Parties to M&A must be diligent about climate change

Climate change has become a high profile issue that is expected to have significant implications for M&A transactions going forward. As public awareness and scientific understanding of climate change continues to evolve, we are more informed about the climate change-related risks that businesses must grapple with and get ahead of. As a result, businesses need to be especially diligent in their assessment of a range of factors that may be impacted by the changing climate when completing M&A transactions. While the risks that should be considered will, of course, vary between transactions, the following is a list of climate-related factors that will likely be relevant to the majority M&A transactions.

The Sustainability of Assets in a Changing Climate

The sustainability of assets and operations, also termed “physical risk”, is always a crucial consideration when evaluating M&A opportunities. Changing weather patterns will further complicate this analysis going forward. For example, the risk of supply chain disruptions may increase as severe weather events become more frequent, while the possibility of changing sea levels may effect industries ranging from agriculture to tourism. Similarly, businesses that require significant infrastructure to operate may face the difficult decision between investing in assets that can withstand increasingly severe weather and risking the costly damage that may or may not occur if more affordable options are chosen. The vulnerability of certain regions to natural disasters – for example, forest fires – has already had a major impact on electricity providers in California as they proactively shut down service in an effort to prevent devastation.

The sustainability of assets should especially be considered in the due diligence and valuation phases of a transaction. Buyers and parties to a merger should consider, among other factors: the location of assets, how vulnerable the location and assets themselves are to severe weather events, the impact that severe weather events may have on assets, the local labour force, and supply chains, overall. Although speculative, the consideration of physical risks to a business should not be ignored.

In short, climate change has the potential to impact an exceptionally wide range of businesses, and failure to assess these risks when evaluating M&A opportunities may result in costly mistakes.


As both awareness and concern about climate change have grown rapidly among members of the public, environmental responsibility has become a central component of many companies’ branding strategies. Research has shown that consumers prefer to support brands that align with their values, and experience has shown that becoming the subject of environmental scrutiny can have drastic negative consequences for businesses. Accordingly, a brand’s reputation for environmental responsibility, good or bad, may be an important determinant of their value going forward. Transactions that move a business in an environmentally responsible or sustainable direction may magnify the value gained as a result of the merger or acquisition.

Transactions that facilitate eco-friendly branding may bring significant advantages, while transactions that reflect negatively on a brand’s environmental responsibility may risk leaving a company behind the eight-ball. Therefore, the values espoused by a brand are an important consideration in evaluating a transaction, particularly where environmental responsibility is an existing component of a company’s branding strategy.

Legislative changes

A third factor which warrants consideration when evaluating an M&A transaction is regulatory risk. The new federal carbon tax now in effect in much of Canada has been met with a wide range of responses. Some have argued that the tax will reduce the competitive edge of Canadian businesses and result in increased costs for consumers. Indeed, recent research suggests that the tax will cause a short-term increase in production cost of more than 5% in some industries. On the other hand, some have suggested that the tax may actually increase profits for some firms by encouraging investment in sustainable sources of energy and thereby reducing reliance on fossil fuels. While the business implications of the carbon tax are not yet clear, it is clear that the ability of businesses to adapt to legislative changes aimed at protecting the environment may be an important determinant of the profitability of a business going forward.

It is expected that further pro-environment legislative changes will follow as uncertainties related to climate change risk become increasingly mainstream and dire. Businesses considering transactions in carbon- or water-intensive industries such as, inter alia, energy, transportation, and agriculture, should pay special attention to the legislature and regulatory trends, globally. This way, buyers and sellers can be proactive about company policies, due diligence, transactional terms, and deal valuation. It goes without saying, then, that attention to the possibility of legislative changes is now a critical component of evaluating M&A transactions.

Parties to a transaction, regardless of the industry, should be diligent in their consideration of climate change-related risks. Although physical and regulatory risks may be specific to businesses operating in particular industries, branding and company values are relevant across all industries. Consideration of climate change-related risks may increase costs in the short term but attention to these risks is likely to pay off in the long term by way of: decreased risk associated with the sustainability of assets, increased value related to branding, and greater preparedness for predicted legislative change.

The author would like to thank Brandon Schupp and Kiri Buchanan, articling students, for their assistance in preparing this blog post.

