such non-core patents may be used to sue competitors of the original owner of the patents, with portions of any settlement or license potentially being paid back to the original owner through the monetizer. In this way, the benefit to the original patent owner is two-fold: increase the costs for competitors, and turn existing assets into profit generators.

However, pharmaceutical and biotech companies are not the only significant holders of patents in this space. Universities are holders of enormous amounts of intellectual property (IP) in the biotech and pharma fields and, according to Feldman and Price, are a treasure trove of ammunition for NPEs. In examining the biopharmaceutical patent holdings of 5 major U.S. universities — the University of California, the University of Texas, the Massachusetts Institute of Technology, the California Institute of Technology, and the University of South Florida — the authors identified dozens of patents that could be deployed against biopharmas based on patterns that monetizers have used against other industries. These included patents on active ingredients of drugs, methods of treatment, screening methods to identify new drugs, manufacturing methods, dosage forms and ancillary technologies.

Much of universities’  IP sits unused and unlicensed. In fact, it is said that only 5% of the vast patent holdings of U.S. universities are subject to licensing. The lack of commercialization often occurs when researchers and labs struggle to find post-research, pre-venture capital funding for innovations that are no longer considered research projects, but are not sufficiently prototyped to attract private investment. This phenomenon is commonly referred to as the commercialization “valley of death”.

The notion that much of the investment into IP by U.S. universities has underperformed is mirrored in Canadian universities. A 2010 Statistics Canada report found that the total IP income (primarily from licencing) at reporting Canadian universities was $53.2 million, while the administrative costs associated with this IP investment was pegged at $51.1 million.  Accordingly, the total surplus for all Canadian universities was $2.1 million, and the average income per university derived from the IP was only $425,000.

The lack of significant revenue generated by investment into IP occurs in a climate of reduced funding by provincial and federal governments here in Canada. Canadian universities have increasingly come under funding pressures, particularly in terms of government-provided research grants (see here, here and here). While organizations such as the U.S. based University Technology Managers have indicated intentions to re-examine policies that recommended against transferring rights to non-practicing entities, it would not be surprising if Canadian universities followed suit. One must therefore ask how long will it be before Canadian universities look to their vast, underperforming life sciences patent portfolios as a means of generating much-needed revenue through transfer or licensing to NPEs, particularly as monetizers are increasingly drawn towards the biotech and pharmaceutical space as a new source of revenue.

The convergence of the high-tech space with the life sciences space may also serve to raise awareness of the biotech and pharmaceutical space in the minds of patent monetizers. The emergence of complex medical devices, algorithms for the determination of health risks, bioinformatics, and the convergence of drugs, devices and diagnostics, increasingly draws together technologies from the high-tech and the life sciences spaces.

With all of this in mind, will we see an influx of NPEs in the biotech and pharma spaces? As Feldman and Price indicate, “[i]t is not inevitable that monetizers will descend on the bio and pharmaceutical industries, but in our opinion it is a serious threat.”  However, beyond simply the likeliness of these events, we should also ask how the entry of monetizers into this space will affect healthcare generally.

While patent suits in the technology space have resulted in injunctions in the U.S. against the smartphones that consumers crave, what is the acceptability of a U.S. injunction against a drug or treatment method necessary for the well-being and health of individuals in need, particularly when the entity asserting its patents offers no alternative treatment? For jurisdictions like Canada, where patent monetizer litigation and related-injunctions are rare, will the increased litigation in the U.S. serve to increase the aggregate costs of getting a drug to market, and therefore the potential costs of treatment? These are questions that should be seriously canvassed by businesses operating in this space, as well as legislators hoping to inhibit or stop such activity.

There are steps that businesses can take to reduce the likeliness that such events could unfold.  As always, the development and maintenance of an IP portfolio focused on a business’s current products and future roadmap will act as a disincentive to NPEs, and will give that business confidence to operate in its respective market. Additionally, businesses may want to consider evaluating the patent holdings of universities to augment their own IP portfolios, thereby shielding potential vulnerabilities while also keeping those same patents out of the hands of NPEs.

M&A activity bolstered by financial sponsors and real estate sector

Crosbie & Company recently released its Canadian M&A Activity – Fourth Quarter 2013 Report. The report explains that while M&A activity in Q4 didn’t deviate much from the year’s previous quarters, suggesting a relatively stable year from a numbers perspective, a closer look at 2013 deal activity as a whole tells a slightly different story.

