Deal Law Wire

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insight and perspectives on developments in mergers + acquisitions

Bullish expectations for M&A activity in the U.S. healthcare and life sciences sector

Last year, M&A activity in the U.S. healthcare and life sciences sector saw a decrease in both deal number and deal value when compared with 2012. While 2012 saw 463 deals worth US$124 billion, 2013 saw 294 deals worth US$97 billion. Nevertheless, according to the results of Mergermarket’s Healthcare and Life Sciences M&A Outlook optimism reigns for 2014.

The report, published June 30, believes M&A activity in the healthcare subsector will rise as a result of increased regulation. In particular, the report expects the Affordable Care Act (ACA) to have a significant impact on M&A activity among hospitals and healthcare providers. Because of the ACA’s shift away from a fee-for-service model and towards a managed care delivery system, it is predicted that hospitals and healthcare providers will look to consolidate to achieve economies of scale. Furthering this push to achieve more productive, cost-efficient systems are Medicare reimbursement cuts, and readmission penalties. Consequently, it is anticipated hospitals will demand facility and equipment improvements in as well as greater IT support or capabilities.

In the life sciences subsector, the report expects M&A activity to be significant among biotechnology/pharmaceutical firms. Large pharmaceutical companies are currently undergoing a period of decreasing sales and limited organic growth opportunities. To address this, companies will look to consolidate to improve their R&D development, and to gain access to new and emerging markets and to new drug pipelines/niche products. This trend began to play itself out in 2013 with Amgen’s US$9 billion purchase of Onyx Pharmaceuticals, whereby Amgen obtained full rights to a lucrative blood cancer drug.

Despite predicting an increased appetite for deal-making, the report cautions as to the effect of regulatory change on closing. New regulations have added complexity and have contributed to greater scrutiny from enforcement agencies, thereby making compliance more difficult. In response to these new challenges, it is anticipated that buyers may obtain representations and warranties insurance relating to the seller’s compliance with healthcare regulations. In an industry survey of would-be deal-makers, 88% of respondents said they intended to obtain representations and warranties insurance in 2014 compared with 44% in 2013.

The author wishes to thank Michael Viner, summer student, for his assistance in preparing this legal update.

Bureau allows Reynolds to acquire Novelis’ North American foil business

On November 15, 2013, Reynolds Consumer Products, Inc. (Reynolds) agreed to acquire the North American division of  Novelis Foil Products for $35 million. Six months later, on May 26, 2014, the Competition Bureau (Bureau) allowed the acquisition by issuing a No Action Letter to Reynolds and announcing that the merger would be unlikely to cause a substantial lessening or prevention of competition.

Transaction Background

Both parties manufacture and supply aluminum foil wrap and semi-rigid aluminum containers. Novelis operates two manufacturing plants and three distribution facilities in Canada, while Reynolds manufactures in the U.S. and distributes to Canada through its two Canadian distribution facilities.

The Bureau’s Analysis

The Bureau conducted separate analysis for aluminum foil wrap and semi-rigid aluminum containers.

The Bureau held that the merger would not affect the level of competition in the aluminum foil wrap market sufficiently to warrant an application under section 92 of the Competition Act (Canada).  Using information submitted by the parties as well as from third parties, like major grocery stores, the Bureau examined whether branded aluminum foil and private label aluminum foil are in the same product market, and suggested that they may not be.  However, the Bureau determined that Reynolds’ presence in Canada did not have a noticeable impact on the price at which Novelis supplied aluminum foil wrap to Canadian retailers.  As a result of that conclusion, the Bureau determined that it did not need to reach a definitive conclusion on the question of whether branded and private label aluminum foil are in the same product market.  This approach highlights the highly evidence-based approach being adopted by the Bureau as traditionally branded and private label goods were routinely considered to be part of the same market.

When assessing the level of competition in the semi-rigid aluminum containers market, the Bureau looked at the number of existing competitors and their respective market share. The Bureau concluded that there are enough players remaining in the market to reduce the potential market harm the merger may cause. Additionally, the Bureau determined that there were low barriers to entry for U.S. based competitors aiming to enter the Canadian product market. Therefore, given the strong presence of the remaining competitors and low barriers to entry, it was determined that the merger would not have likely resulted in a substantial lessening of competition in the semi-rigid aluminum containers market either.

The author wishes to thank Lucy Liu, summer student, for her assistance in preparing this legal update.