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Location, location, location: Where’s your chief executive office?

In the context of cross-border secured financing transactions involving Canada and the United States, the rules relating to perfection and priority of personal property pledged in favour of a lender or agent are similar. In the U.S., Article 9 of the Uniform Commercial Code governs while each Canadian jurisdiction has its own personal property security regime.

The PPSA is largely based on the UCC framework and the PPSAs of each common law Canadian jurisdiction are generally very similar to each other. There are however, a few key distinctions between the UCC and the PPSA, one of which will be discussed below.

In the context of an all-asset pledge by a debtor in favour of a secured party, one notable difference between the UCC and the PPSA perfection frameworks relates to where registrations need to be made to perfect a security interest in collateral against a debtor. While there are some nuances with respect to the type of collateral in which the security interest has been granted which require analysis beyond the scope of this post, generally speaking, Article 9-301 of the UCC requires that for a debtor, irrespective of whether it is a U.S. or any foreign entity, the local law of the jurisdiction where the debtor is located will govern perfection, the effect of perfection or nonperfection, and the priority of a security interest in the debtor’s collateral pledged in favour of the lender or agent.

In most cases, the debtor’s location for purposes of the UCC will be its jurisdiction of formation or, if such jurisdiction does not have a searchable registry (which is of course not the case for Canada), its location would be deemed to be the District of Columbia. On the other hand, the PPSA approach requires a registration to be made in the location where the collateral is located to perfect against tangible personal property such as goods (which would include items like inventory and equipment). So for example, an Ontario company with operations only in Canada having tangible assets in Manitoba and Alberta would typically require PPSA filings in Manitoba and Alberta in order to perfect the security interest in such collateral. The PPSA framework for perfecting against intangible personal property (such as receivables or intellectual property) takes one of two approaches, depending on what “located” means for purposes of the particular PPSA – registrations need to be made where the entity is formed and where its place of business or chief executive office are located. For purposes of perfecting against our all-asset pledge, another registration would therefore need to be made in Ontario because the company was formed there.

Some PPSA jurisdictions, including Ontario, have caught up with the UCC framework in terms of debtor location. Where it gets interesting is when the chief executive office of a Canadian company is in the U.S. Sometimes the parent of a Canadian company is a U.S. company and the primary business dealings of the Canadian company are run out of the U.S. The chief executive office concept can be challenging to pin down because it is a factual rather than legal determination but let’s assume that it has been determined that our Canadian company’s chief executive office is in the U.S. To cover the bases in terms of conflicts of laws rules, a UCC filing would also need to be made in the relevant U.S. jurisdiction (plus, sometimes a DC filing is also made as a precautionary measure).

To close, in cross-border secured financings it is always important to ensure that it is determined (and represented, if applicable) where the chief executive office of a Canadian company is located.

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Cybersecurity in M&A Transactions: Friend or Foe?

The heavy reliance on technology in today’s data-driven world means that cybersecurity threats must be taken seriously. More specifically, with respect to M&A transactions, a target’s cybersecurity mechanisms have become an important part of the due diligence consideration. Indeed, it is important to have a firm grasp on the nature and extent of a target’s cybersecurity vulnerabilities, the likelihood of a breach, and the procedure in place to remedy a breach, if necessary. These considerations have the power to significantly alter the value of a transaction, or even derail it entirely.

With the introduction of EU’s General Data Protection Regulation – which caused ripple effects of tightened privacy legislation in other jurisdictions – compliance with the regulatory regime is an important factor. This is particularly because some targets may not even know that they are subject to certain regulations, and may be acting offside. For example, the GDPR’s strict privacy legislation does not only apply to processors within the EU, but also to any processors that target European data subjects. That is quite a broad reach. Therefore, a compliance assessment is also an important factor in determining the value and viability of M&A transactions.

Furthermore, a target’s contractual obligations with respect to cybersecurity, and specifically regarding the transfer of proprietary data is significant. Such obligations are often connected to incidents of cybersecurity breaches and the associated indemnity in such an event.

Additionally, “employee cyber hygiene”, which refers to how internal personnel are trained with respect to cybersecurity best practices, is also an important consideration. Fending off hacking attempts and reporting suspicious activity are things that employees should be trained in, since their acts could directly impact the cybersecurity of the company. Therefore, the level of employee knowledge and training in this regard can be a telling risk factor.