As reported in the Financial Post:

“The mix of deals in the Canadian M&A market has really shifted in recent years,” said Colin Walker, [Crosbie’s] managing director, noting that some of the sectors that historically were key contributors (such as mining) have become noticeably quiet, while others (such as real estate) have surfaced as the new leaders.

Crosbie’s report sets out the following key shifts in 2013 Canadian M&A activity as a whole:

  • Activity in the Real Estate sector flourished in 2013, representing nearly a third of total deal activity and value
  • Transactions by Financial Sponsors in excess of $100 million represented 23% of announcements and 24% of overall value in 2013
  • While historically strong contributors to the overall market, the Base Metals and Gold sectors declined significantly in 2013, with base metal announcements falling 77%
  • Transaction value in the Oil & Gas sector declined by 71% to $17.6B in 2013, and deal activity fell from 224 transactions in 2012 to 164 transactions last year
  • 114 deals worth $11.3B were reported in the Industrial Products sector, representing a decline of 23% in both number of announcements and value
  • The Consumer Products sector was the only area to see M&A results which nearly mirrored its performance in 2012, both in terms of activity (60 transactions) and value ($17.4 B).

While Crosbie’s report considered key trends in Canadian M&A in 2013 as a whole, it also looked at results from Q4 2013 in particular. Of note is that the 240 transaction announcements in Q4 (compared to 230 announcements in Q3 2014) represented a total value of only $33.5B, considerably below the average of $41.6B for the year’s previous 3 quarters. Despite what may appear to be discouraging results, however, the report interpreted the numbers positively:

“Although M&A activity has been lower than we would have expected, it is nevertheless a good time to sell businesses,” said Colin Walker. “We continue to see strong buyer interest in most sectors and financing for buyers has never been better. These conditions support attractive valuations and provide the ingredients for stronger M&A activity in 2014.”

Indeed, the mid-market was very active in Q4 (211 reported transactions under $250M) and accounted for 88% of activity. Cross-border M&A accounted for 47% of all announcements, and Canadian companies continued to be exceptionally active internationally: Canadian out-bound M&A in 2013 surpassed inbound M&A by 2.5:1, the highest level reported in the past decade.

Private equity’s role in a distressed shipping market

This legal update originally appeared in Norton Rose Fulbright’s April 2014 Shipping Newsletter – Legalseas. For more, please contact either Brad Berman or Brian Devine from our New York office. 

Private equity (PE) is an asset class consisting of equity investment in companies that are not publicly traded on a stock exchange. With the decline in industrial and consumer demand following the worldwide economic pullback beginning in 2008, the shipping industry, still working through oversupply six years later, is an obvious target.

For some ship owners, PE is hailed as the panacea for saving an otherwise distressed market that has suffered from a lack of bank finance – more fallout from the credit crunch.

In recent years, shipping indexes tested record lows, US bankruptcy filings by international shipping companies proliferated. Meanwhile, the still large newbuilding order book, which includes orders for ‘eco’ ships for the future, remains largely unfinanced. Against this gloomy backdrop, PE investors are brightening up the landscape. Increasingly, investors and ship owners are strategically aligning their respective interests and forming shipping private equity ventures (SPEVs).

The shipping industry needs alternative financing sources to fill the vacuum as the banks have pulled back. The current state of the shipping markets is attractive to PE investors, where investment in distressed industries is among the most common investment strategies.

While most industry experts would argue that the majority of PE firms considering shipping private investments have looked, smelled, poked and prodded – but only a limited number have committed. As familiarity grows, however, more are wading into shipping’s waters.

Recent PE investors have included W. L. Ross & Co., Blackstone Group LP, Apollo Global Management LLC and Greenbriar Equity Group LLC.

Clearly, PE investments require careful analysis and market understanding. While the economic terms of a transaction can be negotiated (capital contributions, length of investment period, termination procedures, etc.), PE firms have quickly recognized that the shipping markets clearly have their own nuances and issues. These include the following:


This arcane and sometimes antiquated terminology is but one of the factors that have frightened away PE interests (e.g. is a bareboat charter a net/net lease?)

Inherent risks

Shipping has its own risks, including dangerous cargoes, civil and criminal oil pollution liability and the public’s perception of corporate irresponsibility. Furthermore, there are inconsistencies among local, national and international regulatory regimes leading to compliance concerns.

