Loonie tunes: will the low dollar attract foreign investors?


It is no secret that the Canadian dollar has been singing the blues of late. With the loonie declining more than 30% in the exchange rate against the United States (US) dollar, shopping trips and vacations to our friendly neighbour to the south are likely to become less frequent over the next little while. The Canadian M&A market, however, may stand to benefit from the lopsided exchange rate and it has left investors wondering whether Canadian targets can expect a line-up of interested foreign buyers.

A recent Financial Post article by John Shmuel, “Low loonie luring foreign buyers, but an M&A boom in Canada may prove elusive” (the Article), explores whether the down-and-out Canadian dollar may make for some healthy M&A activity in the first half of this year. The Article indicates that there certainly has been an increase in interest from foreign buyers, in particular from American strategic and mid-tier private equity firms. The object of their affections are reported as being primarily outside the resource space, with recent sizable deals announced in the home-improvement retail sector and the waste management sector.

The exchange rate isn’t the only enticing factor for foreign buyers: the Article points out that the Canadian stock market fell into bear territory last month and equity valuations are hovering near multi-year lows for many Canadian firms. The Article also indicates that it’s not only foreign buyers interested in capitalizing on the low dollar but that, according to a recent survey done by Ernst & Young, more Canadian firms are looking to sell non-core assets over the next two years than other companies around the world.

With interest evident on both sides, the question remains whether it will actually translate into deal activity here at home. The Article indicates that an offer for many of the attractive Canadian targets, with voting shares and being owner operated, would have to be sugary sweet for them to consider a buy-out. Additionally, there isn’t much interest humming around Canada’s struggling energy and mining sectors. The Article indicates that if deal activity doesn’t increase in those sectors, foreign private equity firms will likely only be sniffing around for assets of bankrupt companies.

The Canadian government may also play a role in stemming the flow of foreign acquisitions here as, according to the Article, many of the big named Canadian companies attractive to investors may be considered to be strategic assets for the government and not on the market. Further complicating the M&A landscape is that some economists expect that the Canadian dollar’s weakness is here to stay, meaning repatriated earnings from Canadian operations will be worth less for foreign buyers. With the convergence of these various factors, the M&A boom one might expect with a US dollar heavy-exchange rate may not materialize here in Canada just yet.

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Avoiding tax traps: don’t forget about non-competition agreements

Non-competition agreements can be a valuable tool for purchasers who want to protect their investments in new businesses. However, non-competition agreements can have unintended and unexpected tax consequences, particularly to sellers who grant non-competition agreements to purchasers.

The Income Tax Act (Canada) (the Act) contains specific provisions regarding the taxation of “restrictive covenants”, a broadly defined term that includes, among other things, non-competition agreements, regardless of whether such agreements are legally enforceable.

Under section 56.4 of the Act, the portion of the purchase price allocated to the granting of a restrictive covenant (whether by the parties or as a result of a deemed allocation, as discussed below) will generally be taxable to the seller as regular income, as opposed to a capital gain. This treatment is significantly less favourable for the seller because regular income is subject to tax at the seller’s normal tax rate, whereas only half of a capital gain is subject to tax.

However, the Act allows a seller that deals at arm’s length with the purchaser to avoid this unfavourable tax treatment with respect to the amount allocated (or deemed to be allocated) to non-competition agreements in certain circumstances, including:

  1. if the amount would, absent the restrictive covenant rules, be included in the calculation of “cumulative eligible capital” under the Act and the parties file a joint election; or
  2. if the amount is proceeds of disposition from the disposition of an “eligible interest” (as defined in the Act), the parties file a joint election, and a number of other specific conditions are met.

It is important to note that, subject to certain rules discussed below, the portion of the purchase price that can be reasonably regarded as payment for the restrictive covenant will be deemed to have been payment for the restrictive covenant. This will be the case even when the parties have allocated a portion of the purchase price to the restrictive covenant if the allocation chosen by the parties is not reasonable. This rule would result in any amount so deemed generally being treated as regular income to the seller.