One of the most important points, however, is knowing whether the target has been the victim of a cybersecurity attack that caused damage to its high-value digital assets without management’s awareness or a clear understanding of its implications to the business and its IP assets. Lack of proper due diligence in this area could result in the acquirer taking on the damages and liability from such incidents in the past.

As such, a holistic understanding of a target’s current cybersecurity mechanism, as well as a history of any past incidents, can impact the value of a transaction since this type of information will yield a more accurate risk analysis.

The author would like to thank Saba Samanian, articling student, for her assistance in preparing this blog post.

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Canadian M&A Q3 2019 Review: Canadian M&A activity remains strong despite a slight decline in transaction volume

Crosbie & Company’s “Crosbie & Company Canadian Mergers & Acquisitions Report for Q3 2019” (the Report) reviews the minor slowdown in Canadian M&A activity in Q3 2019 following a record-breaking second quarter. While deal activity declined slightly in Q3 (776 announced transactions compared to 886 in Q2), the Canadian M&A market remained robust, posting its eleventh straight quarter (dating back to Q1 2017) with at least 700 transactions.

Highlights of the Report

  • Slight decline in transaction volume: 776 transactions were announced during Q3 2019 compared to 886 in Q2 2019, representing a 12.4% decrease from the previous quarter.
  • Non-mega deal transaction values align with recent trends: 767 non-mega deals (transactions valued at less than CAD$1B) were announced during Q3 2019, with an aggregate value of CAD$20.0B. This was on par with the average aggregate value of non-mega deals during the previous eight quarters (CAD$21.4B).
  • Cross-border activity remains steady while pure domestic deals see a noticeable drop: There were 336 announced cross-border transactions during Q3 2019 compared to 371 deals in Q3 2018, while there were 78 fewer Canadian buyer/Canadian target transactions, representing a 17% decrease year-over-year (378 in Q3 2019 compared to 456 Q3 2018).

Breakdown by transaction value

In Q3 2019, the Canadian M&A market had an aggregate deal value of CAD$45B, representing an average transaction value of CAD$26.1M, excluding mega-deals (CAD$1B+). This marked the first time in five quarters (since Q1 2018) that the aggregate deal value dropped below CAD$58B. Mid-market transactions below CAD$250M—a consistent and potent segment of the Canadian M&A market—accounted for 91% of the quarter’s transaction volume, yet were valued at only CAD$8.7B (approximately 19% of the quarter’s total M&A value). Deals under CAD$1B had an aggregate transaction value of CAD$20B, which was in line with the CAD$21.4B average value during the previous eight quarters.

The average size of mega-deals declined from CAD$3.3B in Q2 2019 to CAD$2.8B in Q3 2019. Of the nine mega-deals announced during this quarter, five were Canadian-targeted and the largest was an asset purchase transaction valued at CAD$6.2B.

Cross-border, domestic and foreign deals

Cross-border activity remained strong in Q3 2019 as the 336 cross-border transactions represented 54% of total deal value and 43% of total deal activity during the quarter. Canada/US cross-border transactions accounted for 66% of all cross-border activity, with 124 outbound transactions (Canadian buyer/US target) and 99 inbound transactions (US buyer/Canadian target). Indeed, US buyers were responsible for 71% of all Canadian targeted cross-border activity and 95% of the aggregate transaction value.

While Q3 2019 marked the eighth consecutive quarter with over 500 domestic transactions, domestic M&A activity experienced a 12.5% decrease in Q3 2019 (517 announced deals) compared to Q3 2018 (591). This year-over-year drop appears to be due in large part to the 78 fewer pure domestic (Canadian buyer/Canadian target) transactions compared to this time period last year.

Contrary to historical trends, Canadian buyers spent more money generating acquisitions domestically than abroad, spending 75 cents outside of Canada for every dollar spent within Canada. It follows that the most dramatic year-over-year decline was in the Canadian buyer/foreign target deal value, which totaled approximately CAD$32.6B in Q3 2018 and only CAD$8.2B in Q3 2019.