Jurisdictional concerns

Shipping is an international business with movable assets. The ship, it’s owner, lender and insurer are often in different countries and subject to the laws of numerous jurisdictions.

Oversight of management

PE oversight can be difficult, even if formal agreements are in place. Commonly, the technical operation and commercial management of the new entity’s assets are controlled by the minority partner, the ship owner. In addition, it is common for the SPEV to indemnify the ship owner for any actions taken on its behalf without liability other than losses resulting from the manager’s gross negligence, wilful misconduct or fraud. Also, potential conflicts of interest may arise between the ship owner’s existing operations and the SPEV’s business. The SPEV’s corporate documents should outline each investor’s ability to manage and control the investment as reflected in the structure of the governing body (including numbers of representatives, and their powers and classification for voting and operating purposes). However, agreements will need provisions regarding conflicts due to potential vessel acquisitions or chartering opportunities between the SPEV, the ship owner and their clients, counterparties and staff.

Tax issues

The SPEV, the ship owner and the PE interests each will have different investors and hence different tax concerns. For investors located in the US, additional tax considerations need evaluation.


Key to any PE investment is the means of repayment. In a shipping venture, repayment will primarily consist of income from charter hire, and hopefully, asset appreciation in connection with future asset sales. A bareboat charter is the best means of establishing a payment stream to repay the PE investor. In the case of time and voyage charters, the SPEV’s net income can be dramatically affected by maintenance/repair responsibilities and operational costs.

Exit strategy

A long term investment for PE has a 5 to 7 year time horizon. By shipping standards, this can be a short and difficult period to plan and control an exit strategy in a fragmented market largely controlled by small private companies. Restrictions on transferability of assets, including rights of first refusal, as well as voting restrictions need to be agreed at the creation of the SPEV. However, the failure to plan against transfers to unwanted third parties (such as competing ship owners or other PE investors) can have dire consequences. A sale of assets or equity in the company, merger or an initial public offering, all of which can be effective exit strategies, also require advance planning. However, in the case of the IPO concerns related to the SEC registration of advisers to PE funds, or requirements to disclose preferential terms or arrangements offered to select investors (in the interest of transparency and protecting rights of co-investors) can have unwanted ramifications.

The sometimes competing interests of the PE investor and ship owner partners, and shipping’s complex jurisdictional and tax issues, all necessitate careful planning. It has taken careful study for PE to address concerns regarding criminal liability for oil pollution, international trade sanctions, and even piracy. Nevertheless, the movement of PE investors into the maritime sector is a significant development in maritime finance.

Canada’s Competition Bureau requires divestitures and limits on supplier contracts in clearing Loblaw-Shoppers merger

This blog post was written by Bradley Schneider, an Associate in Norton Rose Fulbright’s Calgary office.

Approximately eight months after the announcement of Loblaw Companies Limited’s proposed acquisition of Shoppers Drug Mart Corporation, the Competition Bureau (Bureau) concluded its review and reached a consent agreement with Loblaw to resolve certain concerns over the potential anti-competitive effect of the transaction.

According to the Bureau, the consent agreement will “preserve competition in the retail sale of pharmacy products and drugstore-type merchandise in Canada by requiring divestitures in 27 local markets and prohibiting Loblaw from engaging in specific conduct with suppliers.” While store divestitures are not uncommon in retail mergers, it is noteworthy the Bureau imposed restrictions on the parties’ contracting practices going forward in an effort to address the transaction’s impact on suppliers.


On July 14, 2013, Loblaw and Shoppers entered into an agreement pursuant to which Loblaw proposed to acquire all of the outstanding common shares of Shoppers for a total purchase price of $12.4 billion. The combination of Loblaw (the country’s largest food retailer) with Shoppers (the country’s largest drugstore retailer) would have resulted in a retailer with approximately 2,738 stores and 1,824 pharmacies across Canada.

The Bureau’s analysis

In its review of the transaction, the Bureau focused on assessing (1) the potential for Loblaw to exercise market power in its retail operations that could lead to substantially higher prices for consumers; and (2) the impact of Loblaw’s market power with suppliers on competition and consumers.

Effects of the merger on consumers

In what the Bureau referred to as its “downstream investigation,” it analyzed whether the acquisition of Shoppers would likely create, maintain or enhance Loblaw’s market power by enabling it to sustain materially higher prices than those that would exist without the merger.

