The InterOil decision: robust and independent fairness opinion required

A recent decision of the Yukon Court of Appeal, InterOil Corporation v Mulacek, has potentially significant consequences for corporate governance practices in the context of plans of arrangement.

Fairness opinions in plans of arrangement

When a corporation proposes a plan of arrangement to its shareholders, it is generally considered a best practice of corporate governance to obtain a fairness opinion that assesses the financial fairness of the arrangement for affected shareholders. The fact that the directors sought expert financial advice evidences compliance with their fiduciary duties and, when applying for court approval, is an important factor in persuading the court that the plan is “fair and reasonable”.

InterOil Corporation v Mulacek: Yukon Supreme Court decision

The decision in InterOil Corporation v Mulacek suggests that unless the fairness opinion is thorough, balanced and independent, it may be of limited use as evidence that an arrangement is fair and reasonable.

At first instance, the chambers judge approved an arrangement involving the exchange of the shares of InterOil Corporation for shares of Exxon Mobil Corporation valued at $45 per share, plus a capped “contingent resource payment” (CRP). The judge reviewed InterOil’s board process and the fairness opinion obtained from its financial advisor. With respect to the fairness opinion, the judge found that it:

  • Lacked independence because the expert’s fee was contingent on the success of the arrangement;
  • Failed to disclose the details of the contingency fee;
  • Failed to address the value of the resource assets and the impact of the cap on the CRP so that shareholders could consider whether the arrangement reflected that value;
  • Failed to account for the CEO’s significant financial incentive for the arrangement to proceed; and
  • Was otherwise deficient because it failed to refer to specific documents or facts to indicate what the opinion was based on and lacked analysis of that information.

Despite these findings, the judge found the arrangement “fair and reasonable”. 80% of InterOil’s shareholders voted in favour of it and many of the details lacking in the fairness opinion were evident in the information circular.

InterOil Corporation v Mulacek: Yukon Court of Appeal decision

The Court of Appeal reversed this finding. It held that the shareholders were not in a position to make an informed choice as to the value they would be giving up and the value that they would be receiving. For the reasons outlined above, the fairness opinion was inadequate for that purpose.

In addition to the fairness opinion problems, other facts put the fairness of the arrangement in doubt: the CEO was in a position of conflict; the “independent” special committee likely was not independent; and the arrangement was not a “necessity”. Therefore, the inadequacy of the fairness opinion was not the only basis for the decision. However, the Court’s decision still serves to elevate the importance of a robust and independent fairness opinion, particularly where there may otherwise be some question whether the plan is “fair and reasonable”.

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Chinese capital controls shake-up global M&A market

In late 2016, the Chinese State Council announced new capital controls were to be put in place as of January 1, 2017, with the aim of reducing the outflow of currency from China. These new measures are seen as likely to have significant impacts on industries around the globe, such as housing markets and insurance, as well as the broader market for international mergers and acquisitions (M&A) by initiated by Chinese companies around the world.

Crackdown on money laundering

One of the principal aims of the regulations appears to be a crackdown on money laundering through the purchase of overseas properties. According to Bloomberg, for individuals, the regulations introduced restrictions on international payments and reporting requirements for banks whose customers seek to complete any cash transaction in amounts greater than 50,000 yuan or any overseas transfer of amounts equal to USD$10,000 or more. When completing applicable foreign exchange transactions, individuals are required to pledge that such funds will not be used for the purchase of foreign property, securities or insurance. As well, individuals must provide a detailed breakdowns of their proposed use of funds.

Increased scrutiny on large transactions

In addition to these personal restrictions, according to CNBC, the new regulations also appear to be aimed at curbing outbound M&A activity through increased scrutiny by Chinese regulators of any transaction out of the country valued over USD$10 billion, with transactions under USD$1 billion likely to receive less thorough review. Though there has been typically little public comment from the Chinese government on the new capital controls, the the Financial Times reported the Chinese State Administration on Foreign Exchange as trying to counter the idea that the government wants to curb M&A activity, but rather that it wished to “crack down on ‘fake’ transactions while continuing to clear genuine ones.” The FT further reports that analysts and bankers see the Chinese government as being concerned about the quality of Chinese overseas investments” and fearing that “transactions are being rushed through without proper due diligence to cash in on the [US] dollar’s continuing appreciation against the renminbi.”