Cross-border lumber deal felled by Competition concerns

Tennessee-based Louisiana-Pacific Corporation (LP) recently abandoned its proposed acquisition of Canadian competitor Ainsworth Lumber Co. Ltd. (Ainsworth). The decision came several days after an announcement by U.S. Department of Justice (DOJ) and an announcement by the Canadian Competition Bureau (Bureau) that they each considered the transaction would likely substantially lessen competition of the sale of oriented strand board (OSB).  The Bureau and DOJ collaborated and shared information during the review of the proposed merger.

The Bureau, DOJ and the Federal Trade Commission have long coordinated reviews of cross-border mergers.  This experience is reflected in the recently published Best Practices on Cooperation in Merger Investigations, issued by the agencies in late March. According to the publication, the collaborative effort aims to not only increase the efficiency of the merger review process and reduce the burdens placed on merging parties, but also to encourage the agencies to use consistent analysis and reach similar outcomes.  The recent positions the Bureau and the DOJ took in the LP/Ainsworth case support that they have met their objectives.

Transaction Background

On September 4, 2013, LP and Ainsworth entered into an agreement where LP agreed to acquire all the outstanding common shares of Ainsworth. Both parties are large manufacturers of OSB, and according to the agencies the merged entity would have controlled approximately 60% of the OSB market in Western Canada, 63% in the Pacific Northwest region of the U.S.  and 55% in the Upper Midwest of the U.S.

The Bureau’s analysis

The Bureau analyzed whether the merged entity would gain enough market power to substantially reduce the competitiveness of the OSB industry in British Columbia.

It first considered whether existing competitors in the OSB industry would be able to restrain the merged entity from raising the price of OSB in British Columbia. At the time of the merger review, there were only four OSB producers – including  Ainsworth and LP- that also had mills located in British Columbia. The Bureau concluded that the remaining competitors did not have enough market power nor could they expand their operations fast enough to constrain a material price increase on OSB. The Bureau discounted the market power of competitors with mills outside of British Columbia because they faced higher freight costs , putting them at a disadvantage over the parties’ mills that are in British Columbia.

The Bureau then examined whether new competitors could enter into the OSB industry in British Columbia to reduce the potential market harm the merger may cause.  It concluded that the likelihood of a timely and sufficient entry is low due to high barriers to entry and expansion , such as obtaining environmental approvals to build a new mill and negotiating a long-term supply contract with fibre suppliers.

The Bureau concluded that the proposed acquisition would have likely resulted in a substantial lessening of competition in the OSB industry in British Columbia. Concurrently, the DOJ raised similar concerns, stating that the merged entity would raise the price of OSB in the Pacific Northwest and Upper Midwest of the U.S., and would likely lessen competition in these regions substantially.

The author wishes to thank Lucy Liu, summer student, for her assistance in preparing this legal update.

Navigating the ‘Great Marihuana Gold Rush’

In July 2013, new regulations relating to the use and production of medical marihuana came into force.  The Marihuana for Medical Purposes Regulations (MMPR) significantly overhaul the previous statutory regime regulating medical marihuana in Canada.

The new regulations privatize the production and distribution of marihuana by creating conditions for large scale production.  By 2024, the medical marihuana supply industry is expected to generate $1.3 billion in domestic annual sales.  Considering that the new regulations also allow for the import and export of medical marihuana, the global annual sales figure may be even larger.  Media has already dubbed this new phase in Canada’s medical marihuana history as the “the great marihuana gold rush of our generation”.

At the end of May 2014, Health Canada had received 858 applications by individuals and corporations to become authorized producers.  With approximately 25 new applications every week, Health Canada has been unable to process these applications in a timely manner; and as a result, only 13 authorized Licensed Producers are listed on Health Canada’s website. These companies are at various stages in their operability; some are fully operational and may even be listed on trading indexes like the TSX-V, while others are still establishing their operations. With demand for medical marihuana expected to increase significantly under the new regulations, those companies with a head start may be able to capitalize. The effect of this incentive is already visible in the market, with aggressive growth strategies being pursued (see, for example, Tweed Marijuana’s and Supreme Pharmaceuticals’ recent acquisitions)

The licensed producers range from small, privately funded operations to large corporations raising funds from venture capitalists and through public offerings.  Most interestingly, a junior mining company recently abandoned their mining operations to begin operating a medical marihuana business; their stock price increased 2,600% in the nine weeks following this decision.  However, the complex regulatory regime makes it difficult for anyone to enter this market.