The deeming rule will not apply with respect to non-competition agreements in certain circumstances, most notably where the parties deal at arm’s length and, among other things:

  1. the amount that can reasonably be considered consideration for the non-competition agreement is allocated to a “goodwill amount” (as defined in the Act) and the parties file a joint election in respect of the non-competition agreement; or
  2. no amount is allocated to the non-competition agreement and it is reasonable to conclude that the non-competition agreement is integral to an agreement in writing whereby the seller sells either property or shares to the purchaser.

If the deeming rule does not apply, no amount will be treated as regular income to the seller in respect of the non-competition agreement.

The rules regarding the taxation of restrictive covenants are complex. Parties wishing to use non-competition agreements in their transactions should ensure that they consider whether their non-competition agreements will result in additional tax being payable and whether any elections are necessary to prevent such treatment.

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Equity crowdfunding has arrived in Ontario

Crowdfunding has officially been launched in Ontario as of January 28, 2016, enabling Canadian businesses to raise capital at a low cost by reaching out to a large number of investors over the Internet. The new regime, available in Ontario, Québec, Manitoba, New Brunswick and Nova Scotia, is particularly attractive to start-ups and small and medium-sized enterprises in their early stages of development seeking access to sources of capital not otherwise available in the prospectus exempt market.  Up to $ 1.5 million in annual total proceeds can be raised under the new exemption.

Although crowdfunding has been available in British Columbia, Saskatchewan, Québec, Manitoba, New Brunswick and Nova Scotia since May 2015 by way of local blanket orders, the new regime differs in that it is available to non-reporting issuers and it provides for higher investment and capital raising limits. The new crowdfunding exemption is available to all Canadian companies, both private and public, issuing non-complex securities with the exception of blind pools and investment funds.  Any investor can buy securities under the exemption.

The new regime is regulated by Multilateral Instrument MI 45-108 Crowdfunding, which provides for investor protection by way of registered funding portals and limits on investment.

Limits on investment

Retail investors are limited to $2,500 per investment and are permitted to invest up to $10,000 in any given calendar year.  Accredited investors are limited to $25,000 per investment and are permitted to invest up to $50,000 in a calendar year.  There are no investment limits for “permitted clients”, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations and including banks, registered dealers, pension funds and governmental institutions.

Funding portals

Securities must be distributed via a single registered funding portal, which acts as a gatekeeper by reviewing the issuer’s disclosure and conducting background checks on the issuer and its directors, officers and promoters. Access to the portal may be denied in certain circumstances.

Businesses wishing to avail themselves of the exemption are required to provide a crowdfunding offering document to investors, setting out certain information about the distribution including a brief overview of the issuer, its management and its business. As with any offering document, issuers may be held liable for misrepresentations or untrue statements. Issuers must also provide their annual financial statements to investors as well as a notice of use of proceeds. Investors are required to complete and sign a risk acknowledgment form. The securities of a public company are subject to a 4-month holding period and, as is always the case in the exempt market, securities of non-public companies can only be resold under another prospectus exemption or under a prospectus.

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New merger review thresholds for Competition Act and Investment Canada Act

The threshold for certain pre-closing net benefit reviews under the Investment Canada Act (ICA) and the threshold for a pre-closing merger notification under the Competition Act have been increased for 2016.

Competition Act

Canada uses a two part test for determining whether a pre-merger notification is necessary. The two-part test is based on the size of the parties and the size of the transaction. The transaction size component can be adjusted annually for inflation. Under the size of the parties test, the parties, together with their affiliates, must have aggregate assets in Canada or annual gross revenues from sales in, from or into Canada, in excess of $400 million. Under the size of transaction test, the value of the assets in Canada or the annual gross revenue from sales (generated from those assets) in or from Canada of the target operating business and, if applicable, its subsidiaries, must be greater than $87 million. The 2015 transaction size threshold was $86 million.

These changes took effect on February 5, 2016.

