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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(Un)masking value: how the data masking market can impact M&A activity

Recent rumblings about the “data masking” market have put this concept on the radar of many, which warrants a closer look at the relevant trends and the potential of data masking. The information age has made cybersecurity a necessity and the increase of data breaches and malware attacks have led to calls for greater data protection.

What is data masking?

Perhaps surprisingly, the purpose of data masking is more than just obfuscating original data in order to protect it. An additional layer is the process of creating a structurally similar, yet inauthentic version, of an organization’s data that can be used for purposes such as software testing and user training. This is done to safeguard the actual data, but also have a functional substitute for occasions when the real data is not required.

Data masking maintains the format of the data, but changes the values. While several methods may be adopted to “mask” the data, such as encryption, character shuffling, and character or word substitution, the value must be changed in such a way so as to prevent detection or reverse engineering.

Why is it important?

The increasing concern for cyber attacks for enterprises has made data masking a significant asset. The data masking market size is expected to grow from USD 384.8 million in 2017 to USD 767.0 million by 2022, at a rate of 14.8%. Additionally, North America is projected to maintain its leading position during the forecast period.

Today’s complex business operations, as well as rising customers and enterprise data, result in various data related threats such as cyber attacks and internal data breaches. In fact, 40% of acquiring companies that engaged in an M&A transaction said they came across a cybersecurity problem during the post-acquisition integration of the acquired company. As such, data breaches are a major concern encouraging enterprises to safeguard their data at every possible level. To do this, major vendors providing data masking solutions have formed strategic partnerships or merged with local players as a primary strategy. Essentially, acquiring smaller data masking companies means acquiring a valuable asset that will set an enterprise apart as one that likely will not fall victim to cybersecurity disasters or data breaches. This, at least in part, explains the data masking market’s projected growth, and will sustain this market in the coming years.

The data masking market, and its projected exponential growth, has the ability to change the M&A landscape by creating tiers of enterprises that have data masking abilities and ones that do not. The former would, of course, be preferable. Nevertheless, the precise impact of this market and its sustainability potential is still uncertain and, therefore, requires a watchful eye.

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

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Venture capital investment once again shows strong year-over-year growth in H1 2019

The Canadian Venture Capital & Private Equity Association (the CVCA) recently published its 2019 first half (H1 2019) report on Canadian venture capital (VC) and Canadian private equity (PE) investment. Over the past year, Canadian VC investment has continued its ascent, reaching unprecedented heights and experiencing its strongest first half performance on record. Conversely, Canadian PE investment remains feeble, posting its lowest first half performance since the CVCA began collecting data in 2013.

A review of the increasing trends in the Canadian market reveals that VC investment in Canada is very robust and showing virtually no signs of slowing down. With H1 2019 setting record highs, VC-seekers should be excited and motivated by the current state of VC investment in Canada and the innovative environment that it is cultivating.

Key takeaways

  • Canadian VC investment experiences strongest first half on record: At the close of Q2, the year-to-date Canadian VC investment has hit CAD $2.15B, surpassing the previous first half high of CAD $1.67B in 2018.
  • ICT sector continues to receive majority of Canadian VC funding: Information and communication technology (ICT) attracted 54% of total VC dollars invested in H1 2019.
  • Shifting back to increased investment in early-stage businesses: Early-stage companies received 45% (CAD $973M) of total VC dollars invested in H1 2019, an 8% increase year-over-year (up from CAD $612M representing 37% last year).

Overview of Canadian VC investment activity

In H1 2019, approximately CAD $2.15B had been invested across 256 deals, representing an average deal value of approximately CAD $8.4M. Despite this marked year-over-year decline in deal volume in H1 2018 (down from 308 deals), the positive result was bolstered by the significant rise in average deal size (from CAD $6M in H1 2018). In total, there were eleven CAD $50M+ mega deals which accounted for a 42% share of total VC dollars invested. Four of these deals exceeded CAD $100M. Making these results even more impressive is the fact that the overall Canadian VC activity numbers for this report do not include VC debt deals, which represented an additional 59 deals in H1 2019.

Ontario continues to be the number one jurisdiction for deal activity with both the quantity of investments (94 deals) and deal size (CAD $1.1B) exceeding the combined total for all other provinces. Toronto-based companies accounted for CAD $741M over 76 deals exceeding the total funding of the next top 9 Canadian cites outside of Montreal. Montreal (CAD $473M over 67 deals) and Vancouver (CAD $158M over 27 deals) rounded out the top three cities, both with respect to deal volume and total investment.