The regulations, and the accompanying application process, are quite onerous, and include conditions for becoming a licensed producer, permitted activities, and other obligations. For example, the application to become a producer requires obtaining security clearances for personnel, identifying substances that will be present on site, filing site and security information, notifying local government, law enforcement and emergency service authorities, providing a quality assurance pre-licensing report, and proposing a record keeping method.

However, the application process and regulations are not the only considerations potential applicants should be concerned with; protecting one’s strains from unlicensed use is crucial if one is to secure a competitive advantage. Although higher-life forms, such as plants, are not patentable in Canada, it is possible to patent key genes or cells of a plant.  If drafted correctly, a patent can effectively provide protection to the rights holder for the whole plant or strain. In addition, novel development techniques associated with operations, and new products incorporating the active forms of medical marihuana, may also be patentable.

Specific strains of marihuana can also be protected under the Plant Breeders’ Right Act. If an applicant can prove that their variety is new, distinct, has uniform characteristics and is stable, they may obtain an exclusive right to sell and produce the variety in Canada for up to 18 years.

Businesses considering operating in this space will be best served by investigating the use of patents, plant breeder’s rights, trademarks and trade-secrets to protect their brand and know-how from competitors, to give them a competitive advantage, and even to pursue licensing opportunities for their proprietary strains or operation techniques.

For more on the commercialization of medical marihuana in Canada, please see our earlier post on this blog.

The author wishes to thank Rayomond Dinshaw, summer student, for his assistance in preparing this legal update.

M&A activity in renewable power sector signals growing optimism about viability of renewables

Hydro towersAt the Indo-Canada Chamber of Commerce Awards Gala this past weekend, the High Commissioner of India to Canada, Nirmal Vermal spoke enthusiastically about India’s interest in promoting renewable power development, and also indicated that India would draw from the experiences of countries such as Canada to inform its renewable policy decisions. Mr. Vermal’s comments are significant for two reasons: first, they highlight the extent to which renewables are no longer just the pet projects of developed economies; and second, they reflect a tacit recognition that the developed economies’ initial policy endeavours in this area, while undoubtedly successful in promoting renewables development, were not without their flaws.

Indeed, the recently-released Renewables 2014 Global Status Report (GSR Report), put out by the Renewable Energy Policy Network for the 21st Century, situates India within the context of a broader trend of lesser developed economies—particularly countries throughout Latin America, the Middle East and Africa—starting to focus on the primary development of renewables within their jurisdictions. As the GSR Report notes, the number of countries with renewable energy support policies in place has been steadily increasing in the past decade, rising to 138 countries as of early 2014. Importantly, though, the GSR Report also observed a simultaneous trend of many of these countries undertaking a significant retooling of their policies as they look to retrench from, and in some cases, retroactively revoke, the regulations, subsidies and tax incentives that have caused consumer energy prices to soar and have invited significant political blowback.

This reshaping of renewable energy policy is already having, and will continue to have, a significant impact on the market dynamics of renewables development and use. Promisingly, the decline of public sector investment in renewable projects does not spell the end of renewables development. This is not least because of what the Bloomberg New Energy Finance report,  Global Trends in Renewable Energy Investment 2014 (Bloomberg Report), refers to as a “phenomenon of unsubsidised market uptake” by companies and investors that are adopting an increasingly “warm attitude to renewables”. This “market uptake” is manifesting itself in numerous ways, including in the form of new investment in the sector—through public market equity offerings, venture capital and private equity investment, and asset financings—as well as the recycling of finance in the sector through M&A activity in the secondary renewables space. With respect to the latter, the Bloomberg Report found that, in 2013 alone, $54 billion was spent on acquisition activity in the form of corporate mergers and takeovers, asset purchases, buy-outs and re-financings.

As reported by PwC in its 2014 deal outlook study (PwC Report), there is a full roster of acquisition-focused companies and funds that are eager to expand into the renewables market being vacated by primary developers—developers who were initially attracted to the sector by generous subsidies or tax incentives, but who are now keen to liquidate their assets as those benefits disappear. The most significant drivers of this M&A activity are “corporate buyers” (a term which includes, but is not limited to, energy and utility companies), who accounted for 75% of renewables deal activity in 2013, but various forms of institutional investment funds, infrastructure funds, banks, venture capitalists and private equity firms are also significant players in this field.

At first blush, this increase in M&A activity seems surprising: governments’ policy vacillation and retreat from subsidization would, one would think, undermine investor confidence and deter acquisitions. But this train of thought merely reflects certain embedded assumptions about renewables: mainly, that they are not, on their own, viable business propositions. The fact that companies and institutional investors are taking a bet on renewables is promising precisely because it reflects an implicit market confidence that renewable assets can generate solid yields, even in the known or predicted absence of government supports.

