Deal Law Wire


insight and perspectives on developments in mergers + acquisitions

Post-deal litigation: what it is and how to avoid it

A recent article by PWC which appeared in Lexpert Magazine draws attention to a phenomenon that is pervasive in the United States and is becoming much more common in Canada: post-deal litigation. 

What is it?

Increasingly, shareholders are filing lawsuits to challenge M&A transactions. The litigation often takes the form of a class action, with plaintiff’s counsel alleging a breach of fiduciary duty on the part of the target’s board of directors resulting in a failure to maximize shareholder value. The specifics of the complaint are typically related to the process followed, the price agreed to, or insufficiency of disclosure.

In the U.S., post-deal litigation has become the rule, with roughly 96% of transactions post-2008 being accompanied by litigation, up from 53% pre-2008. Though this type of litigation is not nearly as common in Canada, it still occurs and is likely to increase in regularity, especially in tough markets.

How can dealmakers mitigate the risk of its occurrence?

Unfortunately, no matter how precisely crafted the agreements, the simple fact of having closed a large transaction will in some cases be enough to attract litigious shareholders (and counsel). Other times, however, it is the valuation process or the wording of the contracts which creates shareholder tension manifesting as post-closing litigation. Notwithstanding, some general areas for improvement include:

  • the proper definition of key terms, rather than defining a term by reference to another standard (such as GAAP, for example);
  • inserting explicit formulas and mechanisms into the agreements for valuation and adjustments; and
  • testing valuation and adjustment mechanisms alongside an expert to ensure they operate as intended.

Most importantly, when drafting a provision or creating a process or choosing a mechanism, consider how it could be challenged. If you had to defend it, could you? In the PWC article, Steve Tenai, a litigator here at Norton Rose Fulbright Canada LLP, put it well when he said, “That doesn’t mean perfection… but it does mean… you need to give some regard to what will happen if someone comes along later and challenges this deal.”

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

Webinar – Norton Rose Fulbright’s M&A in 2014: mergers and acquisitions in China

Join us on Thursday, November 6, 2014 for a webinar on M&A in China.

Register now

Despite headwinds facing its dynamic economy, China continues to be one of the world’s leading targets for foreign direct investment and mergers and acquistitions activity. With the Chinese economy now at a critical inflection point, there are both new opportunities and new risks for mergers and acquisitions in China.

This webinar will focus on key factors to consider, including the regulatory approval environment, structural considerations, documentation, cultural and practical aspects of a typical cross-border M&A transaction in China. Although the focus will be primarily on inbound (to China) transactions, the program will also cover outbound (from China) transactional matters.

Topics will include:

  • common structural alternatives for foreign M&A transactions in China
  • China’s principal regulatory authorities and rules affecting foreign investment and M&A
  • recent, important legal and regulatory developments affecting foreign M&A transactions in China
  • issues commonly encountered
  • foreign exchange control, tax, antitrust, employment and other legal and regulatory matters
  • cultural and practical considerations and
  • outbound (from China) M&A developments and rules affecting Chinese companies buying businesses overseas


  • Jeff Blount - Partner, Norton Rose Fulbright & Jaworski LLP (on assignment to Hong Kong)
  • Jie Zhang - Partner, Norton Rose Fulbright & Jaworski LLP (Beijing and Hong Kong)


10:00 am – 11:00 am PST
11:00 am – 12:00 pm MST
12:00 pm – 1:00 pm CST
1:00 pm – 2:00 pm EST
6:00 pm – 7:00 pm GMT


For additional information, please contact Terra Worshek by e-mail or at +1 713 651 5109, or please click here to register.

Promising trends for Canada’s forestry industry

Mining and energy aren’t the only Canadian sectors showing promising signs in M&A activity of late. A recent Financial Post article reports that Canada’s forestry industry is also seeing a rise in sales and deal activity. The Post’s article highlights the U.S. housing market rebound and a shift towards Asian markets as key contributors to the upswing in Canadian forestry.

Canada’s lumber companies struggled following the 2008 crisis as the U.S. housing market hit a standstill. With its main market stalled, the industry was forced to turn to new customers, pivoting to China, and increasingly to India and Japan, to diversify its market reach and tap alternative sources of revenue. The U.S. economy has since improved, and the rise in U.S. housing starts has been another positive development for Canadian lumber corporations.