Industry Sector Activity

Real Estate continued to be the most active industry group in the Canadian M&A market: with 112 announced deals valued at CAD$19B, Q3 2019 marked the fifth consecutive quarter in which this sector accounted for over 100 transactions. The Telecommunication Services industry ranked second with a total deal value of CAD$5.7B. The Information Technology sector experienced a marked increase in deal volume (up 32% from 77 transactions in Q3 2018 to 102 transactions in Q3 2019), while Financial Services achieved the largest year-over-year increase in deal value (up over 450% from CAD$807M in Q3 2018 to CAD$4.5B in Q3 2019). Conversely, a few consistent Canadian M&A industry groups saw considerable year-over-year dips in total deal value, including Precious Metals (down 90% from CAD$8.9B in Q3 2018 to $869M in Q3 2019), Consumer Discretionary (down 60% from CAD$6.4B in Q3 2018 to CAD$2.6B in Q3 2019), and Energy (down 56% from CAD$9.3B in Q3 2018 to CAD$4.1B in Q3 2019).

Geographic distribution

Ontario and British Columbia remained the two most active provinces, accounting for 188 deals totaling CAD$17B and 131 deals totaling CAD$3.3B, respectively. Interestingly, Quebec’s 15% share of total deal volume accounted for only a 2% share of total deal value. In Q3 2019, Prince Edward Island posted the largest transaction in the province’s history – a private equity buyout of a drug manufacturer within the Healthcare industry valued at CAD$329M.


There is persistent optimism that the Canadian M&A market will remain robust, despite some public fear that the market—currently the longest bull market in modern history—may soon take a turn for the worse. Much of this resounding faith in the market’s resilience can be attributed to strong balance sheets, easy access to capital, aging business owners looking to monetize at current high valuations and buyers seeking to boost weak organic growth. As we prepare for 2020, it will be interesting to see whether the continued strength that has defined the Canadian M&A market throughout the 2010s will persist through the decade’s final quarter.

The author would like to thank Daniel Lupinacci, articling student, for his assistance in preparing this blog post.

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The Competition Bureau (the “Bureau”) is required to review certain merger transactions that exceed various financial thresholds, based on the size of the business being acquired and the combined size of the buyer, the target business, and their affiliates. The notification thresholds under the Competition Act (the “Act”) are discussed in more detail here. The Bureau reviews transactions that exceed these thresholds (“notifiable transactions”) to assess the potential competitive effects of the deal prior to its completion, and if the Bureau concludes that a transaction is likely to substantially lessen or prevent competition, they may seek a remedy (such as a divestiture) or an injunction to prevent closing. Although the Bureau has always had the jurisdiction to examine any transaction under the Act for up to one year after its completion, regardless of its size, deals that meet the criteria of a notifiable transaction create the greatest cause for concern and have historically attracted the most attention from the Bureau.

That being said, in May the Commissioner gave a speech which highlighted the Bureau’s plan to broaden its focus to include gathering intelligence on transactions that do not exceed the notification thresholds, but nonetheless raise competition concerns. In pursuit of its expanded mission, on September 17, 2019, the Bureau announced that the Merger Intelligence and Notification Unit (“MINU”), introduced in May, and previously called the Merger Notification Unit, is encouraging parties to voluntarily notify the MINU of transactions that present competition concerns even if the proposed transaction does not exceed the statutory thresholds.

The Bureau’s moves come after the M&A market has enjoyed relatively high activity in the past two years. Larger companies continue to acquire innovative start-ups and often these transactions do not meet the notification thresholds. However, the downstream competitive effects may be significant as there is concern that disruption is dampened with the early incorporation of an innovator into an incumbent.

In furtherance of this mission the Bureau announced it was seeking information from market participants in the digital economy related to why certain digital markets have become concentrated, potentially to the detriment of consumers. By gaining a better understanding of the digital economy market and its players, the Bureau aims to inform its investigations and strategies for protecting consumers, and provide guidance to market participants. The Bureau’s commitment of additional resources to aid in the battle against anti-competitive activity in smaller transactions, then, comes as no surprise and may be just one of its steps towards ensuring the digital economy does not lack competition and favours Canadian consumers.