This market signal is noteworthy not least because it represents such a marked change from years past. A number of factors can be identified as having contributed to this shift: for one, renewable power technologies are becoming increasingly cost-competitive; as noted in the Bloomberg Report, the worldwide average cost of electricity has declined by 53% for PV systems and 15% for onshore wind turbines, while the cost per MWh of coal- and gas-fired generation has increased in many countries. There have also been significant reductions in the costs associated with installing, maintaining and operating renewable projects, as well as improvements in grid management practices and infrastructure. Energy storage technologies are also starting to reach a level of commercial maturity that will make them widely-deployable, thereby allowing renewables to be treated as stable suppliers to electricity grids. Additionally, a Deloitte study found that many major companies are using their investment in renewables as a means to “offset their tax liabilities on robust profits, and to fulfill their corporate commitments to developing clean energy”. Finally, the recently-announced carbon emissions reduction regulations in the United States, and similar regulations in other countries, are seen as likely to increase demand for renewables as older coal-fired plants are retired.

In short, M&A activity in the secondary renewables space is an indicator of the growing optimism about the continued role for, and viability of, renewables within energy markets. Importantly, this shift in confidence not only stands to benefit investors, but also the countries keen to build or sustain momentum around renewables development that have recognized that governments cannot afford to singularly shoulder the burden of achieving this end. Of course, for newcomers to this game, such as India, it seems clear that sometimes it pays not to be the policy leader.

Food & beverage M&A stays thirsty in 2014

According to the Q1 2014 Capital Markets Flash published by PWC, there has been a 45% increase in the number of deals in the Canadian food and beverage industry in March 2013-2014, as compared to a year prior. This healthy activity is also seen in the US, where deals in the food and beverage sector were valued at approximately $40 billion in Q1 alone, and in Europe where there were 292 deals in the last 12 months and a 50% increase in deal volume from Q4 2013 to Q1 2014.

Deals over the past year have ranged from relatively small to large, and in various subsectors of the food and beverage industry such as grocery stores, beer and alcohol, food packaging, snacks and meat products. In the meat products deal, which has not yet been concluded, a bidding war has erupted between two of the US’s largest chicken producers, with the latest offer comprising a $400 million premium over the initial offer.

Even established brands are increasing their footprint in North America, with one health food company doubling its US operation just this year by acquiring 100% of a juice company.

PWC credits growth in the sectors on heightened global competition and consolidation, brand diversification, and the stability of such investments. As evidence of this, Sean Connolly, Hillshire Brands president and CEO recently said regarding his company’s takeover of Pinnacle Foods:

The acquisition creates a leading branded food company with enhanced scale, reach, and capabilities while providing margin expansion and strong EPS accretion [and] The complementary portfolios and strategic fit of these two companies create significant value for the shareholders of both organizations.

Other reasons for activity include companies wishing to get “younger”, with two established companies acquiring trendy companies with expertise in emerging markets, such as coconut-based beverages and healthy children’s food.

PWC and Grant Thornton predict that this sector will continue to grow in 2014 and beyond.

The author wishes to thank Benjamin Reingold, articling student, for his assistance in preparing this legal update.

Mass terminations in the post-merger context

This blog post was written by Pamela Hofman, an Employment & Labour Associate in Norton Rose Fulbright’s Toronto office. 

A number of different parties and interests are at play in any merger. Although it may not be at the forefront during merger negotiations and considerations, the acquiring company should turn its mind to the possibility of mass terminations, and the consequences flowing from them. Comparatively speaking, the Canadian employment framework is quite generous, and there is no employment at will.

Commonly, an acquiring company will identify and seek to reduce redundancies and inefficiencies in the post-merger entity. Prior to instituting mass terminations, companies must consider their legal obligations to the terminated employees.

If the employees of a target company are unionized, section 69 of Ontario’s Labour Relations Act, 1995 deems the acquiring company to be a successor employer. As such, if all or a part of a business or undertaking is sold, leased, transferred, or otherwise disposed of, the purchasing business, as successor, becomes bound by the collective agreement, as if it were a party to the collective agreement. As such, any termination of unionized employees of the target company must be done in compliance with the governing collective agreement. Generally, typical asset purchase agreements require the purchaser to continue employment of all unionized workers on identical employment terms and conditions.