Canadian VC investment by sector and stage

Canadian VC investment continues to be concentrated in the ICT sector, accounting for 54% (CAD $1.2B over 144 deals) of total dollars invested in H1 2019, with life sciences receiving a 27% share (CAD $586M over 55 deals), and agribusiness companies receiving an 11% share (CAD $243M over 20 deals). In fact, of the nine largest deals by value in H1 2018, six were within the ICT sector.

In H1 2019, later-stage companies accounted for 40% ($862M over 44 deals) of total investment. This is a reversal of a trend that appeared to be developing in H1 2018 where later-stage companies received 54% (CAD $901M) of total dollars invested compared to only 41% in 2017. It followed that early-stage companies increased there share to 45% ($973M over 111 deals) of total investment. This is an 8% increase from H1 2018, but still a decline.

The author would like to thank Joshua Hoffman and Daniel Lupinacci, articling students, for their assistance in preparing this blog post.

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A no-shop provision can be a buyer’s best friend, while exceptions may be the target’s best friend

Deal protections are an important aspect of M&A transactions. Buyers will typically negotiate with the target of the transaction to include all kinds of deal protections mechanisms, including no-shop provisions, matching rights, and break fees payable to the buyer. No-shop provisions in particular restrict the ability of the target board to solicit alternative proposals (including negotiations with third parties) and recommend alternative transactions to shareholders. Receipt of an unsolicited proposal may trigger a notice requirement. However, no-shop provisions can be limited in scope. Three common and interrelated “exceptions” to no-shop provisions are fiduciary out, go-shop, and window-shop provisions. While the actions of the directors of the target company are restricted by the no-shop provisions with regard to soliciting and negotiating competing bids, the restriction remains subject to the directors’ fiduciary duties.

So, how common are no-shop covenants? According to the What’s Market: Legal Trends in Canadian Private M&A report published in July 2019:

  • 62% of agreements which were not sign-and-close transactions included a form of no-shop covenant – compared to 58% and 53% from 2016 and 2017, respectively.
  • No-shop covenants were more common in share purchases when compared to asset purchases.
  • 93% of merger agreements in 2018 that were not sign-and-close included no-shop clauses.

The prevalence of no-shop provisions makes it imperative that the target and the buyer consider exceptions. If thoughtfully considered, exceptions to the no-shop clause will ultimately protect the target’s board and their shareholders, while also ensuring that the no-shop clause and other deal-protective covenants remain enforceable by the buyer:

  • Fiduciary out provisions: typically allow the target board to consider a “superior proposal” that would be more favourable to shareholders. Directors are allowed to maximize shareholder value in a change of control transaction in realization of their fiduciary obligations. However, not all alternatives constitute a superior proposal and not all superior proposals may be considered. Upon designating a superior proposal, the board may enter into an agreement with the third party and make a change of recommendation to the shareholders. Fiduciary out provisions provide limitations for valid competing offers and as such, the breadth of the fiduciary out exception is often the subject of significant negotiation. Such provisions do not give the board the right to openly solicit additional proposals but may require that the alternative bid not result from a breach of the agreement, be reasonably capable of being completed, not be subject to a financing condition or a due diligence condition or require the board of directors to determine that the transaction was more favourable to the shareholders. Less common are requirements are that the bid be compliant with all applicable laws and that the board of directors determine that a failure to recommend the alternative would be inconsistent with fiduciary duties.
  • Window shop exceptions: typically allow the target company to entertain and negotiate alternative proposals, generally as long as they are unsolicited. Often, these exceptions may have a threshold for the assets or equity to be acquired in order to meet the definition of “acquisition proposal” and therefore fall within the exception. Usually, there is some level of determination made by the board of directors related to the whether it is within their fiduciary duty to enter discussions with the third party.
  • Go-shop provisions: unlike window-shop exceptions, go-shop provisions allow the target to do a post-acquisition agreement market check. Go-shop provisions may be utilized for a specified period of time, after which the no-shop covenant applies. Go-shop provisions typically contain protections for the buyer. For example, matching rights and break fees can be negotiated into the go-shop provision. Nevertheless, go-shop provisions are relatively rare in the Canadian M&A landscape, as only one deal from 2018 contained such a provision.

Deal protecting covenants are important to protect the buyer. However, the prevalence of exceptions demonstrates the importance of the target board’s ongoing commitment to the interests of the company’s shareholders, specifically by maximizing shareholder value. The inclusion of exceptions which allow the board to meet its fiduciary obligations equally protect the buyer by providing for more certainty in contract.

Canadian courts have consistently recognized the requirement for boards to meet their fiduciary duties in the context of a M&A transaction, although they will not go as far as their American counterparts to say that fiduciary out provisions are required and it is not always clear to whom those fiduciary duties are owed. In pursuit of that duty, at the very least and except in very rare circumstances, agreements should include fiduciary out provisions.