Despite the sense in the market that the Chinese government is seeking to curb outbound M&A activity, CNBC’s report suggests that high dollar value transactions out of China show no signs of stopping all together and that investments considered strategically significant to Chinese interests will receive approval. Media reports have also cited Chinese regulatory support for Dalian Wanda’s USD$1 billion buy-out of Dick Clark Productions as evidence that high profile and politically connected firms are considered exceptions to the new capital control measures, and that such firms will continue to be able to complete high dollar-value outbound transactions. (Despite previous statements of support for the Dalian Wanda-DCP transaction by Chinese authorities, media reports state that DCP’s owner,  Eldridge Industries, subsequently filed suit in Delaware claiming termination fees after one of its affiliates terminated the transaction alleging that Dalian Wanda had “failed to honor its contractual obligations” when the transaction failed to close by the end of February.)

Consequences of new capital controls

A Reuters report notes that a result of greater scrutiny on outbound transactions has been a spike in inbound M&A activity and that he value of inbound M&A transactions has “already reached $7.1 billion so far in 2017, almost double the amount in the same period last year”. This increase in inbound M&A activity is intertwined with desire of the Chinese government “rebalance the economy away from infrastructure, heavy industry and export-led growth and towards domestic consumption”. Whereas the Chinese government had previously considered many sectors off limits to foreign direct investment, a desire to increase domestic consumption and growth means that “foreign investments no longer need to go through a cumbersome approval system, and there has even been some loosening” in certain sectors previously deemed too internally sensitive to be opened to foreign competition.

Though the effect of these changes in Chinese economic policy will continue to evolve over the coming months and years, this new emphasis on stability at home and stopping any slide in the value of the renminbi against the dollar is already showing signs of slowing outbound M&A activity while bringing new opportunities in China for buyers looking to expand into that market. Based on our recent experience, it pays to be patient and to remain optimistic – Chinese regulatory approvals are not altogether gone for good.

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How deal team size can help produce post-transaction synergies

Deal Law Wire - Norton Rose FulbrightRegardless of whether the parties are public or private, the potential synergies that can be gained from an M&A transaction are among the most common reasons cited by acquirers when justifying their proposed transactions to stakeholders. However, without careful planning and execution, these synergies often fail to have the impact on the bottom line that management expects when deals are first conceived. A recent article by McKinsey & Company suggests that by broadening their deal teams, acquirers may be better equipped to realize these post-transaction synergies.

Problems with lean transaction teams

Typically, executives tend to keep deal teams as lean as possible in order preserve confidentiality. According to McKinsey, as a result of this, these small and isolated teams are apt to misevaluate synergies as they can lack insider information from relevant members of management. Without this information, deal teams are more prone to cognitive biases and are less likely to achieve buy-in from critical stakeholders.

Members of management can add value

In order to avoid this, deal teams should consider bringing in specific members of management who can assist the acquirer in executing its strategy with respect to synergies between the two companies. These individuals can provide critical information and can be especially valuable to validate costs and assumptions as well as to evaluate transition timelines. Furthermore, by involving select members of management, acquirers can begin integration planning earlier in the deal process and will be better equipped to promote a shared culture between the two companies.

Deal team size impacts effective due diligence

Strategically increasing the size of deal teams can also lead to a more effective due diligence process. While overestimating synergies was the second largest cause of difficulties or disappointments in transactions, the failure of due diligence to identify critical issues was the largest cause of difficulties in a recent survey. By bringing in the right individuals with the proper expertise, deal teams can put themselves in the best position to identify problems and, if possible, design solutions to solve them. In addition to internal resources, deal teams should also be sure to bring in external experts early on in the due diligence process. These experts can leverage their deal experience and outsider perspective to help identify risks that internal deal team members may overlook.