Overall, the tension between the Bureau’s limited resources and the requirement that it act swiftly when met with a notifiable transaction means that the Bureau is unlikely to expand the notification criteria at this time. However, with the Bureau’s greater understanding of the digital economy and competition issues related to technology as well as its enhanced focus on smaller transactions, businesses must be cognisant of possible competition issues that their transactions present, even at an early stage in the process.

The author would like to thank Kiri Buchanan, articling student, for her assistance in preparing this blog post.

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Chamber of Digital Commerce Releasing the First Ever Comprehensive Report on Canada’s Blockchain Ecosystem

Over the last decade in which the digital economy has grown at an unprecedented pace across industry sectors, blockchain technology and distributed ledger technology have shown the ability to reform the ways in which businesses and governments operate. To better understand Canada’s blockchain ecosystem, on October 4, 2019, the Chamber of Digital Commerce Canada released Canada’s first ever comprehensive report examining the country’s burgeoning blockchain ecosystem.

Through data collected from more than 150 stakeholders from industry, government and academia, this report serves as a baseline measurement of the Canadian blockchain ecosystem for tracking future growth and GDP impacts over the coming years.

On a global scale, spending on blockchain solutions by companies and governments is projected to hit almost USD$16 billion in 2023. Against this backdrop, Canada’s spending on blockchain solutions is expected to grow exponentially and reach USD$644 million by 2023, at a five-year compound annual growth rate of 73.3%, which is the highest growth rate of any country in the world.

Below are some of the key findings from the report:

  • High paying jobs: The average annual salary for a blockchain worker in Canada is pegged at CAD$98,423, which is nearly double the average Canadian salary. This compensation level makes the blockchain industry among the highest paying in Canada. Globally, the annual average salary for blockchain professionals range from CAD$83,958 to CAD$178,577.
  • Legal and regulatory issues: Almost half of survey participants listed “legal and regulatory challenges” at the top of barriers they faced. Survey results indicated that the federal and provincial policy and regulatory positions with respect to digital assets are vague and inconsistent. Larger corporations and startups alike pointed to the uncertainty and lack of harmonization in the regulatory sphere for causes behind hindered investments in blockchain innovation.
  • Canadian companies’ focus areas: The report identified nearly 400 Canadian companies that are currently active in advancing blockchain technology and contributing to the ecosystem. Blockchain-based products and services account for 34% of the Canadian blockchain ecosystem while digital asset infrastructure represents 30%. Enablers, which consist of blockchain consultancies and infrastructure and services, make up 29% of the ecosystem.
  • Innovation breakdown by region: Of the currently active 400 blockchain companies, Ontario emerges as the province which has the most innovators (at 52%), followed by British Columbia (at 29%). In terms of areas of focus, Western Canada provinces such as B.C. concentrate on providing financial services, building trading platforms and conducting crypto mining activities. Blockchain activities in Central Canada, particularly in Toronto as a financial hub, tend to focus on the investments in blockchain-based innovations. Meanwhile, Eastern Canada companies work primarily on supply-chain solutions.

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Emerging Trends in Information Technology (IT) Mergers and Acquisitions

Canada’s burgeoning information technology (IT) sector is a standout in the Canadian mergers and acquisitions landscape. A recent report by Duff & Phelps illustrates that in the first half of 2019, IT was the third most active deal-making sector in Canada with over 104 closed transactions. Against this backdrop, three trends emerge:

