The growth and expansion of streaming services

The source of our television services is significantly changing from traditional cable and television services to online providers. The actively changing television service landscape is because of the growth of over-the-top (“OTT”) media services.

Growing Popularity

According to a report by the Canadian Radio-Television and Telecommunications Commission, OTT services are television services that are provided through the internet. The CRTC Report identifies most of these OTT services as subscription-based-video-on-demand services, such as Netflix and Crave. The CRTC attributes SVOD services as generating the bulk of OTT revenue, surpassing traditional broadcasting revenue by almost a billion dollars.

Streaming Wars

The growth and expansion of streaming services creates an active M&A market. Specifically, the market will remain active as streaming giants continue to acquire smaller production companies. Acquiring production companies is important to increase the share of content to offer subscribers and to compete for the best collection of aggregated content.

Consumers will notice this shift almost immediately as coveted television series and movies begin to migrate from one platform to another. According to a report from Deloitte, consumers are entering a phase of “consumer subscription fatigue.” As companies compete to offer various subscriptions, many consumers find themselves requiring more than one subscription for complete viewing options.

Canadian Content

The continued growth and expansion of streaming services will impact Canadian media and production, and, likely for the better. Services like Netflix have provided a new, global platform for Canadian shows and increased support for generating Canadian SVOD content. With approximately 6.9 million Canadian subscribers and $100 million invested in Canadian content, Netflix has considerable reach with Canadian audiences. Accordingly, Netflix the largest potential for impact in promoting Canadian culture and arts to global audiences.

While the streaming service industry and the existing demand for new and interesting content show no signs of slowing down, it seems likely that Canadian content and viewers alike will reap the benefits of these changes.

The author would like to thank Vahini Sathiamoorthy, summer student, for her assistance in preparing this blog post.

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The anatomy of an alternative mutual fund: dissecting the alternative investment vehicle following recent CSA amendments

Traditionally, commodity pools existed as unique investment vehicles which, contrary to other Canadian public investment funds, were excluded from the investment restrictions and limitations codified in National Instrument 81-102 Investment Funds (NI 81-102). Earlier this year, as part of the final phase of its Modernization of Investment Fund Product Regulation Project, the Canadian Securities Administrators (the CSA) adopted a number of amendments to several National Instruments, including NI 81-102 and National Instrument 81-104 Commodity Pools (NI 81-104) (the Amendments), relating to the establishment of a regulatory framework for alternative mutual funds. When the Amendments came into force on January 3, 2019 (the Effective Date), all commodity pools that existed before the Effective Date were automatically converted to alternative mutual funds. A further six month period was granted to these converted funds to conform to the new requirements, which lapsed on July 4, 2019.

Genesis of alternative mutual funds

The Amendments introduced “alternative mutual funds”, also known as “liquid alts”, which constitute a new category of mutual fund. This new vehicle effectively replaces “commodity pools” that existed pursuant to NI 81-104. As defined in NI 81-102, the term “alternative mutual fund” refers to a mutual fund, other than a precious metals fund, that has adopted fundamental investment objectives that permit it to invest in physical commodities or specified derivatives, to borrow cash or to engage in short selling in a manner not typically permitted for other mutual funds. This new definition is reflective of the added investment flexibility granted to these types of funds.

Seed capital requirements

Under the previous NI 81-104 provisions, commodity pools had a minimum seed capital requirement of only $50,000 and were required to possess this amount in the fund at all times. The Amendments have harmonized the seed capital and start-up requirements for all mutual funds: (i) a fund requires $150,000 in seed capital, provided by either its manager or other related entities at inception; and (ii) the manager (or other seed capital provider) is barred from withdrawing any amount of that seed capital until the mutual fund has raised at least $500,000 from outside investors.

