Friends, consumers, stakeholders: lend me your ears

The importance of a clear and well executed public relations strategy can sometimes be overlooked when a corporation is in the middle of negotiating a merger or acquisition. However, involving your PR team early on in the transaction can pay off in the long run. In a study done by City University London’s Cass Business School, researchers found that the chances of closing a deal successfully can be increased by having a PR team involved during the early stages of deal rather than waiting until the ink is dry and an announcement of a successful merger has to be made. The study found that when the parties to a proposed transactions publicly announced an offer, the transaction closed successfully 84% of the time, compared to just 50% for deals in which the parties failed to make a public announcement and instead merely responded to press inquiries once news of the deal leaked. During acquisitions, when CEOs of both the target and the acquirer made public statements regarding the deal, the success rate of the transaction was as high as 91%, compared to just 67% where public announcements were made without direct quotes from the CEOs of the companies involved.

The importance of a well thought-out public relations strategy can go beyond just getting the deal closed. Increasingly consumers are paying attention to combinations of large corporations and how such mergers or acquisitions may affect them in their day-to-day lives. In the past, consumers have been mobilized by corporations opposing a proposed merger between competitors by taking out advertisements and using social media campaigns that claimed the proposed transaction would lead to higher service fees or less choice for consumers. Such campaigns have led to consumers protesting such mergers and writing to regulatory bodies in opposition of the proposed deal. Starting a public relations campaign early that shows the benefits of a proposed transaction can prevent such anti-merger campaigns from taking hold and creating regulatory and PR problems down the road.

The author would like to thank Olga Lenova, Articling Student, for her assistance in preparing this legal update.

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Canadian M&A activity: mixed results for Q3 2017

As the Globe and Mail reports, Thomson Reuters has recently released figures for Canadian mergers and acquisitions in the third quarter of 2017.

The figures show that while the volume of deals involving Canadian companies in the third quarter was higher than a year ago, the total value of those deals declined. 672 mergers or acquisitions were announced in the third quarter in 2017, while 605 mergers or acquisitions were announced in the third quarter a year ago. This 11% increase in the total number of deals is tempered by the fact that the value of deals fell from $105.3 billion (U.S.) in 2016 to $37.8 billion in 2017.

The decline in deal value can, in part, be explained by the disproportionate effect of the $43.1 billion takeover of Spectra Energy Corp by Enbridge Inc. in the third quarter of 2016. The Globe further explains that while on the one hand a surging loonie translates into more currency in the pockets of buyers, the increase in purchasing power may be moderated by uncertainty surrounding the North American free-trade agreement, tax reform and high valuations.

Nonetheless, the M&A market and Canada’s economy overall remain fundamentally strong. The Globe notes that the slow-down has had a knock-on effect in the equity markets, which are closely tied to merger activity. Fewer public offerings have been required to raise money for deals. Nonetheless, indicators suggest that the IPO market, which came out of the gates flying in January, is set to end the year on a high note. The Report points to the recent Roots Corp. filing to raise $200 million (CAD), as well as multiple new IPOs in the offing in the metals and mining sector, as indicators that the IPO market could be in for a busy fourth quarter to end the year with a bang.

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

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Regulators take aim at cryptocurrencies

The emergence of cryptocurrencies and blockchain technology over the past several years has shaken up the financial services sector in unprecedented fashion, in a corner of the Canadian economy that has been notoriously slow to adopt and adapt to innovative change. This phenomenon has the potential to significantly re-shape many aspects of the modern economy. We have reported on this blog in the past (see here and here) on the evolution of blockchain and cryptocurrency and what it could mean for M&A activity in Canada. It looks like that impact could ramp up in the coming months.

At the end of August, the Canadian Securities Administrators (CSA) signaled that regulation could be on the way for virtual currencies and other technology that approximates “securities” for the purposes of provincial securities laws.

In a Staff Notice released by the CSA regarding cryptocurrency offerings, the group of provincial regulators announced the following:

With the offerings that we have reviewed to date, we have in many instances found that the coins/tokens in question constitute securities for the purposes of securities laws, including because they are investment contracts.