Increased sales and revenue have lead Canada’s lumber companies to seek new acquisition opportunities below the border, primarily in the southern U.S. Although domestic acquisitions have not seen the same jump, the trend is positive nonetheless. Interestingly, the article explains that the industry’s increased focus on U.S. acquisitions is related to the need to diversify supply sources. This southward shift in M&A activity is a way of ensuring market access to the U.S. in the face of uncertain circumstances here at home, including the ambiguity surrounding Aboriginal Title and its potentially dramatic effect on lumber operations in Canada, a pine beetle epidemic in B.C., and continuing tensions surrounding U.S. import barriers on softwood lumber.

While things are picking up on the lumber side of the forest industry, the pulp and paper market has not seen the same level of growth. Instead, a decreasing demand for paper, due to the ever-growing reliance on electronics, has led many Canadian paper corporations to divest their non-core businesses.  According to the report, many of the buyers appear to be U.S.-based private equity firms.

In general, the developments in the industry have been positive. The ability of lumber companies to adapt and seek out new markets not only for sales, but also supply, is encouraging. Industry watchers will be on the lookout for continued activity in this second half of 2014.

Numbers show healthy growth in M&A activity in Q3 2014

Global M&A is strong

In its recently released Mergers & Acquisitions Review for Q3 of 2014, Thomson Reuters proclaims this year’s first three quarters to be the “strongest first nine months for worldwide deal making since 2007.”

The volume of global M&A activity since the beginning of the year surpassed the volume for the same period in 2013 by nearly 60%. Despite a 22% decrease in deal volume compared with Q2, the value of Q3 M&A deals was $888 billion, making it still the highest third quarter in seven years, according to Bloomberg’sGlobal M&A Market Review Financial Rankings, up 29% compared to a year ago. 

Canadian market in an upswing

The Bloomberg and Thomson Reuters numbers also show that the Canadian market is in an upswing. The value of 1,256 Canadian M&A deals announced over the first nine month of the year is US$ 82,540.5 million, versus US$ 67,198.6 million in 1,235 deals announced in the first three quarters of 2013. This translates into an increase of 22.8% in volume with the increase of less than 2% in the number of announced deals.

These results seem to support the view of analysts who predicted that despite a rather tepid start to 2014,  in part due to volatility in global commodity prices, the Canadian M&A market would see the increase of the value of the businesses being offered for sale.

A sellers’ market

In an article published in the Canadian Business Journal at the beginning of Q3 2014, the managing directors at KPMG Corporate Finance observed that conditions are favorable for a sellers’ market in the private mid-size business segment. Authors predicted that even with a healthy supply of private companies offered for sale, the demand for quality targets would not be matched and this would drive the value of businesses on the selling block higher.  

According to the authors of the article, however, the market also has plenty to offer to byers, as many private companies that weathered the recession and are attractive due to their proven ability to manage costs and mitigate the impact of the strong U.S. dollar though the downturn are for sale. One source of acquisition targets comes from owners of the baby-boomers generation who are engaged in estate planning and are seeking to monetize their successes. Another source of companies for sale comes from corporations that are looking to shed non-core operations in order to focus on their core businesses.

Regardless, the Canadian Business Journal article predicted that the demand for quality private companies would continue to surpass the supply, as both public companies and private equity are eager to grow or invest, as the case may be, through acquisition.

The numbers reported by Bloomberg and Thomson Reuters are consistent with the predicted sellers’ market characterized by a higher rate of growth in volume than in the number of deals. However, the overall high level of activity allows to view this not as  indication of a lack of supply, but as a mark of a normal cycle in the life of a healthy, breathing, and growing market.

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

Golden opportunity: mining sector drives Canadian M&A revival

The latest M&A trends indicate a renaissance in the mining sector with gold activity placing Canada at the forefront, both as a top acquirer and a top target. According to a recent KPMG Mining M&A Quarterly Newsletter, global M&A activity in the mining sector soared in Q2 2014, up significantly in both deal volume and value from Q1 2014. Australia, China, and Indonesia are among the top contributors to M&A activity in the iron ore, mineral sands, and copper sectors, but Canada takes the top spot for the quarter by a large margin, owing primarily to gold deals.

Global M&A soars

At the global level, M&A transaction value in the mining sector rose by over 300% in Q2 2014 to $9.8 billion, up from $2.9 billion in Q1 2014. Of the 23 transactions announced in Q2, three exceeded $1 billion in value.

Gold leads the pack

Gold deals represented 58% of global M&A deal value in the mining sector in Q2. Copper and coal trailed by a wide margin, coming in second and third at 14% and 10%, respectively. Domestically, gold represented an even larger percentage of transactions, coming at 85% of all mining M&A deals in Q2 2014. Second and third in Canada went to copper at 15% and uranium at 1%. On the basis of relatively constant gold extraction costs, analysts are forecasting an imminent increase in the price of gold, creating even more buzz for the mining sector.