While increasing the size of a deal team can also increase the possibility of a confidentiality breach, the potential benefits of a larger deal team should still be seriously considered by acquirers. By using a larger team, acquirers can put themselves in the best position possible to achieve their predicted synergistic gains and to identify critical issues during the due diligence process.

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

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Distressing prospects for distressed debt?

According to a Debtwire report released this month, the North American distressed debt market will be characterized by continued volatility throughout 2017, with the oil & gas sector presenting the most attractive opportunity for investors. Financial services, industrials and real estate were also identified in the report as being ripe for investment in the coming year.

Downward allocation trends

2016 saw a lower year-over-year asset allocation to distressed investing, with 50% of respondents stating that they had increased their allocation to distressed debt, compared to 68% of respondents in 2015. This downward trend was explained mainly by concerns over general market conditions and the slow pace of economic recovery, both of which pushed investors to hold onto their capital.

Looking ahead, 43% of respondents indicated that they expected to allocate equivalent amounts to distressed debt in 2017 relative to the previous year, while 21% suggested they would decrease their allocation. Meanwhile, only 36% of respondents anticipated an increase in allocation.

M&A at the fore

In line with the previous year, strategic M&A was identified by 35% of respondents as the primary driver of market activity. As companies struggle to grow organically in a time of sluggish economic progress, respondents expected an increased emphasis on consolidation, synergy optimization and mutual growth benefits through strategic M&A.

The oil & gas sector was identified as being a likely active area for M&A due to the fall in prices within the sector. Indeed, 51% of respondents anticipated allocating more capital to oil & gas companies in 2017, while only 10% planned to decrease allocations. Of those companies expecting to increase their allocation in this sector, 27% of respondents predicted their allocations would increase between 26-50%, while a further 22% of respondents anticipated their allocation would increase between 1-25%.

Interestingly, 26% of respondents pointed to capital expenditures as the likely primary force behind primary issuance in 2017, more than doubling expectations from the previous year, when only 12% of respondents anticipated they would lead. Expectations regarding the role of refinancing (17%) and dividend recapitalization (7%) mirrored last year’s results, while leveraged buyouts are predicted to play a markedly smaller role in the year ahead, declining from 32% in 2016 to 15% in the coming 12 months.

An optimist perspective

Although the global macroeconomic climate has tempered certain investors’ appetite for distressed debt, others see opportunity in light of current market conditions, as economic uncertainty, slow credit markets and volatile commodity prices have created enticing investment opportunities in undervalued companies.

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

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2017 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 2017.

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 $88 million. The 2016 transaction size threshold was $87 million.

These changes will take effect March 4, 2017.

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 ($375 million in 2016). 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 is generally based on the enterprise value of the Canadian business. The threshold was to be $600 million for two years, followed by two years at $800 million, and then $1 billion for a year, after which it would be adjusted annually for inflation. To encourage more foreign investment in Canada, the government plans to adopt the $1 billion limit earlier than expected, sometime in 2017.  Until then, the threshold will change to $800 million on April 24, 2017.

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, several of Canada’s other trading partners, including the United States, are poised to benefit from this provision as well. As the CETA has not yet taken effect, the timing for the $1.5 billion threshold is not known, but could be as early as summer of 2017.

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 11, 2017, this threshold is now $379 million.

Updated to clarify that the timing of the change in the Enterprise Value threshold to $1 billion has not yet been determined.

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Federal court on common interest privilege: information shared in a transaction no longer protected

During commercial transactions, it is common for parties to a transaction to share documents and information that each party’s respective counsel had prepared in relation to the transaction. These documents or information typically concern matters that, upon sharing with the other parties, would assist in the completion of the transaction, such as the steps, procedure or structure of the transaction.