The first step in this analysis involved identifying the overlapping product categories of the two companies. The Bureau noted that both Loblaw and Shoppers sell prescription drugs, over-the-counter medications and behind-the-counter medications (collectively, the Pharmacy Products), as well as health and beauty aids and drugstore-type foods and cosmetics (collectively, the Drugstore-Type Merchandise).

The second stage of the downstream investigation involved defining the market in which Loblaw and Shoppers compete.

Based on extensive analysis, which included using geomatics software, interviewing market participants, consulting industry experts and examining the parties’ internal documents, the Bureau concluded that consumers choose to fill their prescriptions or shop for Drugstore-Type Merchandise based on a number of factors, including convenience, the proximity of a store to their home, and the location of doctors and medical services.  Accordingly, the Bureau held that the relevant geographic market for the retail sale of Pharmacy Products and Drugstore-Type Merchandise (collectively, the Overlapping Products) is local.

Local markets—a key consideration

Next, for each local market where the Overlapping Products are sold, the Bureau examined concentration levels using sales data from the parties and many of their major competitors. In addition, the Bureau looked at the extent and nature of effective remaining competition in each local market of concern, which was a key consideration in its analysis.

Based on the above analysis, the Bureau estimated the potential competitive effects resulting from the merger in each local market where the Overlapping Products are sold and, consequently, identified those markets of greatest concern. The Bureau concluded the proposed merger would result in a substantial lessening of competition in 27 local markets for the retail sale of the Overlapping Products. The Bureau also found that entry into these markets by new competitors would not be likely, timely or sufficient to counteract the merger’s anti-competitive effects.

As a result, the Bureau entered into a consent agreement with Loblaw pursuant to which Loblaw agreed to sell nine  of the pharmacies within its stores to independent operators and 18 of its stand-alone stores to third parties.

Effects of the merger on suppliers

Following the merger, Loblaw will be the largest purchaser in Canada for many of the Overlapping Products. Accordingly, the Bureau’s review in this respect focused on the market power held by Loblaw with its suppliers post-merger and the resulting impact on competition.

In analyzing the competitive effects of the merger on suppliers, the Bureau interviewed numerous Loblaw and Shoppers suppliers, competing retailers, buying groups and industry associations. It also reviewed Loblaw’s internal documentation with respect to its relationship and interactions with suppliers and obtained advice from economic and industry experts. In the end, the Bureau concluded that Loblaw could exercise market power, and in certain cases would have increased market power, in its dealings with suppliers after the merger.

Compensation for pre-determined profit margins

In its review, the Bureau identified certain agreements Loblaw has in place with suppliers that caused competition concerns in the context of the merger. In particular, the Bureau noted that certain agreements require suppliers to compensate Loblaw for a pre-determined profit margin, where the compensation is calculated using a prescribed method and referenced the advertised prices of competing retailers. The Bureau concluded that if these agreements were extended to product purchases for Shoppers’ stores, a substantial lessening or prevention of competition would likely result that would lead to higher wholesale prices charged to the suppliers’ other retailers and, in some circumstances, higher retail prices for consumers.

Based on the above conclusion, the Bureau required Loblaw to agree to certain behavioural restrictions in the consent agreement.

Specifically, the Bureau prohibited Loblaw from entering into agreements similar to the above with suppliers for Shoppers’ stores for a period of five years from the closing of the proposed transaction. The consent agreement further restricted Loblaw, for five years, from seeking financial compensation from suppliers if the retail price of a product advertised in a competing retailer’s flyer is lower than the price of the same product in a Loblaw flyer at the same time.  Finally, Loblaw committed, for two years from closing, not to charge penalties related to short deliveries, not to charge new supply chain penalties and fees to suppliers that supply less than $4 million of products to Loblaw and not to require a reduction in the current cost of products from such small suppliers.

Recent press reports have noted the intensified competitive landscape in Canada’s grocery industry, and the pressure being felt by suppliers as retailers seek to maintain margins despite offering lower retail prices. Certain grocery suppliers have turned to using minimum advertised pricing programs as a means to preserve their brand equity when faced with retailer discounting (additional details can be found in our recent article, Canadian food fight: producers combatting grocery discounts with minimum advertised pricing plans).

