Crypto update: January crash, securitized tokens and threats to traditional VC

Bloodbath in the CryptoMarket

For the past three years in January, Bitcoin experienced significant price corrections. This year is no different – except for its magnitude. Likely exacerbated by an influx of new investors and a spike in actively traded altcoins, Bitcoin depreciated by almost 50% from its all-time high in mid-December.

According to CoinMarketCap, the total market value of cryptocurrencies nosedived from USD $832 billion on January 7, 2018 to USD $450 billion on January 17, 2018, erasing USD $360 billion in value.

The price of the two other largest cryptocurrencies, namely, Ethereum and Ripple, dipped as much as 38% and 65% respectively from their January highs.

Whether this is an isolated correction or whether the markets have crossed into a bear market remains to be seen. As of  today’s date, the market has only started to recover from its January 17 low.

Regulatory headwinds growing stronger

This downturn is popularly attributed to regulatory pressures from the Chinese, South Korean and Indian governments to crack down on cryptocurrency trading and exchanges.

The regulators in South Korea, home to the third largest cryptocurrency markets in the world by traded volume, may be contemplating a ban on cryptocurrency trading. South Korean regulators hinted at the possibility of an outright ban on cryptocurrency trading. Though the regulators subsequently softened their message, they maintained the possibility of a complete ban on crypto trading remained a “live option”.

The regulators in China have similarly expressed that they would clampdown on online exchange platforms and mining operations. China hosts the largest number of Bitcoin mines in the world. Any move to decisively disrupt Chinese investors may adversely affect cryptocurrency prices.

The regulators in India froze major cryptocurrency exchange accounts and tax authorities sent notices to cryptocurrency investors warning that they must pay capital gains on their income from the virtual currency.

Tokenized securities making a debut in trepid market conditions

Blockchain technology now has its crosshairs on traditional forms financing.

Polymath Inc., a Toronto based blockchain firm, is seeking to build a “securities network platform”. It seeks to gives issuers of financial products access to the blockchain, smart contracts and token creation technology through the Ethereum network. Polymath incentivizes the creation of a compliant ecosystem by rewarding both lawyers and software developers who contribute to the development of regulatory contracts built on the POLY.

The promise of on-chain securities is enticing: better functionality and liquidity, instant settlements, very low fees and 24/7 trading. However, the challenges of regulatory compliance remain very real. Whether Poly participants will get the regulation right will depend on the quality and extent of the users it attracts as well as the general sentiment of the regulators.

Regulators’ response to Polymath remains a question mark. The requirement to correctly abide by onerous disclosure obligations associated with issuing securities is one thing; abiding by rules and regulations associated with exchanges and clearing houses is another. And Polymath will need to get it all right.

What does any of this mean for the VC market?

The advent of crypto-securities may very well mean a decline in venture activity. The VC market was already  under stress by startups raising funds through initial coin offerings (ICOs) rather than traditional forms of financing. According to a Bloomberg article written in May 2017, twice as many funds were raised by way of ICOs than VC seed rounds.[1] According to Coindesk’s ICO tracking tool, startups have raised well over USD 3.7 billion in digital coin sales as of the end of November 2017. Instead of giving equity away, startups increasingly issue tokens and grant users a right to participate in their network.

Going forward, more startups may adopt a hybrid model of VC financing and ICO such as Kin, Filecoin, Unikrn, benefitting from the professional participation of VCs while maintaining low cost of capital.

A lot will depend on the CryptoMarket’s recovery and whether investors, after a correction of this magnitude, will still have the appetite for high-risk, high-volatility coins or tokens – now, with the added variable of regulatory uncertainty.

The author would like to thank Saam Pousht-Mashhad, Articling Student, for his assistance in preparing this legal update.

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All for one or some for all: amendment provisions in your USA

Increasingly, we are seeing clients with unanimous shareholder agreements (USAs) that allow themselves to be amended by a certain majority of the shareholders of the corporation. This makes a lot of sense for clients with small minority shareholders who they don’t want to have to chase down every single time there is to be a change to the USA. That said, it raises certain questions, both taxonomically and legally, about a “unanimous shareholder agreement” created through amendment that is not signed by every shareholder.

What is a Unanimous Shareholder Agreement?

As a lawyer, the legal question is most important and interesting to me, but in order to answer it, we need to take a closer look at what constitutes a USA. A USA is both a creature of statute and a contract governed by contract law. In fact, it is theoretically possible for a USA to be a binding contract without meeting the requirements set out for it under statute.

Under statute, the Canada Business Corporations Act (the CBCA) only recognizes a shareholder agreement as a “unanimous shareholder agreement” if it is a written agreement among all the shareholders of the corporation that restricts, in whole or in part, the powers of the directors to manage or supervise the management of the corporation. If a USA does not meet any one of the requirements set out, it would not be considered a USA as defined by statute. The CBCA does not actually explicitly state whether amending a USA requires consent from all shareholders to the USA, but the implication of the language seems to be that it would.

Meanwhile, practitioners and scholars have argued that the USA, regardless of the statutory requirements, at its core, is a contract between parties. If we are treating it like a contract, it follows that parties should be permitted to negotiate and determine the shareholder approval threshold required to amend such contract and be bound by such terms in the contract. There is some case law backing this up, too, as decisions suggest that the courts will generally enforce the terms of the USA with the assumption being that parties are or should be aware of the terms of the USA to which they or their predecessors have agreed upon.[1] This is also consistent with the provision in the CBCA where a purchaser or transferee of shares is deemed to be a party and be bound by the terms of the USA.