Until recently, such documents and information would have been considered privileged communications and protected from disclosure to third parties under the doctrine of “advisory” common interest privilege (Advisory CIP) which applies, as succinctly put by the Federal Court, where:

“different clients […] represented by different lawyers […] share privileged information [i.e., solicitor-client privileged information] on a matter of common legal interest not related to actual or anticipated litigation.”

Iggillis Holdings Inc v Canada (National Revenue), 2016 FC 1352 at 9.

Accordingly, if a person, such as a regulatory body, that was not a party to the transaction requested disclosure of such communication and would otherwise be entitled to this disclosure under applicable law, each party could assert Advisory CIP in order to refuse such disclosure.

However, a recent decision from the Federal Court of Canada has recently called into question the availability of the otherwise seemingly established doctrine, ruling that Advisory CIP in commercial transactions does not exist (at least) in Canada.

In that case, counsel for the purchaser had prepared a memorandum which was disclosed to the seller (whose counsel albeit also participated in creating the memorandum) in the course of the sale and purchase of certain assets and shares. In the memorandum, purchaser’s counsel advised as to how to structure the transaction in the most tax-efficient manner. The purpose of circulating the memorandum was to ensure the seller agreed on the steps in the transaction, understood any risks involved and had the opportunity to discuss these risks and negotiate changes to the transaction.

During Canada Revenue’s Agency (CRA) review of the transaction, the CRA requested production of the memorandum pursuant to its powers under the Income Tax Act, RSC 1985, c 1 (5th Supp). In refusing production, the seller (and purchaser as intervener) asserted Advisory CIP over the memorandum. Accordingly, the CRA brought an application to the Federal Court in order to enforce production of the memorandum.

After reviewing the origins, jurisprudence and suitability of the doctrine in Canada, the court held that the establishment of the doctrine was based on erroneous and faulty grounds and ruled that the doctrine was no longer available to protect privileged communications shared in commercial transactions, ordering production of the memorandum to the CRA. Notably, however, the court did confirm that communications shared between clients represented by the same lawyer (or law firm) are privileged and therefore protected from disclosure to third parties under joint-client privilege:

“There is no controversy regarding the privileged nature of communications involving a common interest in situations where two or more clients are represented by the same lawyer.”

Iggillis Holdings Inc v Canada (National Revenue), 2016 FC 1352 at 9.

This decision, as rightfully acknowledged by the Federal Court, contradicts a long line of jurisprudence accepting and applying Advisory CIP to circumstances similar to that in this case (that is, different parties represented by different counsel) and, not surprisingly, is now on appeal. Further, it is important to note that the decision is not binding on provincial superior courts, where most commercial cases are litigated and where the status quo continues to recognize Advisory CIP (at least, until further notice). Nonetheless, it will be interesting to see how the Federal Court of Appeal decides on the future of Advisory CIP in Canada.

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Conflicts in M&A: what are they and what steps should be taken to address them?

As part of meeting their fiduciary duties to the corporation, directors and officers are required to avoid a conflict of interest in the context of a M&A transaction. A conflict of interest is defined quite broadly by the law and contemplates situations where there is:

  • a direct conflict of interest (i.e., where a director or officer of the corporation is a party himself/herself to a proposed material contract or transaction with the corporation);
  • an indirect conflict of interest (i.e., where a director or officer has a material interest in a proposed material contract or transaction with the corporation even though he/she is not a party to the transaction); or
  • a conflicting duty (i.e., where a director or officer of the corporation acts as a director or officer for another corporation that is a counterparty to a material contract or transaction with the corporation).

When any of the above conflict scenarios exist in the context of a proposed M&A transaction, corporate law requires the conflicted director or officer to disclose the nature and extent of the conflict of interest to the board and to refrain from voting on the impugned M&A transaction (the Transaction). Timely disclosure is required – in the case of a director, the director must disclose of the conflict at the meeting at which the Transaction is first proposed, and in the case of an officer, immediately after the officer becomes aware of the proposed Transaction. Failure to comply with these procedures permits a court, on application by the corporation or any of its shareholders, to set aside the Transaction and/or require the conflicted director or officer to account to the corporation for any personal profit or gain realized from the Transaction, unless the court finds the Transaction to nevertheless be “reasonable and fair” to the corporation.