Select Investment restrictions

Some key investment restrictions imposed on alternative mutual funds under the Amendments are set out below:

  • Concentration restrictions: Alternative mutual funds are permitted to invest up to 20% of the fund’s net asset value (NAV) in securities of a single issuer, at the time of purchase. This represents an increase from the previous 10% of NAV limit that applied to all mutual funds (including commodity pools).
  • Investments in physical commodities: While conventional mutual funds are prohibited from investing in precious metal certificates (other than gold, silver, platinum or palladium) and are subject to a 10% of NAV limit on direct or indirect investment in physical commodities, alternative mutual funds are not subject to these restrictions.
  • Illiquid assets: The previous limits on investing in illiquid assets applicable to mutual funds (including commodity pools) have not changed and so there is a 10% of NAV limit in illiquid assets for alternative mutual funds.
  • Fund-of-fund investing: Alternative mutual funds are permitted to invest up to 100% of their NAV in any other investment fund that is subject to NI 81-102. This is a marked departure from the previous limit placed on commodity pools, which were restricted to investing only in conventional mutual funds that file a simplified prospectus.
  • Cash borrowing: Alternative mutual funds are permitted to borrow cash up to 50% of their NAV, for investment purposes. The ability to borrow cash on these terms is subject to the following restrictions: (i) the lender must be a qualified investment fund custodian; (ii) where the lender is an affiliate or associate of the fund’s investment manager, the fund’s independent review committee must provide its approval; and (iii) any borrowing agreement must be made in accordance with market industry practices and on standard commercial terms.
  • Short selling: Alternative mutual funds are permitted to short sell securities with a market value of up to 50% of the fund’s NAV, subject to a 10% of NAV limit for the securities of a single issuer.
  • Combined limit on cash borrowing and short selling: Alternative mutual funds can only borrow cash and short sell concurrently if the combined amount does not exceed 50% of NAV.
  • Leverage limits: Alternative mutual funds are permitted to use leverage, both directly and indirectly, through cash borrowing, short selling and specified derivatives transactions, excluding for hedging purposes, but their aggregate exposure to these types of transactions is limited to 300% of the fund’s NAV.
  • Other derivatives provisions: Alternative mutual funds are permitted to enter into specified derivatives transactions with counterparties that may not have an “approved credit rating”; however, a fund’s total exposure to any one counterparty under this type of transaction is limited to 10% of NAV on a mark-to-market basis.

Disclosure

The Amendments have also brought alternative mutual funds within the purview of the prospectus disclosure regime that applies to other mutual funds:

  • Form of prospectus: Alternative mutual funds are now fully within the prospectus disclosure regime meaning that alternative mutual funds not listed on an exchange now have to prepare and file a simplified prospectus, annual information form and Fund Facts. Alternative mutual funds listed on an exchange are required to file a long form prospectus and ETF Facts. Furthermore, in their disclosure, alternative mutual funds have to highlight how the alternative mutual fund differs from conventional mutual funds.
  • Financial statements: Now under the purview of NI 81-106, alternative mutual funds must include in their interim financial reports and annual financial statements disclosure related to their actual use of leverage over the reference period of the financial statements. Funds must also describe the impact of hedging transactions on the funder’s overall leverage calculations.

In summary, the Amendments reflect the CSA’s efforts to modernize the previous commodity pools system by crafting a regulatory framework that is effective in facilitating more alternative, flexible and innovative strategies while simultaneously upholding restrictions the CSA deems appropriate for products marketed to retail investors. As we proceed through the first year with the Amendments, it will be interesting to note how these changes influence the practice and success of alternative mutual funds and the seemingly inevitable promulgation of such funds in the future.

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

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Legal update: branches of a corporation are one and the same

In a recent unanimous decision of the full bench in 1068754 Alberta Ltd v Quebec (Agence du revenue) (1068754 Alberta Ltd.), the Supreme Court of Canada has upheld Quebec tax officials’ authority to demand information from a national bank that operates in multiple provinces including Quebec and Alberta, thereby asserting that different branches of the same corporation are still one legal person.

Unlike other provinces, Quebec collects its own income tax and the requirement to pay taxes depends on the residency of a person (legal or natural). Determining residency can be a complex legal analysis and requires a substantial amount of factual information. In 1068754 Alberta Ltd., Quebec tax officials were determining if a trust, which is a legal person, was a resident of Quebec. For this inquiry, they had to collect information from the national bank and, accordingly, they sent a formal demand letter to the bank location in Calgary because under the federal Bank Act s. 462(2), the demand letter is required to be sent to the branch where the account is located. The trust challenged this demand letter since Quebec’s Tax Administration Act said that the tax officials only have power within the province and any action outside the province would be ultra vires or “extraterritorial”.