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

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Both sides of the same coin? Examining the rise of sponsor-to-sponsor deals

As competition and asset multiples increase, private equity (“PE”) firms must find new ways to put their money to work. One way to create new value is through a sponsor-to-sponsor deal.

Sponsor-to-sponsor deals involve PE firms on both sides of a transaction – buy side and sell side. Due to their high cost and complexity, there is a general view that sponsor-to-sponsor deals tend to be inefficient. However, a recent report by Bain & Company’s Annual Global Private Equity Report 2019 (Report) found that sponsor-to-sponsor deals are on the rise, which implicitly suggests that these deals may not be as inefficient as otherwise thought. The following are some of the potential benefits of sponsor-to-sponsor deals.

  1. Sponsor-to-sponsor deals provide opportunities for PE firms to be more creative in generating value. While such deals have previously been viewed as inefficient due to repeated transaction fees and other costs, engaging PE firms on both sides of a deal has the benefit of speeding up the entire transaction process. On a more granular level, the due diligence process in sponsor-to-sponsor deals can be completed at a faster pace compared to other transactions and as such, the extra time saved allows PE firms to focus more on strategy and creative solutions.
  2. Sponsor-to-sponsor deals remain an important exit option. In 2018, Sponsor-to-sponsor deals provided PE firms with great opportunities to increase returns. According to the Report, for the year 2018, most deals in Europe were PE sponsored deals and their exits generated the third-strongest year for the industry. In addition, deal count and deal value for that year were dominated by sponsor-to-sponsor deals.
  3. Current market conditions encourage large investors to focus on investing capital in private instead of public companies. Recently, private company multiples have been equivalent to or higher than those of public companies, making IPOs a less attractive exit option than before. Instead, the best option may be to sell to a strategic buyer that is looking for growth. Alternatively, the investor could sell to another PE firm that has the ability to capitalize on synergies and take the company to a new performance level. As a result, sponsor-to-sponsor exits may soon become the new normal and limited partnerships should work towards being more comfortable with the idea that sponsor-to-sponsor transactions may become a bigger part of the deal market.

Overall, sponsor-to-sponsor deals are increasing in popularity. The benefits are evident especially in the current deal market. Where assets may approaching an overpriced valuation, or dealmakers grow hungrier to put their money to work, sponsor-to-sponsor deals may soon become thrive in the marketplace.

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

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“Weeding out the competition” – an update on M&A activity in the cannabis sector

As discussed in previously, the legalization of cannabis in October 2018 sparked a flurry of activity in the Canadian market, as both foreign and domestic investors were eager to enter the space. Notably, in 2018, M&A transactions peaked with over 700 deals completed in the cannabis sector, the total value of which exceeded US$12 billion.

While high entry costs and capital expenditures may continue to be drivers of consolidation in the cannabis sector, there are other emerging factors that may significantly impact the trajectory of M&A activity. With the 2019 year-end rapidly approaching, a reflection on some of these significant changes may shed some light on what’s to come for the Canadian cannabis sector.

Legalization of Alternative Cannabis Products

The Government of Canada announced that the production and sale of edible cannabis, cannabis extracts and cannabis topicals will be legal in Canada, as of October 17th, 2019. We expect that this diversification of cannabis products will both spur market growth and drive M&A activity. However, there are other important implications of this change:

  1. As legal cannabis products diversify, so too will the parties of major M&A transactions. A recent report by Deloitte suggests that cosmetic, alcohol, food and beverage, and consumer packaged goods companies are all likely to enter the space to avoid outside encroachments on their respective market shares. This development may not only bring new companies into the market, but change the hierarchy of big players.
  2. Alternative cannabis products may also blur the lines between the current market segments. The divide between recreational and strictly medicinal use products will likely become less clear once cannabis food and drink products become available.

While M&A activity in the space is likely to decrease as the industry matures, we expect this maturation to be delayed by the legalization of alternative cannabis products this fall.

Supply Issues

Cannabis producers have had difficulty keeping up with the current market demand, and this issue may be exacerbated by the emergence of new cannabis products. Cannabis shortages may also continue to impact the way cannabis companies scale their businesses. Vertical integration between retailers and producers will likely continue to be a common strategy driving future M&A deals.

For the past two years, the cannabis industry has been a significant driver of the Canadian economy, but the industry is already on the precipice of drastic change. We will be watching with interest to see how these new countervailing forces impact M&A activity, and the cannabis sector more generally.

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

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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.


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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