Investment Canada Act

In general, any acquisition by a ‘non-Canadian’ of control of a ‘Canadian business’ is either notifiable or reviewable under the ICA. Whether an acquisition is notifiable or reviewable depends on the structure of the transaction and the value and nature of the Canadian business being acquired, namely whether the transaction is a direct or indirect acquisition of control of a Canadian business. With limited exceptions, the federal government must be satisfied that a reviewable transaction ‘is likely to be of net benefit to Canada’ before closing can proceed; notifiable transactions only require that the investor submit a report after closing.  Separate and apart from the net benefit review, the ICA also provides that any investment in a Canadian business by a non-Canadian can be subject to a national security review.

In April 2015, the metric used to calculate the review thresholds changed. Prior to April 24, 2015, the acquisition of control of a Canadian business by a non-Canadian was generally subject to pre-closing review and approval by the responsible Minister where the book value of the assets of the Canadian business exceeded a prescribed threshold ($369 million in 2015).  Lower thresholds ($5 million) existed for the acquisition of control of a business related to Canada’s national identity or cultural heritage, or where the buyer was not from a member of the WTO.

As of April 24, 2015, the threshold for the net benefit review will generally be based on the enterprise value of the Canadian business. The threshold will be $600 million for two years, followed by two years at $800 million, and then it will be $1 billion for a year, after which it will be adjusted annually for inflation.

Under the Canada-European Union Comprehensive Economic and Trade Agreement (CETA), Canada committed to significantly increase the threshold for review under the ICA to $1.5 billion for investors from members of the European Union in most industry sectors. Given most favoured nation clauses in other free trade agreements Canada has signed, many of Canada’s other trading partners are poised to benefit from this provision as well. Pursuant to the newly concluded Trans-Pacific Partnership (TPP), Canada also committed to increase the threshold for review under the ICA to $1.5 billion for investors who are nationals or are controlled by nationals of the TPP parties. As neither the CETA nor TPP have been ratified, these changes have not yet taken effect.

How enterprise value will be determined will depend on the nature of the transaction:

Publicly traded entity: acquisition of shares Market capitalization plus total liabilities (excluding operating liabilities), minus cash and cash equivalents
Not publicly traded entity: acquisition of shares Total acquisition value, plus total liabilities (excluding operating liabilities), minus cash and cash equivalents
Acquisition of assets Total acquisition value, plus assumed liabilities, minus cash and cash equivalents transferred to buyer

The enterprise value test will not apply to all transactions. The lower review thresholds remain for: (i) cultural industries; (ii) investors from non-WTO members; and (iii) SOEs. These investments will continue to be reviewable based on a book value of assets test using the current monetary thresholds which can be adjusted annually to account for changes in gross domestic product. Effective February 5, 2016, this threshold is now $375 million.

Please contact a member of our Antitrust, Competition and Regulatory team if you have any questions.

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ABA 2015 Canadian Public Target M&A Deal Points Study – Key Takeaways (Part 2)

As discussed in our post last week, the American Bar Association (ABA) recently came out with its 2015 Canadian Public Target M&A Deal Points Study (the Study), tracking variations in the common terms and conditions found across acquisition agreements regarding companies listed on Canadian exchanges. The Study draws upon 88 acquisition agreements for the acquisition of Canadian publicly-traded targets announced between the years of 2013 and 2014 (the Agreements).

Last week’s post summarized the Study’s key findings with respect to the target’s representations and warranties and conditions to closing. This week’s post will highlight key takeaways with respect to deal protection provisions and remedies.