If an employee is not offered employment post-merger, the employee’s statutory, contractual and common law entitlements must be considered. Similar to Ontario’s Labour Relations Act, 1995, section 9 of Ontario’s Employment Standards Act, 2000 (“ESA”) deems the purchaser of a business to be the successor employer. Additionally, the length of employment, used for the purposes of calculating termination and severance pay, is based upon the combined employment at the predecessor and successor employer.

The ESA has particular provisions which apply in the context of mass terminations, and which supplant the normal notice, or pay in lieu of notice requirements. Section 58 of the ESA sets out that the mass termination requirements apply when 50 or more employees are terminated at the employer’s establishment within the same four-week period. If such a mass termination occurs, subsection 3(1) of Ontario Regulation 288/01 entitles all employees with more than three months of continuous employment to eight weeks’ notice where 50-200 employees are terminated, 12 weeks’ notice where 200-500 employees are terminated and 16 weeks’ notice where more than 500 employees are terminated. However, the mass termination provisions do not apply if either the terminations represent fewer than 10% of the employees who have been employed for at least three months, or if the terminations are not caused by the permanent discontinuance of part of the employer’s business at the establishment.  Additionally, subsections 2(1) and 9(1) of Ontario Regulation 288/01 provides that  if an employee refuses an offer of reasonable alternative employment, the employee will be disentitled to termination and severance pay.

For more on labour and employment issues that arise in the context of M&A, please see our previous blog posts regarding labour considerations in asset deals involving non-unionized employees and labour considerations in asset deals involving unionized employees.

The author wishes to thank Adrienne Walls, articling student, for her valuable assistance in preparing this legal update.

M&A activity strong in the luxury goods sector

Deloitte recently released its first annual Global Powers of Luxury Goods report (the Report). The Report, which focuses on designer apparel (ready-to-wear), handbags and accessories, fine jewelry and watches, and cosmetics and fragrances, looks at the top 75 luxury goods companies – a mix of both public and private players. Deloitte reports that mergers and acquisitions (M&A) activity in the luxury goods sector has been strong in the past year, and highlights three key factors which explain why: (i) the globalization of luxury, (ii) value chain integration, and (iii) company consolidation.

The Globalization of Luxury

There is an ever increasing population of wealthy and upper middle class consumers in emerging markets that have an appetite for western luxury brands. This has prompted many luxury goods companies to expand their presence into new markets, particularly in Asia and the Middle East.

Spurred on by the success luxury brands are having, or are poised to have, in emerging markets, private equity players have become serious about investing in luxury goods companies. Emerging market investment groups are looking to acquire western luxury brands, a move that serves to both increase the profile of those brands in emerging markets as well as facilitate growth of the brand. Conversely, established European private equity firms are looking to focus their funds on aspirational Asian brands, particularly in China and India, with a view of helping smaller, local luxury brands grow into global luxury labels. The involvement of private equity firms has been very beneficial to the luxury goods industry, as private equity firms offer both capital and expertise to aide in the complex process of international growth for luxury goods company.

Value Chain Integration

Luxury goods companies must maintain control over all aspects of their business, from design to sourcing raw materials, from manufacturing to marketing and distribution. The ownership of successive stages of the luxury brand’s value chain can ensure that brand-appropriate levels of quality and service are maintained at all times, and will ultimately serve to protect the heritage of the luxury brand. Accordingly, vertical integration of the value chain has become an important for luxury goods companies, and has become a driver of M&A activity in the luxury goods sector.

In order to gain access to top suppliers and their technical expertise, luxury goods companies are increasingly looking to acquire suppliers in order to ensure control of key raw materials. For example, several luxury handbag and footwear brands have acquired majority stakes in tanning and leather processing companies. Similarly there have been recent mergers between mining companies and luxury jewelry makers, bringing about the ‘mine to market’ concept.

At the other end of the value chain, luxury companies are seeking greater control at the point of sale. Luxury brands looking to establish a presence in emerging markets are looking to joint-ventures or partnerships with local distributors to ensure that the brand is able to maintains a certain level of control over retail operations. Similarly, luxury brands are looking to involve themselves in the e-commerce side of retail. This has fueled deal activity between luxury brands and online retail specialists.

Consolidation

Operating a successful luxury goods company, especially on a global scale, requires significant experience, knowledge and resources. Consolidation, whereby smaller luxury brands come under the umbrella of a larger luxury conglomerate, is therefore not only a way for smaller companies to stay afloat in a competitive marketplace, but one way to take a take a smaller luxury brand global.