Both lower courts (namely, the Quebec Court of Appeal and the Superior Court) ruled that the tax officials have the authority to send a demand letter to the Alberta branch and the Supreme Court agreed. The Supreme Court explained that the tax officials have power over the national bank because the bank operated in Quebec and the tax officials have power over anyone operating in their province. The Bank Act merely outlined the procedure of fixing notice to the bank as a corporation.

The Supreme Court further explained that the process of fixing the notice does not amount to exercising coercive powers outside the province because the actual enforcement of the order would be done within provincial boundaries. The tax officials in Quebec could impose penalties on the Quebec branch for non-compliance with the demand letter pursuant to s. 39.2 of the Tax Administration Act. As a result, the demand letter would still be enforceable within Quebec’s borders.

This decision impacts corporations that have branches in different provinces regardless of where the head office is located. Under Quebec’s Tax Administration Act, corporations, as a whole, can be presumed to be fixed with formal notice as long as a branch of the corporation is served. As the Supreme Court explained, “[t]he bank, as a corporation, is a single entity; its branches are treated as distinct only for limited and specific purposes.” The Supreme Court further explained that, “One is not required to conceptualize the bank and its branches as separate entities to achieve this purpose. Instead, s. 462(2) is premised on the idea that a branch is part of the bank. This is exemplified by the fact that nothing further is required from a branch upon receiving a document under s. 462(2) for the bank to be fixed with notice; the entities are one and the same.”

This decision likely does not impact subsidiary corporations as they would be considered a different legal person. To fix notice on a parent corporation after serving the subsidiary corporation would be to completely disregard separate legal personalities of shareholders and corporation, a fundamental rule of corporate law. To disregard this separate entity, also known as the corporate veil, requires a high threshold to be met under Canadian corporate law and the legal test and rules in this area are complicated.

The author would like to thank Shahroz Ahmad, summer student, for his assistance in preparing this legal update.

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5G technology driving M&A activity in the telecommunications sector

The much anticipated rollout of fifth-generation wireless (“5G”) technology and changing consumer habits are expected to drive M&A transactions in the telecommunications sector over the next year. According to EY’s May 2019 Global Capital Confidence Barometer (the “EY Report”) 55% of telecommunications executives expect to actively pursue acquisitions in the next year, a significant increase from the long-term average of 45% for the telecommunications sector.

As consumption patterns for video and gaming continue to change telecommunications executives are anticipating the impact that future 5G speeds and capacity will have on adjacent industries like mobile streaming services and mobile gaming. Increased speeds will also facilitate further developments and consumer demands in the Internet of Things, such as digital home accessories, in-flight cellular, in-vehicle cellular, and in-vehicle infotainment systems. Accordingly, telecommunications executives ranked expansion into these three adjacent sectors as their highest strategic growth priority.

These emerging technologies and markets also require telecommunications companies to begin acquiring new talent and technology, such as increased IT, data science and enterprise capabilities. In the EY Report access to technology, talent, and innovative start-ups was cited as the leading strategic driver behind pursuing acquisitions in the telecommunications sector over the next year. This focus is also reflected in the capital allocation of telecommunications companies, as most of those surveyed were planning significant technology investments this year in order to drive internal efficiencies and create new services in anticipation of the rollout of 5G technology. Changing capital allocations are also impacting the frequency of portfolio reviews, with 41% of telecommunications companies undertaking a reviewing every quarter, compared with 24% in October 2018. The increasing frequency of portfolio reviews will allow telecommunications companies to adapt quickly to market or regulatory conditions and change their capital allocation accordingly.

Telecommunications executives have expressed overall confidence in the M&A market, with 82% expecting the market to improve in the next year, compared with 65% in April 2018. However, telecommunications companies must be mindful of the challenges associated with integrating operations and talent after an acquisition. Further, the regulatory environment is an especially influential external factor in the telecommunications sector, adding potential uncertainty into telecommunications M&A acquisitions.