1) Deal protection provisions

  • Fiduciary out: Generally speaking, a “fiduciary out” provision grants a target-board the right to solicit a superior proposal (Fiduciary Exception to No-Shop) or change its recommendation to accept an offer (Fiduciary Exception to Target-Board Recommendation Covenant), in the exercise of its fiduciary duties. The provisions, however, are inconsistent as to when exactly these “fiduciary-out” rights may be exercised. With respect to a Fiduciary Exception to No-Shop, 85% of the Agreements, (representing a 13% increase from the results of the ABA’s 2013 Canadian Public Target M&A Deal Points Study), allowed this right to be exercised in response to an acquisition proposal that is reasonably likely to result in a superior proposal, whereas 14% permitted this right to be exercised solely in response to an actual superior proposal. With respect to a Fiduciary Exception to Target-Board Recommendation Covenant, 82% of the Agreements, (representing a 27% increase from the results of the ABA’s 2013 Canadian Public Target M&A Deal Points Study), permitted this right to be exercised once the target-board has received both a superior proposal, and has in good faith determined that the exercise of the right is required to comply with its fiduciary duties, whereas 16% of the Agreements permitted this right to be exercised once the target-board has determined that the exercise of the right is required to comply with its fiduciary duties alone.
  • Break fee: A break fee represents a fee paid by the target to the buyer in the event it either backs out of a deal or terminates the agreement by way of a breach. The chart below highlights the situations in which a break fee is triggered and the percentage of deals that included such a trigger:


2) Remedies

  • Specific performance: Specific performance is an equitable remedy given upon a breach whereby the court requires, in contrast to the payment of damages, that a breaching party perform its contractual obligation. Out of the Agreements that included a remedy of specific performance, 74% of those Agreements provided that a party “shall be entitled” to a remedy of specific performance upon a breach, whereas 26% of the Agreements merely provided that a party “may seek” specific performance upon a breach. A remedy of specific performance, however, did not necessarily apply to all breaches. 36% of Agreements that included a remedy of specific performance provided that a party could either seek or be entitled to a remedy of specific performance only in the event of a breach for which a termination fee (meaning either a break fee or a reverse break-fee) is not payable by the innocent party.
  • Survival of representations, warranties and covenants: The Study found that 80% of the Agreements provided that the representations, warranties and covenants of the agreement survive termination. The standard, however, differed as to when a party will be held liable for breaching a representation, warranty or covenant following termination. Out of those Agreements that included surviving representations, warranties and covenants, 44% of those Agreements provided that liability was only triggered upon a “wilful, knowing, intentional or material” breach whereas 56% of those Agreements provided that liability was triggered upon a lower standard of “any” breach.

For more details please visit the Mergers and Acquisitions Market Trends Subcommittee webpage where a copy of the Study is available to all ABA members.

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

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The M&A market for venture capital-funded companies in 2016

As we enter into what has been proclaimed the ‘Fourth Industrial Revolution’ by the World Economic Forum, venture capital funded companies (VCFCs) continue to disrupt traditional markets, albeit under tightening investment activity. More recent data on this trend has been made available by KPMG International and CB Insights in their quarterly global report on venture capital (VC) investment trends, Venture Pulse Q4 2015. The report analyzes the latest global trends in VC investment and provides insights from both a global and regional perspective, also looking at investments in different industry sectors.

Highlights of VC investment trends in 2015


While overall investment in VCFCs hit a multi-year high in 2015, investors became more cautious with their investments late in Q3, which led to a significant decline in VC investment in Q4 as the total amount of investments in the sector decreased 30% from $38.7 billion in Q3 to $27.2 billion in Q4, with the total number of investments decreasing 13% over the same period.

Notably, VC investment in certain industries progressed despite the global downturn. While the financial technology (fintech) sector was not immune from the overall reduction in VC investment, investment in education technology VCFCs increased over 300% from $295 million in Q3 to over $1 billion in Q4.

North America (North American VCFCs)

In North America, VC investment reached a five year high in 2015; however, there was a significant decline in Q4 as the total amount of investments decreased 32% from $20.8 billion in Q3 to $14.1 billion in Q4, with the total number of investments declining by 16% over the same period.

Understanding the M&A market for VCFCs in 2016

The report connects the overall drop in investment activity to global investors’ pessimism and concern regarding (1) an uncertain global economy, (2) expected interest rate increases, (3) overheating in VC ecosystems and (4)  inflated price valuations for VCFCs as a thirst for innovation among mature companies is driving up the price of startups. Further, the report predicts that these trends and, therefore, investor caution is likely to continue into 2016.