  • ‘Buying into’ privacy or cybersecurity risk. Buyers are becoming increasingly aware of the importance of conducting rigorous due diligence on a target company’s privacy and cybersecurity systems and practices. Marriott’s data breach in 2018, where about 383 million guest records globally were exposed to cybercriminals, highlights this. The Marriott breach occurred on IT infrastructure Marriott inherited through its acquisition of the Starwood hotels group in 2016. The vulnerability arose in 2014 when the Starwood hotels group’s IT systems were compromised by malware installed by cybercriminals. However, the exposure of customer information was not discovered until 2018. In handing Marriott a £99M fine for infringement of the European General Data Protection Regulation (GDPR), the UK Information Commissioner’s Office stated that organizations must be accountable for “carrying out proper due diligence when making a corporate acquisition, and putting in place proper accountability measures to assess not only what personal data has been acquired, but also how it is protected.” In Canada, generally, the Office of the Privacy Commissioner does not have the power to levy fines as large as what has been seen in the EU and US but has released its findings on several high profile data breaches. As a whole, these finding provide guidance, albeit limited, as to what Canadian regulators consider as reasonable security safeguards by accountable organizations. As privacy regulators globally align on stricter enforcement and larger penalties for data breaches, buyers of Canadian target companies will increasingly focus on mitigating privacy and cybersecurity deal risks.
  • Dealing with competition law. There is an emerging global trend of anti-trust authorities becoming more aggressive with the technology sector. The Canadian Competition Bureau is similarly scrutinizing mergers involving technology targets. Typically, in Canada, most mergers in the technology sector do not meet the financial thresholds that require merging parties of potential mergers to notify the Bureau. Nevertheless, all merger transactions, whether or not they are notifiable, are subject to examination by the Commissioner of the Competition Bureau to determine whether they have, or are likely to have, the effect of preventing or lessening substantially competition in a definable market. The Bureau recently expanded the role of its Merger Notification Unit (now referred to as the Merger Intelligence Notification Unit (MINU)) to focus on active intelligence gathering on non-notifiable merger transactions that may raise competition law concerns. The Bureau is also encouraging parties to such transactions to voluntarily engage with the MINU well in advance of closing. To date, the Commissioner has challenged at least one completed acquisition, the acquisition of Aucerna by the private equity firm Thoma Bravo. Aucerna is a Canadian software company operating in the “relatively modest” and specialized Canadian oil and gas software market with annual revenues in the “tens of millions of dollars,” per the Competition Bureau’s statement. Thoma Bravo also has a portfolio company Quorum Business Solutions, that competed vigorously with Aucerna and was the only other licensor, aside from Aucerna, of reserves software used by Canadian oil and gas firms. On the basis that the acquisition would lead to an effective monopoly, the Commissioner required Thoma Bravo to divest the related software business of Quorum Business Solutions. In that vein, Bureau personnel have been actively following up with parties to non-notifiable transactions to request confirmation of certain information.
  • ‘Acquiring’ an innovation strategy. Companies outside the technology sector are acquiring technology companies, whereas traditionally acquirers were large strategic technology companies. The motivation for this new breed of buyers is not consolidation, acceleration of market access, acquisition of cash-flows or any of the typical rationale for acquisitions. Rather, as part of their innovation strategies, these companies are realizing that it may often be cheaper or faster to acquire desired skills or technologies rather than building those, or having those built for, themselves. For example, significant deal activity in fintech can be attributed to financial institutions such as banks and insurance companies buying technology assets to transform their businesses and service offerings.

These trends are likely to shape IT transactions in several ways:

  • At the outset of an IT transaction, parties to a merger involving technology assets will want to consider whether or not to engage early with the Competition Bureau where a contemplated transaction is non-notifiable.
  • The due diligence stage will focus more deeply on a target company’s privacy and cybersecurity policies and practices. Given the scant guidance by Canadian regulators on what constitutes reasonable measures to avoid privacy and cybersecurity breaches, coordinated legal and technical due diligence is required to identify and analyze potential issues. Mitigation of these issues will involve strategic negotiation of the specific privacy and cybersecurity representations, warranties, covenants and indemnification, as well as pre-closing remediation of the same.
  • The negotiation of ancillary deal agreements, such as transition service agreements that provide for services by the seller post-closing will should be considered early in the deal timeline where a buyer, outside the tech sector acquires a technology company as part of its innovation strategy. Typically, this buyer will lack the resources to quickly integrate the acquired assets within its infrastructure while the seller most likely will not want to provide transition services and such negotiation are likely to be lengthy.

In short, these emerging trends are likely to deepen and broaden the scope of due diligence, especially regarding privacy and cybersecurity and will likely impact the deal timeline if parties need to account for competition law issues or transition services.

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New guidance on material climate change disclosure for reporting issuers

On August 1, 2019, the Canadian Securities Administrators (CSA) released CSA Staff Notice 51-358 in efforts to clarify the scope of disclosure for reporting issuers, specifically for smaller issuers. Securities law in Canada requires reporting issuers to disclose material risks affecting their business and, where applicable, the financial impacts of such risks.