There are concrete steps a corporation can take to increase the likelihood that a Transaction is viewed as “reasonable and fair” to the corporation, such as:

  • have a “Conflicts of Interest and Disclosure Policy” that requires directors and officers to disclose of their other offices or directorships and material shareholdings and that prescribes certain procedures/protocols be followed in the event of a Transaction (or any other conflict of interest);
  • engage legal advisors early in the process;
  • have accurate and complete records (including meeting minutes) that show the board devoted sufficient time and attention to considering the nature and extent of the conflict and ultimately made a well-informed decision when deciding to approve the Transaction;
  • have a special committee of (or simply designate) independent and disinterested directors to consider the Transaction and to negotiate on behalf of the corporation; or
  • have shareholders approve the Transaction by way of a special resolution on the basis of full and frank disclosure of the nature and extent of the conflict.

Deciding which (or whether any) of these steps are worth taking will be cost and context dependent. What is clear, however, is that in the rush of a potential deal, it is crucial that directors and officers consider and continuously monitor its conflicts procedure in order to avoid subsequent litigation that could result in the invalidation of a deal.

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Canada v. the US: highlights from the 2016 private deal points study

Deal Law Wire - Norton Rose FulbrightThe American Bar Association recently published the 2016 Canadian Private Target M&A Deal Points Study. The study, which was authored by a group of Canadian lawyers, including several from Norton Rose Fulbright Canada LLP, was based on a review of publicly available acquisition agreements for transactions signed in 2014 and 2015. The study provides a useful comparison of the prevalence of important deal terms in both Canadian and U.S. M&A practice. A brief overview of some of the largest differences identified in the study between Canadian and U.S. transactions is set out below:

  • No shop / no talk provisions: These provisions generally prohibit a target or its representatives from soliciting or encouraging an acquisition proposal or participating in discussions that could be expected to lead to an acquisition proposal for the period between the signing of an acquisition agreement and the closing of a transaction. In Canada, 62% of deals had such a provision, while in the U.S., 90% of deals had this type of provision. Notably, the difference between Canadian and U.S. usage has narrowed between 2012 and the most recent version of the study.
  • Accuracy of representations: While it is customary that representations must be true at closing, representations can also be required to be true as of the time at which the acquisition agreement is signed. While unsurprisingly 100% of both Canadian and U.S. deals required that the targets’ representations were accurate at closing, only 32% of Canadian deals required that the representations were accurate when they were made in contrast to 63% in the U.S.
  • Legal opinions: In both Canada and U.S., the prevalence of a provision in acquisition agreements requiring a non-tax legal opinion to be provided by the target’s counsel has fallen in each year this study has been conducted. In the most recent study, 34% of Canadian deals had such a provision while only 11% of U.S. deals included this type of provision. This is down from 45% of Canadian deals in the 2012 study and 27% of U.S. deals in the 2011 study.

While no one factor can account for the discrepancies between U.S. and Canadian practice, the authors of the study suggest that the fewer deals for which information is available in Canada and the large percentage of Canadian deals that are in the natural resources sector may have an impact on the results. Even so, this study can be a useful indicator of what is considered “market” in Canada and the U.S. and is also a valuable guide to indicate trends in M&A practice.

