Q1 2013 M&A Trends

Canadian M&A continued its decline in Q1 2013, reaching lows not seen since Q1 2009. According to Crosbie & Company Inc.’s Q1 2013 M&A Report, which compared M&A activity results from Q4 2012 to Q1 2013, the market has declined significantly both in transaction value (51%) and volume (35%). Specifically, while Q4 2012 saw 301 transactions valued at $52.8 billion, Q1 2013 saw 196 transactions valued at $25.9 billion.

PricewaterhouseCoopers (PwC) noted similar trends in their recently released report, Capital Markets Flash: Q1 2013 Canadian M&A Deals Quarterly, including that:

the decline in Canadian M&A activity was largely due to sector specific issues and a slowdown in Canada’s generally buoyant natural resources sector (which represented only 8.9% of total M&A deal value this quarter). This may be largely attributable to increasing investor caution and declining commodity prices;
the real estate sector was Canada’s most active sector by deal value (36.6% of total M&A activity). The acquisition of Primaris Retail REIT by H&R REIT for $4.6 billion represented the largest M&A deal of the quarter;
overseas pension fund acquisitions accounted for three of the largest M&A deals in Q1 2013 and represented over half of the ten capital group transactions;
cross-border activity accounted for over 40% of announcements in Q1 representing a major driver of activity in the Canadian market. Canadian firms engaged in more acquisitions overseas than their foreign counterparts by a ratio of 2.2:1; and
there were only three Canadian M&A transactions valued over $1 billion in Q1 2013.

Will the Canadian market see an increase in M&A activity for the remainder of 2013? Mark Jamrozinski, M&A transactions services leader with Deloitte, states: “I don’t think the volume has fallen off a cliff, but I also don’t think it’s going to rebound in some record-setting pace either. And I think the uncertainty in the macro economy is going to continue to cause people to be very cautious, as they approach growth opportunities.”

Investment Canada Act amendments raise questions for state-owned enterprises

By Kevin Ackhurst on May 13, 2013 Posted in Antitrust, competition and regulatory

Following its approval in December 2012 of two high-profile transactions involving foreign state-owned enterprises acquiring Canadian businesses, the Canadian government announced new policies that would guide the minister of industry in applying the Investment Canada Act (ICA) to subsequent similar transactions. On April 29, 2013, the government introduced its budget implementation bill, Bill C-60, which contains amendments to the ICA to implement the December 2012 policies. If enacted in their current form, these amendments will provide the minister greater authority to require net benefit reviews as well as the ability to prolong reviews of transactions that may raise national security concerns.

Given that the ICA review process has been criticized as insufficiently transparent, the changes that may result from Bill C-60 will only increase the uncertainty associated with the review process. To properly assess the regulatory risk of a transaction, parties should have clear guidance on what constitutes a state-owned enterprise. The amendments broaden the definition and empower the minister to declare that an entity is controlled in fact by an SOE, potentially subjecting transactions that previously would not have been subject to review to such a review.

For more information about the implications of Bill C-60, please see our recent Legal Update.

New shareholder rights plan proposal may act as catalyst for proxy contests

By Trevor Zeyl on April 19, 2013 Posted in Corporate finance

Last month, the Canadian Securities Administrators (CSA) published for comment proposed National Instrument 62-105 (NI 62-105), a discussion on which can be found here. The proposal suggests a new regulatory framework for the treatment of shareholder rights plans or “poison pills”. In essence, the proposal creates a more flexible framework of defensive tactics that can be used by target boards and shareholders. If adopted, NI 62-105 would significantly change the Canadian M&A landscape.

Under the proposal, a rights plan would be effective when adopted by a target board. Such plan would be allowed to continue so long as it is approved by a majority of security holders within 90 days from the date of adoption, or 90 days after a take-over bid has been commenced. To that end, regulators will not intervene unless it is in the public interest to do so. Currently, if a hostile bidder asks a Canadian securities regulatory authority to cease trade a rights plan to render it inoperative, that authority will generally do so after a specified time.

While the proposal, if enacted, will certainly discourage hostile take-over bids, it may act as a catalyst for an increase in shareholder activist activity.