While this notice does not produce any new legal ramifications, it is intended to reinforce and expand upon the guidance provided in CSA Staff Notice 51-333 Environmental Reporting Guidance. The driving factor to release this notice was motivated by the following considerations:

  • Increased investor interest. Many investors, particularly institutional investors, have become increasingly focused on insufficient disclosure on climate change-related risks.
  • Room for improvement in disclosure. Based on CSA’s review of the disclosure of a sample of TSX-listed issuers, they noted that many provided boilerplate disclosure on climate-change related risks or no disclosure at all.
  • Domestic and global developments. There have been global and domestic initiatives for voluntary disclosure frameworks, such as the Climate Risk Technical Bulletin published by the Sustainability Accounting Standard Board.

The CSA guidance reminds issuers of the disclosure required in their Annual Information Forms and Management Discussion and Analysis, specifically reiterating the materiality threshold. Information is likely material, and therefore disclosable, if a reasonable investor’s decision to buy, sell, or hold a company’s securities would be affected if the information was omitted or misstated; and the materiality of a known trend, demand, commitment, event or uncertainty turns on an analysis of probability of its occurrence. The guidance notes that issuers will be exposed to climate change-related risks uniquely and will affect issuers in different ways. While there is no bright-line threshold for materiality, the guidance suggests that issuers consider both quantitative and qualitative factors in determining materiality, that they look at overall context, that timing is considered, and that trends, demand, commitments, events and uncertainties are assessed.

The role of the board of directors & management

The board has a role in strategic planning, risk oversight and the review and approval of an issuer’s annual and interim regulatory findings. Management also has a key role to play in risk management and the preparation of annual and interim regulatory filings. With regards to risk oversight specifically, boards and management should be taking appropriate steps to understand and assess climate change risk and the materiality of this to their business. Some specific examples of questions that board and management should consider include:

  • Is oversight and management of climate change-related risks and opportunities integrated into the issuer’s strategic plan, and if so, to what extent?
  • Has management appropriately considered how each of the different categories of climate change-related risks may affect the issuer (e.g., physical and transition risks)?
  • Has management considered which business divisions or units have responsibility for identifying, disclosing and managing material climate change-related risks and what their reporting lines are to senior management? To what extent are these responsibilities integrated with mainstream business processes and decision-making?

What are Climate Change-related Risks?

The following are the types of climate change-related risks that issuers may face:

  • Physical risks. These can be acute or long-term shifts in climate patterns. Examples include changes in water availability, sourcing and quality, or extreme temperature changes affecting operations and supply chain.
  • Transition risks. These are reputational, market, regulatory, policy, legal and technology-related risks. An example of a regulatory risk would be increased regulation of climate change-related matters, such as enhanced disclosure requirements.
  • Opportunities. Efforts to mitigate and adapt to climate change also produces new opportunities to issuers, such as the development of new products and services.

In conclusion, reporting issuers should use this guideline to ensure that they are complying with disclosure requirements required by securities law in Canada. As more investors focus on climate change-related risk and environmental, social and governance (ESG), the more relevant the subject matter becomes.

The author would like to thank Nazish Mirza, articling student, for her assistance in preparing this blog post.

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Ethical consumerism: a new driver of M&A in the beauty and clothing industries

In a previous post, we discussed the rise of M&A activity in the meat and dairy sector as consumer tastes change and concern for the environment becomes more widespread.

Industry experts believe that this trend, namely of ethical brands driving M&A, is much broader than the food and beverage space. Beauty, clothing and apparel and other consumer brands focusing on natural and sustainable products are also driving M&A activity. As the 2019 year end rapidly approaches, a reflection on some of these larger trends may shed some light on what may come in 2020.

Beauty and cosmetics

  • The research and development costs of creating effective all-natural products are high and existing organic beauty brands have the advantage of being first-to-market. For this reason, many large cosmetic companies are looking to acquire existing businesses that have captured market share in the space, rather than developing their own products to compete.
  • While consumer desire for natural products is certainly a factor spurring M&A activity, companies are also making strategic acquisitions to develop new and innovative products. A number of natural beauty brands are expected to start releasing alternative cannabis products, such as creams and topicals, once these products become legal in Canada later this month. This innovation in the beauty space has the potential to spur M&A activity not only by providing larger beauty companies with the ideal entry point into the cannabis space, but it may also create new synergies between cosmetic and cannabis companies.