Accordingly, telecommunications companies should pursue technology and talent thoughtfully, ensuring that integration plans are in place beforehand. Additionally, they should also be mindful of any regulatory changes coming in response to the rollout of 5G technology or changing consumer habits in the sector.

The author would like to thank Malcolm Woodside, summer student, for his assistance in preparing this legal update.

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Merge with caution: the future of food delivery services

The convenience and efficiency of meal ordering applications (“apps”) has led to a rapid development in food delivery services. However, despite the ever-growing popularity of online takeout, the increase in food-delivery companies and the decrease in restaurants offering food delivery service is slowing the growth of what could be a lucrative market.

Consumers of this market are notoriously fickle in their loyalty. Rather than order through a specific app, consumers are more likely to order through apps which offer a wide variety of restaurant options and cheaper fees. Recent media attention has highlighted the conflict between delivery companies struggling to establish loyalty in an over-saturated market, and restaurants who are finding that sending food to customers is not worth the hassle. Restaurants are reporting that the fees imposed on them make deliveries an unprofitable venture. In order to compete, delivery services are offering increasingly subsidized pricing. The amount of competition has emboldened some restaurants to negotiate for lowered fees, accelerating the “race to the bottom” for these delivery services. In addition, restaurant operations are unable to address the growing demand for delivered food in addition to traditional service. Some have built separate entrances and systems specifically for delivery orders, but lack the digital capability to handle the requests.

Where to go from here?

With restaurants making the push for lower fees, delivery companies must adapt. Technology platforms and start-ups have emerged to help bridge the gap between delivery services and restaurants by integrating the ordering process into the restaurant’s existing systems. Several delivery companies have already carried out acquisitions of digital start-up companies to help place orders more seamlessly into a restaurant’s kitchen. Delivery services who have successfully involved digital systems to integrate into kitchens have seen an increase in orders. News articles report that of the restaurants who partner with various apps, half have now integrated delivery-based technology services. In 2015, no restaurants had integrated this service.

On the flip side, some of the largest start-ups in the delivery service industry are reportedly considering mergers with competitors rather than going public. The disappointing performances of similar companies following initial public offerings has raised concerns about the prospects of going public, and has pushed major players in the industry to look towards mergers with others. These acquisitions could either help lower the fees that delivery companies charge clients, or increase them due to decreased market competition.

After considering marketing and administrative costs, it is clear that companies that have already gone public have not yet been profitable. The integration of digital platforms into delivery services and the potential for mergers paints an exciting future for the industry. We look forward to seeing how the trend develops.

The author would like to thank Roohie Sharma, summer student, for her assistance in preparing this legal update.

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Investor uncertainty will continue to impact Canadian M&A momentum

Deal count reached a seven-year high in Canada last year, but there has been a loss of momentum in the first half of 2019. On-going trade conflicts and concern over a possible market correction have generated greater economic uncertainty, and the investment outlook for the second half of the year continues to be clouded by these factors.

Rising valuations have been partly attributed to favourable debt conditions. With stimulus measures like the central bank holding interest rates low, the financial environment has been conducive to growth in Canada – so why are some investors dubious? For one, the availability of lower discount rates on long-term earnings has encouraged greater financial risk-taking, and a there is mounting concern that global trade issues could cause a reckoning.

Trade tension with China and the residual impact on global trade is soon expected to redress lofty earning expectations in some sectors of the Canadian economy. Global economic growth has softened, and the persistently high valuations set against this backdrop has manifested doubt in the market consistent with predictions made earlier this year.

A survey of M&A and capital markets professionals across 53 countries completed by Refinitiv in January anticipated that uncertainty caused by escalating global trade tensions and political instability in key economies would slow M&A activity. Sure enough, worldwide M&A deal count was down 16% compared to the first half of 2018 and it has become apparent that trade wars among the world’s largest economies has shaken investor confidence across the globe.