Specifically, if the proposal has the intended effect of strengthening a target board’s defensive capability, acquirers who traditionally pursue control of a company through a hostile takeover may instead engage target boards in a proxy contest for director seats. This route, whereby a dissident shareholder puts dissident directors up for election who are favourable to their cause, may be the most obvious method to effect corporate change. It also saves the dissident shareholder from having to go head-to-head against a target board with recourse to an unimpeded shareholder rights plan.

We may also see an emergence of proxy contests centered on the rights plans themselves. This type of proxy contest involves dissident shareholders seeking support from other shareholders to terminate the rights plan by majority shareholder vote. If a dissident shareholder is successful in forcing the termination of a rights plan, its prospects of acquiring that company through a hostile takeover bid becomes a realistic proposition. While this may prove to be a costlier and more time consuming option, it is not entirely unrealistic given the obstacles that the proposal, as drafted, would place in front of dissident shareholders.

Federal Court of Appeal endorses projecting future events in upholding Canadian Competition Tribunal decision

By Kevin Ackhurst on March 8, 2013 Posted in Antitrust, competition and regulatory

On February 11, 2013, the Federal Court of Appeal (FCA) released its reasons in Commissioner of Competition v Tervita Corporation, an appeal of the Competition Tribunal’s (the Tribunal) 2012 divestiture order against Tervita.

The case is important because it marks the first time the commissioner of competition has successfully challenged a merger based on a projection that the parties to the transaction would have become competitors if the transaction had not taken place. The FCA ruled that the “Competition Act requires [the Tribunal] to project into the future various events in order to ascertain their potential economic and commercial impacts.” In addition, this challenge related to a merger that fell below the notification thresholds.

Background

The case involved the acquisition of a company that had a permit to operate a secure landfill that could have competed with the two secure landfills already owned by Tervita. These two sites were the only sites in the area.

The vendors argued they hadn’t planned to open a secure landfill, but a bioremediation business that would not have competed with Tervita’s secure landfills. The Tribunal’s analysis went further than this: having concluded that the vendors would have operated the bioremediation site, the Tribunal determined it would have failed within one year. At that point the vendors would have either tried to sell the site or convert it into a secure landfill site. The Tribunal concluded that the site would thus ultimately have been used as a secure landfill site in competition with Tervita’s sites.

The transaction was found to substantially lessen competition because it allowed Tervita to remove the threat of a potential competitor. Internal documents from Tervita showed they expected prices would fall for customers if the new site opened as a secure landfill.

Key lessons from the Tervita decision

The Competition Bureau (Bureau) will not shy away from reviewing mergers that are below the pre-merger notification thresholds in the Competition Act (Act). Merging parties must be cognizant of this fact and not stop their competition analysis after merely reviewing the notification thresholds.
In determining potential market entry, merging parties must take into account future events likely to occur after the merger closes. As such, parties to a merger must be aware that the Bureau may challenge their merger if there are grounds to believe that, absent the merger, they could become competitors in the future.
The FCA determined that in a prevention of competition case, the potential market entry must occur within a “reasonable period of time,” which the court found as the time it would take a new party to enter the market. Thus, if it can be established that one of the merging parties, absent the merger, would have entered the market and begun competing with the other merging party within such a period of time, the parties should be aware that the Bureau may have grounds to challenge their merger.
Be careful when drafting internal analyses and correspondence. The Bureau can find them and use them against you. The Tribunal relied upon internal documentation from the parties to conclude that the planned bioremediation business would fail and the vendor’s eventual entrance into the secure landfill market in northeastern British Columbia would result in a reduction in prices charged to customers in this market and cause financial hardship on Tervita. Merging parties must be cognizant that the Bureau will seek all relevant internal documentation to bolster its case.
The efficiency defence under section 96 of the Act can only be relied upon if the efficiencies gained from the merger outweigh and offset its anti-competitive effects. Moreover, even in the absence of evidence of the merger’s anti-competitive effects, the efficiency defence can only be utilized by merging parties if the efficiencies created by the merger are more than “marginal” or “negligible.” Thus, to rely on this defence merging parties must be able to establish significant and quantifiable efficiencies gained from the merger that outweigh and offset its negative effects.

For more information and analysis on the Tervita case’s implications, click here for an analysis by Bradley Schneider and me.