While questions will remain surrounding the lack of clarity on the form and substance of oversight, as it relates to cryptocurrencies, what appears certain is that increased scrutiny for cryptocurrencies through regulation is around the corner.

The author would like to thank Peter Valente, Articling Student, for his assistance in preparing this legal update.

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A growing appetite for food and beverage companies

After a year since we first reported that acquisitions of natural and organic food manufacturers had increased demonstrably, the trend has not wavered. Companies in the food and beverage industry that are branded with a view to promoting health and wellness have garnered an increasing amount of attention. This attention in recent years has not always been the case. This is evidenced by looking at the revenue a food start-up would have had to earn before becoming attractive to a larger acquiring company years ago, compared to nowadays. Roughly 5 to 10 years ago, a food start-up that was branded as a health and wellness company had to earn roughly $75 million in revenue before a company wished to acquire it. Conversely, companies are now interested in a health and wellness food start-up even if it makes $10 to $20 million.

Increased deal activity in food and beverage sector

Food companies geared towards health and wellness are not the only ones in the food and beverage industry to have increased in deal activity. As previously discussed, the “indulgence” category and particularly “super-premium” products have become more attractive to acquirers. “Super-premium” products, such as craft beer, have grown in demand whereas demand for the counterparts, such as commercial beer, have decreased.

However, growth in mergers and acquisitions (M&A) activity is not unique to the above-mentioned categories in the food and beverage industry. Growth in the number of deals has occurred in the entire industry as a whole. What’s more is that the industry is expected to become even busier. It was predicted that 2017 would be very successful year for M&A in the food and beverage industry. An example of the growth in M&A activity in the food and beverage industry is the number of completed transactions during Q2 2017. The 77 completed transactions that occurred in Q2 2017 is a 40% growth from Q2 2016.

Growth expected to continue

It has been predicted that the food and beverage industry growth seen so far will continue for the duration of 2017. The announcement that Dole Food has asked Morgan Stanley and Deutsche Bank to receive potential offers for the sale of the company further fuels this prediction. Dole Food has already received a number of bids during the first round.

Rationale for boom in food M&A

One potential reason for the boom in M&A activity in the food and beverage industry is the aging population in Canada that are looking to sell their businesses. Another reason offered is that consumption tendencies are changing, which in turn is prompting companies to diversify their products.

Reasoning aside, it is evident that food and beverage companies have become more attractive to acquire. It is yet to be seen whether the upward trend of food company acquisitions will continue.

The author would like to thank Monica Wong, Articling Student, for her assistance in preparing this legal update.

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Like fine wine, does M&A activity get better with age?

Canada’s population is aging quite rapidly. Statistics Canada reported that in 2016, the proportion of seniors representing the total Canadian population surpassed that of children. Furthermore, since 2011, there has been a rapid increase in the number of Canadians over 65 years of age and leaving the workforce. As explored in a previous blog post, such demographic changes and trends are rather intimately related to merger and acquisition (M&A) activity. In particular, as more and more Canadians reach ages 65 and older, a greater proportion of retiring business owners will consider selling their businesses.

Demographic changes fuel food & beverages M&A

The food and beverage industry is anticipated to especially experience a burst of M&A activity due to the above-mentioned demographic changes. In fact, Deloitte predicted that 2017 would be a “banner year for food and beverage M&A deals” and partly attributed this prediction to the retirement of aging business owners. More specifically, with robust business valuations, retiring business owners in this industry may be more inclined to sell their businesses and plan for retirement.

Consumption patterns require product diversification

Another, demography-related factor that could potentially lead to increased M&A activity in the food and beverage industry is the different consumption patterns and changing tastes of different age groups. This is particularly the case with respect to the wine industry. For example, in the United States, consultants and researchers have found that millennials are less “brand loyal” than baby boomers, with the latter generation exhibiting decreasing wine consumption altogether. Similarly, to the extent that millennials and baby boomers have divergent nutritional requirements, there may be new-found demand for different foods and beverages. In order to accommodate such changes and maintain their relevance in the marketplace, businesses will likely have to diversify their products and services and innovate.