While the US tariffs on Canadian steel and associated countermeasures have been lifted, the precarious process of negotiating a North American trade pact has been disruptive to Canadian investment decisions. Despite a rebound in Canadian exports, threats of further hostile trade actions contribute to a general sense of economic uncertainty. It seems likely that the loss of momentum seen in the first two quarters of 2019 is a preview of what is to come, and markets will continue to respond to escalating trade tension.

The author would like to thank Alisha Alibhai, summer student, for her assistance in preparing this legal update.

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“DARQ” technology and disruptive M&A: gearing up for the “post-digital era”

As technology has become embedded into most parts of our lives, the majority of companies have completed a digitization process. Maintaining a digital platform has become the new norm, and increasingly sophisticated technologies continue to be developed. Accenture’s Technology Vision 2019 (Vision Report), describes this as the transition to the “post-digital era,” where “digital” is a new normal and is no longer a sign, on its own, of innovation. The Vision Report highlights main technology trends that companies will need to get ahead of in order to become leaders.

The main questions related to this “post-digital shift” are; what is next, and how can companies get ahead? One possible answer appears to be “DARQ” technology, acquired through transactions with disruptive technology companies.

Emerging DARQ Technology

According to the Vision Report, 45% of businesses attribute a significant acceleration of innovation to emerging technology. One trend discussed is the growth of “DARQ” technology. The acronym DARQ stands for four different emerging technologies including; distributed ledger technology, artificial intelligence, extended reality, and quantum computing. As they develop, these technologies will have a profound impact on the way companies interact with consumers, employees and each other.   For example, distributed ledger technology, such as block chain and cryptocurrency removes the third party from transactions and can enable self-executing smart contracts. Additionally, virtual reality is poised to completely change the consumer experience with on-demand and immersive interfaces.

The Vision Report also warns that it is in the best interest of companies to get ahead of the DARQ technology. It emphasizes learning from the experience of companies who did not get ahead of the previous social, mobile, analytics, and cloud (SMAC) innovation. Those that lagged behind with embracing SMAC were met with a struggle to keep up with the digitizing age. This should be kept in mind as the new wave of DARQ technologies emerges.

As DARQ technologies grow, they are set to become the “next source of differentiation and disruption” for years to come. Consequently the investments in DARQ technology seem to be ramping up steadily, as 89% of businesses report experimenting with at least one of the four DARQ technologies. Against this backdrop, the question becomes how can companies stay relevant and get ahead.

Disruptive M&A

In the context of DARQ technology, the Vision Report suggests that companies can either invest in innovation themselves, or acquire smaller start up companies specializing in such technology. As we have previously discussed, disruptive technology is an emerging driver of M&A, and as predicted, companies have an increasing interest in acquiring disruptive technology.

Deloitte recently discussed the acquisitions of companies involved in disruptive technology as “Disruptive M&A” in a recent article (Disruptive M&A Article). The focus of Disruptive M&A is different from standard M&A transactions, as it is usually geared toward accessing technologies, talent and operating models. According to Deloitte, companies that are targeting disruptive technology start ups, are often not in the technology sector themselves. This suggests a push to interface with new disruptive technologies across a variety of industries.

However, the challenge with Disruptive M&A is the inherent complexity of such transactions. The transactions are usually more rapid, and may be done in groups, executed in series or simultaneously. Adding to the complexity, is the nature of the target companies in Disruptive M&A transactions whose value may be analyzed differently. Finally, after the transaction is complete, integration may prove more difficult.

Companies who want to get ahead of the DARQ technology trend may be interested in participating in Disruptive M&A to acquire companies currently building specialization in this area. Utilizing this nuanced form of M&A will allow companies to begin acquiring and developing technologies that will soon become part of the fabric of business before the next wave of new technology. It will be interesting to follow how companies acquire and adopt such technologies, and how it might change the landscape of M&A.

The author would like to thank Lauren Rennie, summer student, for her assistance in preparing this legal update.

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Avoiding independent contractor liability in M&A

The distinction between employees and independent contractors is significant as it pertains to workers’ legal entitlements. Employees have an exclusive working relationship with an employer, which engages rights and obligations under applicable employment legislation and the common law. By contrast, independent contractor agreements are entered into by legal and contractual equals. As a result, independent contractors are not afforded employment law protections.