New Merger Review Thresholds for Competition Act and Investment Canada Act

By Kevin Ackhurst on January 14, 2013 Posted in Antitrust, competition and regulatory

The threshold for a pre-closing net benefit review under the Investment Canada Act and the threshold for a pre-closing merger notification under the Competition Act have been increased for 2013.

Investment Canada Act: the direct acquisition of control of a Canadian business by a non-Canadian from a WTO-member country is subject to pre-closing review and approval where the assets of the acquired business had a net book value of more than $344 million as at the end of the target’s last completed fiscal year prior to the acquisition. [The 2012 threshold was $330 million.]

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 C$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 $80 million (or in the case of an amalgamation at least two of the amalgamating corporations must have assets or revenues from sales greater than $160 million). [The 2012 transaction size thresholds were $77 million and $154 million respectively.]

These changes are effective January 12, 2013. Please contact a member of our Antitrust, Competition and Regulatory team if you have any questions.

Business-related patents

By guestauthor on January 11, 2013 Posted in Intellectual property, Technology and innovation

This post was contributed by Matthew Marquardt, Partner, Norton Rose Canada LLP and Laura Johnson, Associate, Norton Rose Canada LLP

“Business method” patents remain a hot topic in business and legal circles, yet are still too often overlooked – particularly in contexts such as M&A.

As recently as 2011, the Federal Court of Appeal in Canada affirmed that business methods are patentable, quashing the rejection by the Commissioner of Patents of the now infamous Amazon.com ‘one-click’ patent on the basis that the claimed invention was a business method – and therefore not patentable subject matter. Although that decision, along with similar rulings in the US and elsewhere, has had a fair amount of air time at the CEO, CTO, and CLO levels, patents are still too often overlooked when assets are counted in M&A transactions.

The biggest reason business-related patents are often overlooked is that they don’t spring naturally to mind when business assets are being gathered on the table. But patents can, and have frequently been, obtained for a very wide range of business-related improvements: basically, anything related to the conduct of a business has the potential to support a patent application. Business-related patents can be seen as any patents relating to a novel aspects of doing business, including business methods developed either through abstract ideas or software. This can include everything from new ways of funding companies to improvements in bank machines, as well as business-related software or hardware like computer systems.

The second reason is that when IP lawyers discuss “business method” patents, they are discussing a very narrow, technical range of patents – a range that covers a very small percentage of business-related patents. As suggested above, the vast majority of innovations brought to bear in increasing profitability in most businesses are susceptible to patenting, whether related to software, machines, or even potentially pencils: the rumour that “business methods” are not patentable is (a) not true, and (b) distracts attention from the very real fact that patents can, and do, affect most businesses.

Business-related patents can play an important role on both sides of a transaction – on the buy side they can function like the proverbial Rembrandt in the attic, with their discovery dramatically increasing the importance of purchased assets – who wouldn’t like to find, among the dusty boxes of assets purchased in a transaction, a patent that will lay the competition dead? (And yes, that really does happen.) On the sell side, because of their potential strategic use against competitors, they can be used to dramatically affect an asking price: the threat of an auction of patents among the purchaser’s future competitors, for example, can have an electrifying effect on the buyer’s perception of value.

Navigating the new Investment Canada rules for state-owned enterprises

By Kevin Ackhurst on December 11, 2012 Posted in Antitrust, competition and regulatory

On December 7, 2012, the Canadian government approved two proposed investments in Canadian energy companies by state-owned enterprises (SOEs) under the Investment Canada Act (ICA): the proposed acquisition by PETRONAS of Progress Energy Resources Corp. (Progress) and the proposed acquisition of Nexen Inc. (Nexen) by China National Offshore Oil Company (CNOOC). Norton Rose Canada represented PETRONAS before the Investment Review Division of Industry Canada.

Concurrent with these announcements by the Minister of Industry, the government unveiled new guidelines applicable to future acquisitions of control of Canadian businesses by SOEs. However, the general test under the ICA remains –such acquisitions must be found “likely to be of net benefit to Canada.” In any case, acquisitions of control of Canadian businesses with asset book value of less than $330 million are not subject to review.

Click here for a legal update prepared by Kevin Ackhurst and John P. Carleton that reviews the two approvals, explains the new rules, and provides practical suggestions for investors—both SOEs and private sector investors— who may be faced with navigating the ICA in the future.