Canada goes for gold

Canada’s domination of gold activity in Q2 2014 is undeniable: twelve Canadian gold transactions valued at $4.6 billion were announced, accounting for nearly half of the global mining deal value in this period. Additionally, every global gold deal above $200 million was Canadian. According to Financial Post Data, 2014 has seen over 40 Canadian mining deals to date valued at over $7 billion.

Golden opportunity

The significant climb in mining equity indices and gold and copper prices at quarter-end, combined with energetic levels of Canadian M&A activity in the mining sector, as well as the emergence of China as a global deal participant, indicate a significant uptick in this sector and the potential lead-in to a genuine revival.

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

The effect of government privatization on global M&A

RR Donnelly released the August edition of its Venue Market Spotlight, entitled Government Privatizations and M&A. In the report, a high-level summary of a survey of experts, RR Donnelly speaks to the effect that government asset sales and other forms of privatization are having on global M&A activity. The report forecasts that government privatization will become a key driver in the next 12 months and beyond.

This post will survey a number of aspects of this burgeoning phenomenon as summarised in the RR Donnelly report.

Growth, generally and by sector

Not surprisingly, 86% of respondents project a rise in M&A resulting from government privatizations and partnerships. As governments respond to financial pressures, they will continue to move away from direct ownership and operation of capital-hungry businesses. Instead, they will look to private sector firms to step forward into the role of owner/operator while governments step back into a regulatory role. The upshot of government privatization plans? Quality assets entering the market at reasonable if not discounted rates.

The industries which are most likely to see significant growth are those whose businesses require large amounts of capital to sustain operations: energy, TMT and transportation. Cash-strapped governments are finding it difficult to maintain, let alone upgrade and expand, infrastructure in these sectors and are frequently turning to private firms for solutions, whether by way of partnership or full-scale privatization.

Regional trends and deal types

Europe is projected to see the largest government privatization M&A boost. The recent economic crisis has driven European governments to the private market where they are selling burdensome assets at very attractive rates. Asia-Pacific is projected to see the next-largest rise in activity, with the growing private market there eager to expand by way of government asset purchases.

The majority of respondents forecast that public-private partnerships (PPPs) will be the most popular form of government privatization. PPPs, a partnership of government and one or more private sector companies which is created to complete a medium to long-term project, represent one significant advantage for governments over full privatization: these partnerships, unlike asset sales, do not require the government to step back and completely relinquish control over asset management.

Catalysts and challenges

Respondents reported asset use maximization, infrastructure improvement, and economic growth as the top three motivations of governments seeking privatization of assets. Governments looking to stabilize their economies and promote efficiency in the operation of their assets are turning to the private sector where they are finding the necessary capital, as well as abundant amounts of expertise and motivation.

As do all good reports, this one canvasses the challenges that privatization transactions might present to private sector firms. The majority of respondents stated that the process itself and regulatory compliance are the two most significant challenges facing companies seeking to take advantage of government privatization. Others noted that the transaction may result in the creation of legislative and regulatory regimes which would require time and expertise to put together and follow.

These challenges aside, the opportunities are significant. Private firms would do well to consider this growing market when contemplating their next transaction.

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

Webinar – Norton Rose Fulbright’s M&A in 2014: poison pills

Shareholder rights plans, more popularly known as “poison pills,” remain one of the most powerful and storied of modern anti-takeover defenses. Developed in the 1980s, poison pills have seen their popularity soar and then wane, but now may be on the verge of a renaissance as they become adapted to defend corporations from newly emerging threats.

On October 2, 2014, Glen J. Hettinger, Partner, Fulbright & Jaworski LLP (Dallas, Texas) and Bryan Caleb Wittman, Partner, Fulbright & Jaworski LLP (San Antonio, Texas) gave a presentation providing an introduction to poison pills – how they function, their key terms and optional features – and discussed recent developments in the design and utilization of poison pills.  Discussion topics included Institutional Shareholder Services guidelines, the “shelf” pill, the net operating loss pill, bifurcated ownership thresholds and the use of “wolfpack” provisions to fend off shareholder activists.  Recent Delaware cases reaffirming the validity and utility of poison pills were also reviewed.

Check out presentation by viewing the video above.

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

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

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

The investment chapter

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

Impact on M&A activity

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

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

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

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

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

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

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

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

PWC predicts moderate growth in Canadian M&A

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

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

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

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

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

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