Product innovation versus business acquisitions

M&A equips businesses with the agility to effectively respond to these trends. Specifically, according to Deloitte, businesses may achieve this product diversification “by acquiring smaller businesses and proven brands and pursuing deals that open up new categories and geographies”. Such an approach presumably affords the acquiring companies the benefit of the goodwill of the businesses being acquired. Similarly, rather than innovating directly by developing and introducing new products themselves, some businesses are increasingly innovating indirectly by acquiring smaller, yet “trendy” companies.

As Canadian demographics continue to change, it will be interesting to see how companies respond and if such changes will in fact encourage M&A activity in food and beverages and if so, to what extent. Additionally, it is worth noting that while the above discussion focuses on the food and beverage industry, it is quite manifest that changing demographics may affect a variety of other industries and businesses, which will have to respond similarly and perhaps draw upon M&A as a vehicle for doing so.

The author would like to thank Samantha Sarkozi, Articling Student, for her assistance in preparing this legal update.

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IP representations and warranties in tech M&A

When negotiating an M&A deal involving a technology company, parties need to pay particular importance to the representations and warranties regarding the target company’s intellectual property (IP). In a recent Forbes article, “18 Key Issues in Negotiating Merger and Acquisition Agreements for Technology Companies”, Richard Harroch addressed some of the standard issues that come with every deal, such as specific provisions regarding consideration, escrow and holdback periods and representations and warranties regarding financial position of the target company, but also highlighted the importance of careful negotiations relating to the IP of the target company. To facilitate a smooth negotiation period, sellers should familiarize themselves with both the types of clauses buyers typically request, and buyers’ rationale for wanting those clauses in a purchase agreement.

Representations and warranties related to IP

Buyers will want to confirm that the seller is the sole and exclusive owner of the intellectual property it is selling and that the IP is not limited or subject to any encumbrances. The buyer will also want to ensure that the seller has the appropriate licenses for any third party IP and that the seller is not subject to any pending or threatened legal proceedings challenging its intellectual property rights.

Examples of matters that may limit a buyer’s ability to exploit any IP it acquires include:

  • claims by third parties that patents are invalid or infringe on their patent rights;
  • liens on the intellectual property;
  • invalid evidence that contractors or third parties have assigned their rights to any property they helped create;
  • rights of first refusal or exclusivity in favour of third parties;
  • failure to obtain consents of third parties;
  • failure to properly register the IP; and
  • open source issues where the IP is in the public domain.

Sellers will want to consider limiting their exposure to post-closing claims by inserting qualifiers into their representations and warranties, such as limiting their liability to issues that they knew or ought to have known about.

Representations and warranties related to IP infringement

Buyers typically want a warranty that the seller’s business does not infringe, misappropriate or violate any other party’s IP rights and that no other party is infringing the seller’s rights. They will also want a warranty that there is no litigation or claims pending or threatened that may happen post-closing.

Buyers typically prefer to lengthen the period in which they may bring claims against the seller post-closing relating to breaches of warranties relating to IP because, in their view, the acquisition of a technology company is substantially an acquisition of the company’s IP. Sellers should try to limit the scope of these representations and warranties by including materiality qualifiers and knowledge qualifiers, by limiting representations to infringement on issued patents rather than all other IP rights, and by eliminating any ambiguous representations, such as a buyer wanting the seller to warranty that no third party is “diluting” the seller’s IP.

Sellers should also be aware of the possibility that there are third parties who may be unhappy with the seller’s potential merger or acquisition, and should take steps to protect themselves and their IP rights. For example, there have been  instances where third parties have commenced legal action after a deal is announced in an effort to force the seller’s hand to settle a claim (i.e., the thinking is that a seller may be more inclined to settle a claim knowing that any pending litigation regarding its IP could potentially cause a deal to fall apart).

The author would like to thank Olga Lenova, Articling Student, for her assistance in preparing this legal update.

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Trends and opportunities in InsureTech M&A

Insurance companies have increasingly looked at technological innovation as both an opportunity to increase profit margins, and as a potential disruptive force in the industry, with some insurance executives estimating that one third of their operations may be lost to FinTech. On-demand insurance that allows a consumer to purchase insurance on an as-needed basis has started to enter the marketplace. Despite market disruptions, there are a lot of opportunities for traditional insurance providers to take advantage of technological advancements

In today’s data driven world, insurance companies can use data analysis to improve operational efficiency. There is also an opportunity for insurance companies to integrate the use of wearable fitness devices or fitness apps into their policies to better predict the health of the insured individual and increase sales opportunities. In the United States, the Food and Drug Administration reported that by 2018, approximately 1.7 billion smartphone users around the world will be using a medical mobile app. This creates increasing opportunities for insurance companies to connect with customers and improve insurance premium calculations using health data collected by the mobile app.