As such, companies looking to merge or acquire VCFCs should be wary of these trends and should look to protect themselves from unfortunate results. Indeed, this is especially important in 2016 as the report predicts that the amount of VCFCs exiting via IPO and M&A are expected to rebound from the depressed numbers in 2015, based on the following theses:

  • investors may now be skeptical of keeping companies private over the longer term as they are not meeting private sector valuations; and
  • as VC investment has slowed, there already has been significant consolidation or merger activity among VCFCs.

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The auction process in M&A

In the context of M&A transactions, an auction is a process by which multiple buyers simultaneously bid to acquire a target. The term “controlled auction” refers to an auction where there is a carefully sequenced and monitored process involving a selected group of buyers. The main goal of a controlled auction is to realize the best possible price for the target and the most favourable transaction terms for the seller. Unlike in the United States, Canadian law does not require the board of directors of a seller to focus on maximizing shareholder value in a change of control transaction. Instead, Canadian law gives the board of directors of a seller the ability to consider a wider range of factors including taking into account the interests of creditors and employees.

One of the main focuses of an auction process is determining how broad or narrow the select group of buyers should be.  This is typically determined by the seller with the help of its financial advisors. A group of buyers could be limited to buyers picked for financial or strategic reasons. Once the group of buyers is selected, the seller will prepare a due diligence dataroom that includes certain confidential non-public information. Due to the sensitive nature of the information in the dataroom, potential buyers are required to enter into confidentiality agreements or non-disclosure agreements prior to being granted access to the due diligence dataroom. Within a specified time, buyers are asked to submit a non-binding proposal that contains basic terms for the proposed transaction, which typically include the purchase price, and a proposed timeframe for completing the transaction.  Once all of the proposals are received, the board of directors of the seller will review the proposals with its financial and legal advisors with the result that either a smaller subset of the selected  group of buyers are invited to submit revised proposal, or the seller proceeds to the next stage with a single selected buyer.

Generally, the next stage of the auction process may involve providing access to additional confidential information so that the potential buyers can complete their respective due diligence investigations of the target. In some auctions, it is at this stage, and to the seller’s advantage, that the seller would provide a draft of the definitive transaction agreement to the remaining buyers and request that the buyers provide any revisions by a specified time. If there is more than one buyer still in the auction process at this stage, once the revisions are received, the seller would consult with its financial and legal advisors and select the “final” buyer.  The selection would typically be based on a number of factors including the proposed purchase price, conditions to completion of the transaction, and other relevant transaction terms, all of which would be reflected in the buyer’s revisions to the draft definitive transaction agreement. Once selected, the “final” buyer, along with its financial and legal advisors, would finalize the definitive transaction agreement with the seller and its financial and legal advisors.

An auction process may be a good method for a seller to obtain a better price for a target and more favourable transaction terms.  However, an auction can be a lengthy and costly process, and it provides no guarantee of a sale of the target at the end of the process.   Under the right circumstances, an auction process may be the ideal method for obtain top dollar for a target.

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ABA 2015 Canadian Public Target M&A Deal Points Study – Key Takeaways (Part 1)

On January 14, 2016, the American Bar Association (ABA) published its 2015 Canadian Public Target M&A Deal Points Study. The study draws from 88 deals announced in 2013 and 2014 that targeted companies listed on Canadian exchanges. Since 2006, this publication and its companion piece on private target M&A have been released annually by the ABA’s Market Trends Subcommittee. (We wrote extensively about the ABA’s 2014 Canadian Private Target M&A Deal Points Study here and here.) Using strictly quantitative analysis, the study tracks variations in the common terms and conditions found across these transactions, which offers a unique look at M&A acquisition agreements ‘by the numbers’.

All the deals considered by the study had a transaction value of over $50 million, with the majority (55%) falling in the $100 million to $500 million range. Predictably, the main target industries were mining and natural resources (29%) and oil and gas (25%). Most of the buyers (66%) were also Canadian, and the vast majority (92%) were strategic buyers (with private equity deals carving out an 8% niche).

This two-part post will outline the report’s key takeaways in the areas of (1) the target’s representations and warranties, (2) conditions to closing, (3) deal protection, and (4) remedies.