Mandatory Jail Time for Certain Competition Act Offences Now in Effect

By Laura Johnson and Kevin Ackhurst on November 20, 2012 Posted in Antitrust, competition and regulatory

Effective today, an individual convicted of certain violations of the Competition Act (Canada) may be punished with prison time instead of community service. These offences include price-fixing, bid-rigging and misleading advertising. For more information please see Norton Rose’s Legal Update on the topic prepared by our colleague Stephen Nattrass here.

Merging parties should take note of these amendments because parties that start coordinating their businesses before the completion of the merger could be in violation of the Competition Act (Canada). This means that parties to an M&A transaction should not, pre-closing, agree with their counterparty on prices to be charged, dividing up customers (either specific accounts or by geographic territory), or to restrict output. Parties must maintain a regular competitive mindset until closing has occurred because until such time, they remain competitors. Any pre-closing anti-competitive behaviour could land the parties in hot water. Parties who are uncertain as to whether their pre-closing behaviour might be offside the Competition Act (Canada) should consult with an anti-trust specialist in advance.

Trends in Q3 M&A activity

By guestauthor on October 31, 2012 Posted in Corporate finance, Finance

This post was contributed by Trevor Zeyl, Associate, Norton Rose

People walking in building lobby

Canadian M&A activity was down sharply in Q3, but the proposed $15.1 billion takeover of Nexen Inc. by China National Offshore Oil Company Limited drove the overall value of deals up 23% over Q2 and 16% over Q3 2011. PricewaterhouseCoopers (PwC) recently released its report, Capital Markets Flash: Q3 Canadian M&A Deals Quarterly, which outlined the following developments:

Q3 2012 saw 599 announced Canadian M&A transactions worth $58.6 billion. Volumes were down 17% from Q2 2012 and 21% from the same period last year.
Domestic M&A activity slumped 47% from Q2 and 50% when compared to the same period last year.
Foreign acquisitions by Canadian entities continued to be strong, totalling $18.9 billion in Q3% 2012, a small decline of 13% compared to Q2 but still 23% ahead from Q3 2011.
The US replaced Europe as the dominant target for Canadian suitors, with over $13.8 billion, or more than 73% of the Canadian outbound acquisition dollars, heading south of the border.

According to PwC’s Canadian deals leader, Nicolas Marcoux, “The drop off in activity is attributable to an absence of targets in the market, rather than an absence of demand for deals.”

The mining and metals sector, the most targeted industry for M&A activity in 2011, was particularly vulnerable to the downturn in Q3 and has fallen from the top five most targeted industries for M&A activity. This is due in large part to a slowing Chinese economy and the related decrease in demand for commodities.

With some deals in the pipeline, such as Exxon Mobil Corp.’s $2.6 billion offer to acquire Celtic Exploration Ltd., investors should be cautiously optimistic that Q4 M&A activity may correct the disappointment of the Q3 results.

Increasing focus on M&A alternatives

By Troy Ungerman and Laura Johnson on October 17, 2012 Posted in Corporate finance, Finance, Financial institutions

With increasing cash reserves and a stagnant economy, firms are looking for alternatives to M&A for excess cash, including returning capital to shareholders by way of repurchase, dividend and debt reduction.

According to the Thomson Reuters fourth annual Outlook for Investment Banking Services Survey, as valuations continue rising in the Americas, firms are becoming less interested in using cash for M&A transactions, with 36% of respondents believing firms will continue building cash reserves, up from 25% last year. Of those surveyed, 33% cited repurchasing shares as a top priority for 2013 (versus 27% for 2012) and 32% cited distributing cash via dividends as a top priority for the year (versus 24% for 2012).

Just last week AuRico Gold Inc., acting on the increased demand from influential investors in gold companies for dividends, announced that it would use much of the $750 million it received from the sale of a Mexican mine to return proceeds back to shareholders rather than looking for an M&A opportunity. Aurico’s stock jumped 21% on the day of the announcement and has increased by 4% since then.

Despite some movement towards alternative uses of cash, M&A forecasts overall for 2013 show a 12% improvement over 2012, matching 2011 with $2.4 trillion with of deals, led by activity in the healthcare industry. Areas of high activity are expected to be Latin America, Western Europe and developed Asia.

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