Market trends in 2017

In the 2016 PwC report Opportunities Await: How InsurTech is Reshaping Insurance, 43% of insurance industry participants claimed that FinTech is central to their corporate strategies, however, less than 30% looked at partnerships with FinTech companies. Despite the reluctance of industry participants, 2016 saw a global investment and M&A deal volume totalling $12.1 billion, according to KPMG’s  report, The Pulse of Fintech Q2 2017. While in 2017, there has been a decline in deal value, industry trends, such as consolidation, has seen the number of deals keep pace with 2016. Even though deal value has been much lower in 2017 so far, KPMG expects larger value deals in the coming year, as InsureTech start-up companies begin to mature. So far, there have been with 155 deals closed this year, with a combined value of $2 billion.

There has also been an increasing trend of business-to-business InsureTech providers, with many early-stage companies moving away from focusing on end consumers. Instead, many start-ups are looking to create a partnership with existing market participants, allowing traditional insurance companies to improve their digital capabilities. Artificial intelligence is also becoming an increasing presence in traditional insurance companies. In January of 2017, a Japanese insurance firm replaced over 30 of their workers with artificial intelligence technology, allowing the insurance company to dramatically decrease the time needed to calculate payouts by automating data analytics. Investment and acquisition of artificial intelligence technology is likely to increase in the coming years as insurance companies move towards automation of insurance claims procedures.

The author would like to thank Olga Lenova, Articling Student, for her assistance in preparing this legal update.

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Cross border M&A in 2017

Following the surge of mergers and acquisitions in the final quarter of 2016, many attempted to predict whether 2017 would follow suit. For instance, the Financial Times anticipated that the increase in mergers and acquisitions would carry into 2017. Similarly, JP Morgan forecasted that companies would adapt and cross-border deals would continue to surge, despite political changes and uncertainty, such as the Brexit referendum and the change in administration in the United States. In fact (and as predicted), the growth of cross-border transactions has been significant. Bloomberg Law reported that in 2017 thus far, there has been a total of 5,041 cross-border deals that have either been announced or proposed. These deals have been reported to be worth over $1.17 trillion in value. The latter amount already exceeds the total value of cross-border deals from 2008 to 2013. If this rate is maintained for the rest of the year, 2017 may be a record-breaking year for cross-border transactions. The record-breaking year was in 2007, which saw cross-border mergers and acquisitions worth a total of $2.24 trillion.

One of the reasons for this rise in number of mergers and acquisitions is the increased desire to diversify. Particularly, where there is domestic political uncertainty, companies are more inclined to look abroad. However, international deals also pose their own unique issues, which in turn requires companies to consider various factors. The Deal Room noted certain considerations to be cognizant of when dealing with cross-border parties. One consideration is how tax and antirust rules vary between the regions. The differences in laws will likely affect the value of the investment. In line with varying tax and antitrust laws are differing accounting practices between multiple jurisdictions. If the parties to a deal do not agree on the particular method to use, the value of the target company could be adversely affected. It was suggested that one possible way to mitigate some of the risks associated with conducting cross-border mergers and acquisitions would be to conduct due diligence well in advance of closing a deal.

Time will tell if this upward trend will continue and if, in fact, 2017 will in fact be a record-breaking year for cross-border deals.

The author would like to thank Monica Wong, Articling Student, for her assistance in preparing this legal update.

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Libor retirement and implications for contracts tied to it

The London Interbank Offered Rate (Libor), the interest rate benchmark used to calculate interest rates on short-term loans by many large banks, will be phased out after 2021 according to its regulator. The London based Financial Conduct Authority (FCA) recently announced that due to growing concerns regarding the long term sustainability of the benchmark, which prior to the financial crisis of 2008 was little-known to those outside of the finance world, a move in another direction was necessary. Libor use in recent years has declined due in part to the dwindling volume of unsecured lending among banks, which is largely transaction driven, and because of new regulations that encourage banks to seek longer term funding options.