1) Target’s representations and warranties

  • Compliance with law: In the majority of deals surveyed, the representation regarding the target’s compliance with law continues to incorporate buyer-friendly language. The vast majority of deals include a representation regarding the target’s compliance with all laws (with a majority of those representations including language to the effect that the target has not received any notice of violation). Of the agreements with a compliance representation, 69% place no time qualifier (“…is, and at all times has been, in compliance…”) on the target’s compliance with law representation, while 21% put date restrictions on the target’s compliance, and only 10% confine the representation to “current” compliance with law. Given this trend, any deviation from a broadly stated and inclusive representation about compliance would undoubtedly raise red flags in the mind of the buyer.
  • GAAP and presentation of financial statements: When the target represents that its financial statements “fairly present” the financial position of the company, only 23% of the acquisition agreements bolster this representation with an assurance that the financial results have all been prepared “in accordance with GAAP.” Of the 77% of deals that do not certify GAAP compliance in their “fairly presents” representation, 79% of this subset include the further qualification that the financial statements fairly present the state of the company “in all material respects.” The majority of acquisition agreements skew target-friendly on the question of the accuracy of the target’s financial statements. However, 93% of the acquisition agreements include a buyer-friendly representation by the target that it has accrued no hidden liabilities.

2) Conditions to closing

  • Accuracy of representations: When must the target’s representations be accurate? All of the deals surveyed had a “bring down” requirement whereby all of the target’s representations and warranties had to be accurate at closing. A further 35% of deals had the added condition that the target’s representations and warranties had to be true as of signing the agreement (and continuing to closing). How accurate do the target’s representations have to be? The majority of acquisition agreements include the target-friendly caveat that inaccuracies in the representations and warranties shall not affect closing unless they (either alone or in the aggregate) constitute a material adverse effect (MAE). Most MAE clauses feature a “double-materiality” carve-out that nullifies any individual MAE qualifications in individual representations. Generally, provisions regarding the timing and accuracy of the representations give the target far more leeway than the buyer.
  • The “walk right”: The “walk right” gives the buyer the ability to walk away from the transaction if there is an MAE in the business, financial condition or financial results of the target in between signing and closing. All of the agreements surveyed had such a walk right, and a further 28% of the deals included a walk right if the “prospects” of the company suffered an MAE
  • MAE carve-outs: The definition of MAE used for the aforementioned closing conditions usually features certain carve-outs (i.e., effects caused by certain events do not constitute an MAE and would not trigger, for example, a buyer’s walk right). 97% of the deals included a carve-out for changes affecting the general Canadian economy (with 91% including language about “disproportionate effects” on the target company). Similar figures (and similar “disproportionate effects” language) were found with respect to changes in the general industry in which the target operates. Other popular carve-outs include the announcement of the transaction, a change in law or accounting principles, and an act of war or terrorism.

Stay tuned for the second post in this series which we will publish next week, canvassing the ABA’s key findings regarding deal protection and remedies. A copy of the ABA study is available to ABA members on the Mergers and Acquisitions Market Trends Subcommittee webpage.

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

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M&A in China amid economic uncertainty

To the casual observer, the economic outlook in the Asia Pacific region, and China in particular, has been rosy for a long time, with international attention focused on fast-paced economic growth and emerging wealth in the region. However, the beginning of 2016 has proven to be difficult for Chinese government officials as they contend with tumultuous stock markets and newly released 2015 economic figures. As far as the outlook on M&A is concerned, Chinese companies’ overseas mergers and acquisitions were strong in 2015 and are expected to continue growing while spending on foreign M&A into China was down significantly in 2015.

In the first week of 2016, trading on the Shanghai and Shenzhen Stock Exchanges was abruptly stopped after the CSI 300 Index fell by 7%, triggering a newly imposed circuit-breaker mechanism. The effects of the stoppage were felt in markets around the world, adding to the rising uncertainty about the Chinese government’s ability to steer its economy through its growing pains.