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

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Canadian M&A expected to rise in 2017

Fuelled by low interest rates, strong corporate balance sheets and stable finances, 2016 was a strong year for Canadian M&A. Looking forward, Citi Canada, in association with Mergermarket, surveyed a range of Canadian dealmakers to gauge their expectations for Canadian M&A in 2017. The results of this survey are set out in a recent report entitled Navigating Change: Canadian M&A in a period of global upheaval. Highlights of the report are set out below:

  • Deal volume. Two-thirds of respondents expect to see a rise in Canadian M&A volume in 2017 compared to 2016.
  • Free cash. The majority of respondents believe that the large cash positions on corporate balance sheets will drive Canadian M&A. At the end of 2015, TSX-listed issuers collectively held $40 billion in cash on their balance sheets, illustrating a significant reserve for deal-making. Respondents believe these large cash positions, as well as asset sales, will be the preferred method of financing acquisitions in 2017.
  • Quest for growth. The second largest expected driver of Canadian M&A is companies’ desire for inorganic growth, due in part to slow global economic growth.
  • Asia-Pacific. Just under three-quarters of respondents believe that Asia-Pacific will be one of the top sources of inbound Canadian M&A in 2017. This view is further bolstered by Prime Minister Trudeau’s goal of developing a trade deal with China.
  • Energy. As in the past, the energy sector is expected to lead Canadian M&A through 2017. This is due in large part to the buyers’ market resulting from lower energy prices. M&A involving industrials, chemicals and outbound healthcare is also expected to see high deal volume in 2017.
  • Political uncertainty. The largest concern for Canadian M&A voiced by respondents was political uncertainty resulting from the Trump administration – we covered these risks and uncertainties in a previous post.

As the year progresses, Deal Law Wire will continue to provide you with updates regarding Canadian M&A.

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

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Big year on the horizon for big pharma

DLW_blog_pillsGlobal M&A activity in the biopharmaceutical industry skyrocketed in 2014 and 2015, eclipsing US$200 billion in deal value each year and prompting EY to declare such elevated activity to be the “new normal” in the industry. After another strong year in 2016, big pharma companies now appear poised to carry this trend into 2017. In fact, according to EY’s M&A Outlook and Firepower Report 2017 (the Firepower Report), both the pressures on big pharmaceutical companies to pursue inorganic growth, and the ability of these companies to execute strategic acquisitions, are higher than they have been at any point over the past several years.

Findings in Firepower Report

The Firepower Report predicts that pricing pressure will be a key driver of M&A activity as payers around the world push for lower drug costs. This pressure, enhanced by the establishment of biosimilars in developed markets and overcrowding in increasingly competitive therapeutic fields, is steadily eroding the pricing power of big pharma companies and threatening to erode future revenue streams. As a result, analysts’ revenue forecasts for both legacy and new drugs have been trending downwards, creating a “growth gap” for many big pharma companies as compared to overall drug market sales. Efforts to counteract the effects of these dampened growth trajectories have focused on M&A activity in what EY calls a “race for inorganic growth”.

Fortunately, according to the Firepower Report, a convergence of political and industry factors has the potential to create favourable M&A conditions for big pharma in the coming year. First, EY has identified that there is significant unspent “firepower” among big pharma companies. “Firepower” is a metric derived from the strength of companies’ balance sheets that is used by EY to approximate a company’s ability to engage in M&A activity. While “firepower” is down overall among big pharma companies, EY reports that for the first time in several years, big pharma “firepower” is beginning to exceed target company valuations, putting larger growth targets within reach.

Relatedly, target company valuations have sharply declined, which could increase buyers’ appetites for M&A. In this regard, there is historical precedent: a similar decline in biopharmaceutical company valuations in 2008 was followed closely by a slew of “mega-deals” in 2009.

Impact of geopolitical developments on M&A

Finally, the past year’s geopolitical developments may also spur M&A activity. This is particularly true in the United States, where optimism about favourable future regulatory and tax environments, coupled with the possible repatriation of up to US$100B in cash into the target-rich country, could significantly drive dealmaking. EY further suggests that any anticipated benefits in the United States may induce companies in other jurisdictions to accelerate their own M&A agendas.

All considered, the biopharmaceutical industry seems poised to equal, or even eclipse, the elevated dealmaking levels achieved in the recent past. Indeed, in mid-October, 2016, 43% of executives in the life science industry said that they had five or more deals in the works. With big pharma in the driver’s seat, it appears likely that a big year is on the horizon.

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

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