Clothing and Apparel

  • A recent report states that in the past two years, the number of sustainable apparel products available to consumers have increased by an astounding 139% and vegan products available have increased by 116%. Some of these numbers are attributable to new companies and products. However, certain existing brands are also switching to sustainable fabrics for their clothing.
  • Technological innovation may have huge potential for driving M&A in this space. Sustainable clothing companies are developing the technology to make fabrics from materials like vegetable-tanned and pineapple leathers, alpaca wool, non-violent silk and other materials. Large retailers may look to these companies for strategic acquisitions and partnerships as the demand for sustainable clothing increases.

As ethical consumerism becomes more mainstream, one might expect to see more strategic acquisitions of all-natural beauty and clothing companies and/or the acquisition of technology companies that make the creation of sustainable products more profitable.

While meat and dairy alternatives have been responsible for a significant amount of M&A activity, we will be watching with interest to see whether ethical consumerism will continue to drive M&A the consumer product space, and the type of trends that emerge as ethical brands mature.

The author would like to thank Tegan Raco, articling student, for her assistance in preparing this blog post.

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Canadian credit market overview: despite slowing growth, many aspects still on the rise

The Bank of Canada (BoC) recently announced its decision to maintain the overnight rate target at 1 ¾%– while the Bank Rate and deposit rate are 2% and 1 ½% respectively – resulting in no shortage of backlash. In its press release, the BoC cites the escalation of international trade conflict as a factor in the constricting of business investment, and thus, is a heavy blow to the global economic momentum that it had projected to be an influential growth factor in its Monetary Policy Report (MPR) back in July. Uniquely, the BoC remains the only hawkish major central bank in the world, as all of its global counterparts continue to exercise dovish policies aimed at lowering various interest rates. Of course, the Canadian dollar – and the Canadian Credit Market (CCM) as a whole – will continue to move based on expectations of BoC’s next announcement.

With a focus on these mixed feelings towards what the future of the CCM may look like, it is worthwhile to take a closer look at the CCM’s overall performance as of late. Ernst & Young’s Credit Market Barometer provides an overview of the CCM’s 2019 year-to-date statistics and gives annual/quarterly comparative performance metrics based on analysis of various credit market conditions and indicators. It also gives some insight into the CCM’s outlook going forward, with its trends and statistics sourced from different credit market and governmental entities.

Key Takeaways

A review of the increasing trends in the CCM reveal that over the past year, the growth in total credit outstanding in Canada has somewhat slowed, but the quality of new borrowers has improved, which is linked (in part) to the marked decline in gross impaired loans (GILs). Impaired loans statistics are representations of delinquency probabilities (for example, GIL represents the gross value of loans that are deemed improbable for full collection of both principal and interest). The GIL ratio (which is simply GIL as a percentage of gross loans and acceptances) has improved to its lowest level in over six years, last recorded at approximately 0.53%, which is partially due to progression of the wholesale loan delinquency rate. In terms of the growth slowdown, one of the reasons for this might simply be Canada’s sluggish Gross Domestic Product (GDP), a direct result of falling commodity prices. Another attribution of this is certainly the slowing advancement of personal loans and credit cards, which is down from about 4% to roughly 2% over the past year. In terms of other standout numbers, these trends have translated to a 5.8% year-over-year rise in total credit outstanding (which is down from 6.3% a year earlier), and a 3.8% rise in the credit-to-GDP ratio. Despite consumer growth ringing in lower than the BoC had projected, the past year has still seen an increase in mortgages and stable credit quality overall (which continues to surpass historical levels),helping the positive light continue to shine on the CCM.

Categorically, this past year has also revealed growth on higher deposit margins, loan and deposit volume growth, fee income growth, and a lower corporate tax rate, which has all led to growth in overall revenue. On the whole, there have also been indications that Canadians are cutting back their debt levels due to higher interest rates, and that the growth of deposits has surpassed the growth of loans.


The next scheduled overnight rate target announcement is October 30, 2019, which will include a full update of the BoC’s outlook for the economy and inflation. It will be interesting to track these and other constant changes in the CCM (and its ongoing performance) moving forward.

The author would like to thank Daniel Lupinacci, articling student, for his assistance in preparing this blog post.

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