When is Libor used?

Libor is calculated daily based on submissions by panel banks on the estimated rate at which they would be willing to lend to their counterparts. Libor is used to set rates on instruments such as mortgage loans, bank loans, floating-rate debt and interest rate derivatives. It also helps determine the value of certain transactions, along with acting as a general barometer of interbank confidence. Aside from allegations of Libor manipulation in recent years, one of the foremost drivers of the phase-out decision is that the value of transactions determined by Libor has been steadily decreasing.

While oversight of Libor has increased in recent years including a requirement that submissions by panel banks be based to the greatest extent possible on the actual value of transactions to ensure that it accurately represents market conditions, the Chief Executive of the FCA Andrew Bailey stated in a speech to Bloomberg London earlier this summer that transactional data has been increasingly difficult to realize because “the underlying market that Libor seeks to measure – the market for unsecured wholesale term lending to banks – is no longer sufficiently active”. Interbank lending among U.S. commercial banks is at its lowest levels since the 1970s.

The phase-out of Libor

Data gathering efforts on actual transaction value are ongoing, however recent data from central banks suggest that eligible term borrowing transactions are becoming few and far between – as a result, the underlying market for Libor has begun to evaporate as panel banks cease submitting their rates. The rationale for the phase out put forward by Mr. Bailey is that if there is not an active market for eligible transactions, how can Libor continue to measure it effectively?

Libor alternatives and moving forward

The alternatives to Libor remain in the balance, but there are several other benchmark rates anchored in arguably more robust markets that could be used after Libor. Perhaps more problematic is what will happen to parties with contracts tied to Libor after 2021. The answer to that question is unclear, but some commentators have suggested that Libor’s administrator and panel banks could continue to generate Libor rates notwithstanding the transition away from it. Others have suggested that contract parties could enter into agreements prior to Libor’s retirement to clarify the rates to be used going forward after the retirement of the benchmark. While it is unclear which approach will be adopted, transition planning for Libor contracts should begin now.

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Wait and CETA

We have previously reported on the progress of the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) on this blog (see here and here). While the implications and impact of CETA on both business and M&A activity in Canada remain uncertain, after protracted negotiations and a near decade-long process, CETA  is slated to come into force later this week, on September 21, 2017.

Background on CETA

CETA is a bilateral economic relationship that will impact most sectors and thereby affect both the Canadian and EU economies. In particular, CETA is a free trade agreement that eliminates or reduces trade barriers that cover most sectors and aspects of Canada-EU trade. Prior to the coming into force of CETA, approximately 25% of EU tariff lines on Canadian goods were duty-free. After full implementation, 99% of EU tariff lines on Canadian goods will be duty-free.

In the news

The Minister of International Trade recently released the following statement:

Canada is a trading nation, and Canadians know that our prosperity is linked to our connections with the global economy. The Greater Toronto Area is a region full of success stories about companies of all sizes and their ability to tap into the potential of exporting. Europe, Latin America and the Asia-Pacific provide new opportunities to expand our trade relationships and benefit Canadian workers and their families.

Implications for the Canadian economy

The effect of implementing CETA may have far-reaching, global effects. Some highlights include:

  • Opening the door to unprecedented access for the exportation of Canadian goods and services to the EU market;
  • Creation of new market opportunities through the leveraging of financial services and information systems and services;
  • Enhancing labour mobility;
  • Fewer regulatory hurdles which will streamline processing and movement of goods and services;
  • Increased inbound investment through lifting the government threshold of review of foreign investment by EU countries from $600 million to $1.5 billion thereby reducing hurdles for European investors to acquire Canadian companies; and
  • Opportunities for accelerated growth through acquisition and cross-border market activity.

The final text of CETA the can be found here.

Time will tell what knock-on effects the implementation of CETA will have on M&A activity in Canada, but what is certain is that after this week, Canadian business will have unprecedented preferential access to the world’s two largest economies – the US and the EU.

The author would like to thank Peter Valente, Articling Student, for his assistance in preparing this legal update.

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