The misclassification of employees as independent contractors continues to attract considerable legal action and media attention. Recently, Ontario has seen a rise in class action lawsuits involving claimants alleging to have been misclassified by their purported employers. If found to have misclassified employees, these companies could face claims for unpaid Employment Insurance and Canada Pension Plan contributions, wages and benefits, as well as various categories of damages. Canadian companies would be well served to consider the risk of inheriting independent contractor liability through M&A deals. Specifically, an assessment of the target company’s workforce should be undertaken as part of the due diligence process to ensure that workers are classified correctly and penalties are avoided. An overview of the law relating to the classification of workers should help guide this analysis.

In a recent decision emerging from Quebec, an individual was held to be an employee despite being labelled an independent contractor in a franchise agreement with the deemed employer. In reaching this decision, the Supreme Court of Canada affirmed that the language used in an agreement is not determinative of whether an employment relationship exists between parties. According to the majority of the Court, “the inquiry must assess the actual nature of the relationship between the parties, regardless of the terms of and labels used in the franchise agreement.” An employment relationship was identified based on several factors including the assumption of risk and opportunity of profit, degree of control and ownership of tools. Similar factors have been considered by courts in common law jurisdictions.

Notably, the Ontario Court of Appeal has recognized dependant contractors as an intermediate classification between an employee and independent contractor. Dependant contractors appear to work for themselves, but may be entitled to protections usually reserved for employees because of their dependence on a single employer. While this status is still developing, dependant contractors have been extended common law damages for wrongful dismissal.

Based on the foregoing, M&A due diligence must involve more than simply reviewing the independent contractor agreements of a target company. Whenever possible, buyers should also request access to employment data, contractor lists, job profiles, descriptions of services, service histories, pay records and other available information as part of the discovery process. Buyers should be attuned to the labour and employment practices of the companies they are dealing with in order to avoid independent contractor liability, particularly as this area of the law continues to unfold.

The author would like to thank Lila Yaacoub, summer student, for her assistance in preparing this legal update.

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Leave a mark: the growth trajectory of “impact investing” in Canada

Impact investing represents a continuation of Canada’s ongoing commitment to social finance, an “approach to mobilizing private capital that delivers a social dividend and an economic return to achieve social and environmental goals”, as defined by the Government of Canada. The rapid growth of impact investing is driven largely by investor demand for addressing the social and environmental impact across various asset classes, according to a report released by the Responsible Investment Association (RIA) earlier this year (RIA Report).

The Start

The term “impact investing” was first coined in 2007 by The Rockefeller Foundation and is often described as “investments intended to create positive impact beyond financial returns”, as defined in a research note published by J.P. Morgan Global Research.

The recent popularity and traction of impact investing is driven by factors including an increase in customers and other stakeholders of public and private companies demanding sustainable business practices from businesses; the diversification of non-profits and charities’ revenue sources away from traditional sources such as donations and grants; and an increasing number of investors seeking to align their personal values with their approaches to investing.

The Scope

According to RBC’s social finance white paper (RBC White Paper), impact investing is often explained as being situated across a continuum of investment approaches, with traditional investing on one end and venture philanthropy on the other end. Impact investing is distinguishable from socially responsible investing (SRI) and responsible investing (RI), investment approaches that generally seek to minimize the negative social and environmental impacts of investments by incorporating an analysis of a business or an asset’s environmental, social and governance (ESG) performance into the investment decision-making process rather than proactively investing in businesses and assets that create positive social and environmental benefit.

The most important distinction between impact investing and other investment approaches such as traditional investing, RI, SRI and/or venture philanthropy is the intention and expectation of investors to seek both a measurable social and environmental impact and a financial return. Due to the myriad of investors who engage in impact investing, the expectations of financial return from investors also range from return of capital to market-competitive to market-beating returns. Beyond providing financial statements to investors, it is common for asset managers and advisers to measure and report the social and/or environmental performance to ensure accountability to investors.