It is against this backdrop that the Bureau recently issued draft Price Maintenance Guidelines that explore when companies can engage in price maintenance behaviour, such as instituting a minimum advertised pricing program. It also explains why the Bureau stated in its press release announcing the Loblaw settlement that its Civil Matters Branch will continue to investigate Loblaw policies, agreements and conduct related to pricing programs with suppliers that reference rivals’ prices.

Raising capital for your deal? Changes might be coming

The Ontario Securities Commissions (the OSC) has recently published proposals which, if enacted, will facilitate the raising of capital by issuers in the exempt market.

On March 20th, the OSC published for a 90-day comment period the following four proposed prospectus exemptions:

  • Offering Memorandum Exemption – Offering memorandum exemptions are currently available elsewhere in Canada. Under this proposed exemption, an issuer will be able to raise money from  investors who are provided with an offering memorandum in prescribed form. While there is no limit on the size of the offering, the number of offerings an issuer can make or the length of time an offering can remain open, there are proposed limits on the amount each investor can invest: a cap of $10,000 per calendar year for individual non-eligible investors; and a cap of $30,000 per calendar year for individual eligible investors who are not accredited investors. Complex or novel securities cannot be offered under this exemption and post offering disclosure obligations apply.
  • Family, Friends and Business Associate Exemption – This exemption would allow start-ups and SMEs to gain greater access to capital from individuals in their social networks. This exemption is proposed to apply to issuers as well as selling security holders. Only prescribed securities which are not novel or complex may be distributed under this exemption. There is no proposed limit on the size of the offering and there are no proposed limits on investment by individual investors. Similar exemptions currently exist in other Canadian jurisdictions.
  • Existing Security Holder Exemption – This exemption, which is based on an existing exemption adopted by other Canadian securities regulators, is available to reporting issuers on the TSX, TSX-V or the Canadian Securities Exchange. Only classes of equity securities already listed by the issuer on the exchange may be distributed in reliance on this exemption. An issuer cannot use this exemption to increase the outstanding securities in a class by more than 100%. Investors must represent in writing that they held the type of listed security under the exemption as of the record date and continue to hold such securities. In a twelve month period, an investor cannot invest more than $15,000 under this exemption unless investment advice regarding suitability has been obtained. If the purchaser is a resident in a Canadian jurisdiction, this advice must be obtained from a registered investment dealer within the jurisdiction in which the purchaser resides.
  • Crowd Funding Exemption – This exemption will allow issuers to raise capital through crowd funding portals. Issuers must be incorporated, have their head office and have a majority of directors resident in Canada. Limited types of securities can be offered under this proposed exemption, issuers cannot raise more than $1.5 million in a twelve month period and an offering can only remain open for 90 days. An offering document must be given disclosing the minimum offering size and maximum offering size (if applicable). Under this proposed exemption, an offering cannot be completed unless the minimum offering is fully subscribed and the issuer has the financial resources, upon completion of the offering, to achieve the next milestone in its written business plan or carry out the activities set out in the plan. Limits on investment for individual investors apply: a single investment under the exemption cannot exceed $2,500; and an individual cannot invest more than $10,000 under the exemption in a calendar year. In addition, investments under this proposed exemption must be made through a registered funding portal.

The OSC has worked with securities administrators in Manitoba, New Brunswick, Quebec, Saskatchewan and Nova Scotia in formulating the Crowd Funding Exemption.

With the exception of the Existing Security Holder Exemption, the signing of a risk acknowledgement form by most investors is a requirement for use of the proposed exemptions.

The author wishes to thank Kaitlind de Jong, articling student, for her valuable assistance in preparing this legal update.

Resurgence of M&A activity in the energy sector

On Monday, Whitecap Resources (TSX:WCP) announced that it had agreed to buy a number of oil and gas properties from Imperial Oil Ltd. (TSX:IMO) for $855 million.  This transaction comes on the heels of renewed M&A activity in the energy sector. According to the Globe and Mail, this deal “pushes the industry’s tally for merger and acquisition activity for the quarter to $7-billion, nearly 10 times the total for the first three months of 2013”.

There are a number of reasons for this turnaround, including a rebound in Canadian energy prices. This is in part due to the fact that the discounts that had been previously applied to oil prices, on account of oil transportation bottlenecks, have narrowed as companies have begun to rely more heavily on rail as well as new pipeline capacity that has been created.