In a consolidation scenario, large luxury conglomerates bring broad expertise in the luxury goods industry, additional capital resources, and the option to share production facilities, operating systems, and real estate, among other things. Smaller luxury brands are given the benefit of being able to grow and become global luxury labels. The large luxury conglomerates in turn are able to grow their successful luxury empire with the addition of new, successful brands under their wing. The process of consolidation has therefore fueled M&A activity in the luxury goods industry, with the acquisition of many smaller luxury brands by large luxury conglomerates.

Q1 2014 M&A in the industrials sector

Mergermarket’s Global Industrials Trend Report: Q1 2014 suggests continued decline for deal value in the Industrials sector, with some exceptions.

The first quarter of 2014 saw M&A deal value in the Industrials sector (US$ 20.9bn) fall by 44.3% from Q4 2013 (US$ 37.5bn), despite global M&A value (US$ 623.2bn) rising 10.1% over the same period. Overall, Industrials generated just 3.4% of Q1 global M&A deal value. This represents the sector’s lowest global proportion since Q2 2009 and approximately half the deal value generated by the sector in Q4 2013.

The Q1 2014 Industrials data follows a 20.1% sector-wide year-over-year decline in M&A between 2012 and 2013.  This downward trend stems mainly from the sustained slowdown in the Industrial Products and Services (IPS) sub-sector, which generates most of the sector’s overall M&A activity (US$17.3bn). The IPS sub-sector underwent an 18.3% year-over-year decline from 2012 to 2013 and by the close of Q1, generated only half the deal value (48.5%) produced in Q4 2013.

One exception to the downward trend is the Industrial Automation (IA) sub-sector, which underwent an 11.1% year-over-year increase from 2012 to 2013. The IA sub-sector experienced a surge in deal value in Q1 2014, nearly doubling its Q4 2013 deal value (US 0.7bn) to obtain its highest Q1 value (US$1.3bn) since 2011. While much of that increase stems from Renova Group’s acquisition of Octo Telematics (US$ 548m), the ongoing M&A boom in the Technology, Media, and Telecommunications sector—which accounted for nearly one third (28.5%) of global M&A activity in Q1 2014—may lead to further acquisitions of companies that centre on IA-related technologies.

The author wishes to thank Kyle Mitchell, articling student, for his assistance in preparing this legal update.

Activist Pershing Square Teams Up With Valeant Pharmaceuticals To Target Allergan Inc.

This blog post was written by Andrea Campbell and originally appeared in Norton Rose Fulbright’s Special Situations blog.

Shareholder activism has been dubbed “the new M&A” in recognition of activists’ propensity to drive companies to pursue value-creating transactions.  Last month, Bill Ackman’s Pershing Square Capital Management took this trend to a new level when it teamed up with Quebec-based Valeant Pharmaceuticals International to orchestrate a hostile takeover bid for Botox manufacturer Allergan Inc. – a deal valued at over US$45 billion.  A joint vehicle formed between Pershing Square and Valeant was able to accumulate a strong toehold in Allergan in advance of Valeant’s bid by amassing nearly 10% of Allergan’s outstanding shares without detection.  While US securities law requires investors to disclose holdings exceeding 5%, the joint vehicle used the generous 10-day disclosure window to continue its accumulation.

Pershing Square is no stranger to activism: in 2012, the New York-based hedge fund shook up the board of CP Rail in a move that installed seven new directors in a matter of months.  However, Pershing Square’s latest activist maneuver could signal the beginning of an unusual trend – one that sees deep-pocketed shareholders joining forces with strategic purchasers to coordinate takeovers of under-performing companies.  Though the approach is novel, its benefits are clear: strategic purchasers can capitalize on hedge funds’ proven willingness to invest millions without extensive diligence, and hedge funds stand to gain hefty returns even if another purchaser steps in to pay a higher price.

Pershing Square’s approach has certainly captured the attention of Canadian media and the M&A world, but the reality is that it could not be easily replicated in Canada.  Though Canadian law would not have required disclosure of the 9.7% stake in Allergan (the Canadian disclosure threshold is set at 10%, compared to 5% in the US), strict insider trading regulations are in place that would have made Pershing Square’s strategy more difficult to pursue in Canada.  Under Canadian securities law, any investor who learns of a contemplated takeover bid from a potential bidder is prohibited from trading on that non-public information.  In order to acquire shares in advance of a bid in the Canadian context, an activist investor may actually have to become a joint bidder to comply with applicable securities law.  Industry observers anticipate that Pershing Square’s strategy may spawn similar reform south of the border.