The Scale

The RIA Report revealed that the impact investing industry grew from $8.15 billion to $14.75 billion in Canada between 2015 and 2017. This significant growth has been attributed to increasing awareness and interest in social and environmental impact from asset managers and retail investors. In particular, public equity has captured considerable engagement, and at the end of 2017, represented 41% of reported impact assets under management (AUM). This is a departure from the concentration of impact investing in private equity and private debt historically. Respondents to the RIA Report, being predominantly asset managers and asset owners, believe that the increase in public equity carries with it the opportunity to “democratize” impact investing, making it more accessible to a wide array of Canadian investors.

More than ever, investors are prioritizing intentionality and magnitude of impact above asset class allocation. Similarly, investors and asset managers are moving past integrating ESG factors in their decision-making toward specifically targeting assets that have positive social and environmental outcomes at their core. The RIA Report notes that although a part of the increase in impact AUM may be attributable to the appreciation in the valuation of the underlying assets, it is safe to assume that significant inflows of net new capital contributed to impact investing strategies.

As impact investing continues to be a relatively young and immature industry, the top barrier to growth is the lack of high quality investment opportunities with operating history. Investors identified business model execution and management as a primary source of risk to their impact investment portfolios. Another challenge is the measurements and reporting frameworks of impact investment being too fragmented, complex and non-standardized.

Notwithstanding its stage of development and current challenges facing the industry, 98% of investors reported that their impact investments met or outperformed their expectations and expect impact investments to continue to grow. As the impact investing market continues to grow and reach maturity, investors are likely to adopt existing impact measurement metrics such as Impact Reporting and Investment Standards (IRIS) or UN Sustainable Development Goals (SDGs) as an agreed upon common language to measure impact, service providers and intermediaries are likely to continue to hone their expertise and qualifications, and asset managers will likely continue to increase the depth of their service offerings and related products.

Kelly Gauthier, board member of RIA and the Managing Director of Impact Advisory at Rally Assets, noted that retail and institutional investors increasingly want to drive positive social and environmental change with their investments regardless of whether it is coined “impact”, “responsible”, “sustainable” or otherwise. The investors’ objective remains that they demand investment opportunities that deliver financial returns and social and/or environmental impact.

Impact investing is experiencing rapid growth in Canada and is an up-and-coming investment approach which Canadian investors and asset managers would do well to understand.

The author would like to thank Lila Yaacoub, summer student, for her assistance in preparing this legal update.

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AI as a solution for cybersecurity problems in M&A deals

Artificial Intelligence (AI) has immense potential as a solution for cybersecurity vulnerabilities in M&A deals. Generally, M&A deals generate value and as such, understanding vulnerabilities on the acquirer and target sides is important for completion of the transaction. With the common usage of networks and servers to store high volumes of data by corporations, vetting for cybersecurity attacks has become a priority in the M&A due diligence process. In a recent study, IBM reported that the global average cost of a data breach has risen 6.4 percent over a 12 month period to $3.86 million. The average cost for each lost or stolen record that contains confidential information is also up 4.8 percent to $148, a number that can grow at an exponential rate any time a significant breach has taken place.

Preventing such attacks may require leveraging new AI solutions. IBM also reported that the average cost of a breach for organizations that fully deploy security automation is $2.88 million, which is a $1.55 million net-cost difference for organizations without automation. As with any other innovation, AI can help facilitate and be a useful tool  in the M&A due diligence process. With respect to cybersecurity vulnerabilities, AI solutions can help with the following factors found to affect the cost of a data breach:

  • Early detection: AI solutions can help identify and potentially contain the data breach faster than without automation technologies.
  • Effective management of detection and escalation costs: AI solutions can help maintain internal frameworks to manage detection and escalation costs.

Unsurprisingly, there has been an uptake in deals involving cybersecurity start-ups, including within the health and technology sectors. The effectiveness of AI solutions for protecting against cybersecurity vulnerabilities remains to be seen, as AI also gives rise to additional considerations, including in relation to supervising and monitoring the results and safeguarding against additional cybersecurity compromises that can arise with engaging AI solution into existing networks and servers.

The author would like to thank Fatima Anjum, summer student, for her assistance in preparing this legal update.

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