The upsurge in M&A activity is also due to a rise in investor confidence. This is evident by the fact that many of the recently announced energy sector acquisitions are backed by successful equity financings.  In the Globe and Mail article, Ryan Ferguson Young, manager, corporate advisory at Sayer Energy Advisors notes, “[t]here is way more positive investor sentiment in the industry, so more capital is being thrown to the industry – it’s definitely improved commodity prices and the general perception that the industry is on a rebound.” Whitecap, for instance, issued $500 million in subscription receipts to help fund the acquisition. It’s this seemingly newfound access to capital that, according to Mason Granger, an oil and gas fund manager with Toronto-based Sentry Investments, fast-tracked M&A activity in the energy sector: “Going back to 2011, 2012 and the first half of 2013, that was a pretty tough time for energy stocks. But we saw signs of life at the end of last year, and financing activity picked up markedly in the second half of 2013, which I viewed as an important precursor of M&A (merger and acquisition) activity this year.”

After a lacklustre 2013, the energy sector’s boost in M&A activity in 2014 has left those in the oilpatch hopeful for sustainable growth. It is also welcome news for companies in other sectors, as there are consistent views that the energy sector will be the driver behind increased M&A growth in other markets.

Mining M&A: deal activity expected to pick-up in a buyers’ market

The Prospectors and Developers Association of Canada wrapped up their annual conference in Toronto last week, and Bay Street appears to be abuzz with optimism that mining M&A is finally going to make a comeback. This is welcome news, as 2013 marked the lowest levels of M&A activity the mining sector has seen in years: $12 billion worth of deals were concluded in 2013; $6 billion less than 2012 saw and well off the mark of 2007, which saw $103 billion worth of deals completed.

So, how exactly is 2014 shaping up? Alisha Hiyate, in her recent article in Mining Markets, and Rachelle Younglai, in her recent article in the Globe and Mail, have offered some interesting insight and predictions for the year ahead.

Rumours have been circulating since Q4 in 2013 that after the dust settled from a tumultuous 2012 and 2013, sooner or later, certain companies may be in a position to sell, and sooner or later, certain companies would be ready to buy. Many predict that we’ve now reached that point, and the result will be the advent of a buyers-market. This means we can anticipate a lot more acquisition activity as we move forward in 2014. Expect the targets to be smaller companies with viable properties in need of a capital injection to optimize their operations and achieve their business plan. Expect the buyers to be companies that were able to regroup in 2013 and have spent the early part of 2014 building up their balance sheets.

However, even with a rise in acquisition activity, shareholders of mining companies should not necessarily hold their breath waiting for a big payout from an acquisition. Not all target mining companies and their shareholders are guaranteed to receive the hefty premiums from potential buyers that would have previously been the status quo. While modest premiums are likely still attainable, more companies are likely to see hostile or compelled bids reaching the table, which may further serve to limit any premiums.

The number of hostile bids are expected to go up in 2014. Low valuations of mining companies, which could serve to end most deal discussions long before they are even presented to shareholders, may lead to an increased number of hostile rather than friendly bids. Acquiring companies can use the hostile bids to ensure their proposals are considered, and in turn, involve the market in determining the value of any potential deal.

2014 may also see a growing number of “compelled” transactions. Large investors with significant holdings that want to reduce their exposure to the risks of mining may pressure a company’s management into striking a deal with an acquiring company. When that acquisition transaction takes place, such investors would be presented with a clear exist strategy and could therefore significantly reduce, or divest completely, their holdings in the target mining company.

Finally, 2014 may see an increased amount of “distressed” M&A in the mining sector. Many mining companies took to alternative financing strategies to make it through 2012/2013. This included engaging in high-yield debt, convertible debt, and royalty and streaming deals. Some of these financing strategies, when combined with low commodity prices, may have left companies in increasingly vulnerable positions. Their vulnerability is further compounded by many of the debt-like covenants of the alternative financing agreements. Such covenants are increasingly likely to be breached as project costs rise and commodity prices drop. Companies in breach could wind up in the hands of creditors and in turn the subject of a restructuring. Similarly, companies who entered streaming or royalty deals may look to sell off certain properties. The result in both cases will present opportunities for potential buyers to step in.

The bottom line: M&A in the mining sector will likely make a comeback in 2014. However, while things are arguably improving from last year, we should not hold out and expect the deal space to return to the way it was in its 2007 hay-day. Instead, we should watch out for acquisitions that favour the buyer and deals that take place out of necessity: in the form of hostile, compelled and distressed M&A transactions.