Newly released figures show that China’s GDP grew by 6.9% and 6.8% per quarter in the last two quarters of 2015. While this is consistent with the government’s target of 7%, it is the first time we have seen growth fall below 7% since 2009. Continued focus on China’s slowing GDP growth, however, may be misplaced according to a recent report by MergerMarket. While the government has attempted to reign in unbridled growth, the Chinese economy continues to be highly leveraged. China’s total debt has increased more than fourfold over the last 7 years and today, its corporate debt represents nearly 125% of GDP, all of which has led to speculation of a potential credit bubble.

According to a recent article in the Financial Times, the slowdown in economic growth has been most visible in China’s lagging real estate and commodities markets, while the services sector (including healthcare, education, law, accounting and financial services) has been a driver of the growth we have been able to see.

Last year, Chinese companies increased their spending on overseas mergers and acquisitions by 85.8% over the previous year, representing an estimated $110.3 billion in 2015. During the same period, deals coming into China dropped by a third from the previous year, amounting to an estimated $10 billion. Commentators anticipate that outward M&A spending will continue to grow in the future as Chinese companies look for opportunities outside of China to invest their capital and seek out technology and innovation. Europe was the top region for Chinese foreign M&A in 2015, with significant focus being drawn to the energy, mining and utilities sectors.

The Chinese government will be releasing its new five year plan in March of this year which should shed insight on what economic policies the government intends to put in place to manage its growth and strategically position the economy in the coming years.

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

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New Year’s resolution: buying & selling smart

2015 was a huge year for global M&A with deal activity reaching $4.2 trillion by the middle of December.  If 2016 continues at the same pace, be prepared for a big year of M&A activity. In order to be well equipped for the upcoming year, ask yourself the following two questions when contemplating an M&A transaction.

Where are the key market opportunities?

According to the publication released by Raconteur entitled M&A Outlook 2016, on a global scale, five sectors are “blazing a trail”: financial services, telecommunications, pharmaceuticals, computer manufacturing, and oil and gas.

  • Financial Services – Consolidation is the new buzzword in the financial services sector.  Complex regulatory regimes  and the volatile economic environment has wealth managers, asset management firms, and lenders seeking opportunities to increase scale and growth as a long-term strategy.
  • Telecommunications – There is always competition to be the biggest and the best in the telecommunications sector.  M&A activity is driven by the increasing demands of consumers for greater convergence of services.  Joining forces is a smart strategic move in such a capital-intensive industry.  Similar to the financial services sector, consolidation, particularly in the European market, can be expected.   
  • Pharmaceuticals – In the pharmaceuticals industry, companies compete on the basis of scale, efficiency, new markets and innovations. The combination of Pfizer and Allergan, representing the biggest pharmaceutical deal throughout history, will likely trigger M&A activity in 2016.
  • Computer Manufacturing  Silicon Valley is ripe with deal activity.  The need to diversify and increase economies of scale is key in the computer manufacturing sector.  Steve Mollenkopf, CEO of Qualcomm, believes there will be tremendous growth in computing and resources dedicated to supporting the cloud.
  • Oil & Gas – The difficulties faced by the oil and gas industry are unparalleled.  Plunging oil prices has put pressure on companies to minimize costs leading to structural changes and M&A activity.  In 2015, transactions in the oil and gas sector focused on asset disposals but, if prices begin to stabilize, in 2016 oil and gas players may engage in larger transformational deals.

Is there an algorithm for valuing a business?

Advancements have been made to help buyers and sellers arrive at a single dollar figure but, according to Doug McPhee global head of valuation services at KPMG, “when it comes to judgment, even the most technically correct valuation is dependent on what a potential buyer would pay for a business in the current situation”.

Intangible assets such as a company’s brand are very difficult to quantify.  With that said, the International Organization for Standardization has established seven approved accounting techniques with the aim of standardizing brand valuations. Ideally, these methods would result in consistent valuations among leading algorithmic valuation services; however, this has not been the case.

Valuation service firms input anywhere between 10 and 60 data elements to arrive at a valuation of a company.  The downside is that the Apple brand, for example, has been valued at anywhere between $128 and $246 billion among leading valuation agencies.  These large valuation gaps ultimately lead one to question the usefulness and accuracy of algorithmic valuation services and standardized accounting techniques.

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