Amending a Unanimous Shareholder Agreement

What to do, then, when the corporation wants to amend provisions related to restricting the powers and duties of directors, which is a statutory and contract aspect? Currently, case law does not provide guidance in the scenario where amendments are made to alter or expand the restrictions on the powers or duties of the directors. Over time, these restrictions may be subject to a higher level of scrutiny from the courts and may not be enforceable if it is found that shareholders incur liabilities that would otherwise have been subject to the directors when certain rights, powers and duties are transferred to the shareholders under the USA.

Undeterred, we as legal practitioners have backstopped this problem to the best of our abilities, often using one of the following mechanisms:

  • Power of Attorney (PoAs) – In practice, the form to appoint a PoA is usually included in the USA itself or attached as a schedule whereby the shareholder agrees to appoint an officer of the company (usually the CEO) to sign and approve the amended USA on behalf of the shareholder.
  • Voting Trust Agreement (VTAs) – Also known as pooling agreements, Voting Trust Agreements allow shareholders to transfer their shares to a trustee who will then vote those shares according to the terms of the agreement. In this context, VTAs could include a provision stating that the trustee is required to vote according to the will of the majority to approve the amendment of the USA.


As much as I don’t like to end a blog post with a shrug and a “maybe”, the three things I will tell you are:

  1. So far, the above is all market practice in Canada;
  2. The courts have only looked at the issue in a limited scope; and
  3. If you ask me what you should do to amend your USA, I’m going to try to just get you to get everyone’s signature to avoid this whole headache. You’re not necessarily stuck if you can’t, but we starting wading into that territory we lawyers put a giant “LEGAL RISK” stamp on when we write you emails about it.

[1] Re Systemcorp A.L.G. Ltd., 50 BLR (3d) 163, Justice Farley wrote in his decision that “all shareholders have by their being bound by the USA agreed that they have placed their trust in the wisdom of the specified majority who have agreed to accept such an offer.”

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

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What private equity investors look for in acquisition targets

According to a report by PWC, 43% of tech M&A deals were funded by private equity (PE) investors. For the deals with disclosed values, more than 52% are in the $50 million to $1 billion range.

Private equity investors may look for different factors in a target company than the traditional corporate buyer. For this reason, the dynamic of attracting offers and deal-making changes with the involvement of a private equity firm.

Focus on management

PE investors look for a company that has a clear path to deliver success. This is, among other reasons, why PE investors are highly invested in the management of the target company. According to an article by PWC, PE investors want the target company’s management to seamlessly execute in the following three areas:

  • transform the company’s business model to reflect how consumers and businesses want to purchase and use technology in the current world;
  • grow through effective sales motions, including new joint ventures, alliances and new customers; and
  • reduce costs and creating efficiency within the company’s existing structure.

PE investors look for management teams that are agile and have the ability to successfully facilitate change, work cohesively with a focus on transparent communication.

Research and development

Part of presenting a clear path to success involves effectively communicating the company’s research and development plan and organization. Research and development forms an important part of many technology and healthcare companies. PE firms invest heavily in to find acquisition targets that fit their criteria and perform substantive industry and competition research before making an offer. For PE investors, its key that the message and plan be communicated in a simplified manner.

Private equity investors also look to understand how a target company’s research and development compares and competes with others in the market. Target companies are expected to identify the right amount to be spend on research and development – an amount that is sufficient to differentiate the target company from the marketplace as well as to drive additional revenue to support high valuations.

Alternative investment strategies

In addition to the traditional PE buyouts or carve-out acquisitions, PE firms are also looking to alternative ways of investing, such as mezzanine investments (a hybrid of equity and debt financing), minority growth capital and change capital. That being said, PE investors do expect a complete financial overview of the target company, along with properly documented assumptions.

Despite the various emerging technologies, private equity firms are expected to continue investing in more mature businesses with a regular cash flow stream as opposed to new ventures.

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

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Maintaining perfection post-closing

In a secured financing transaction, such as acquisition financing, a creditor would often protect its interest by creating, attaching and perfecting a security interest by registration in the personal property of the debtor or the guarantor. Once a deal closes, secured creditors would often forget to monitor their registrations to maintain perfection. Post-closing events such as (i) change to debtor name, (ii) transfer or sale of the collateral, or (iii) expiration of registration period are among the common events that may unperfect secured creditor’s security interest if left unattended in Ontario.

Change to debtor’s name

As per Section 48(3) of the Personal Property Securities Act (Ontario), a perfected security interest by registration will become unperfected 30 days after the secured party learns of the name change. In this case, a secured creditor should either register a financing change statement or take possession of the collateral within such 30-day period to maintain perfection. Time will start to run upon the secured creditor first acquires knowledge of such name change, whether by a written notice or deemed knowledge (i.e., debtor changing its letterhead and is observable by the secured creditor).

Transfer or sale of the collateral

Usually, the credit agreement will permit the sale of inventory in the normal course of business, and the buyer will be able to purchase the collateral free and clear of the security interest.

Where the transfer of collateral is not inventory in the ordinary course of business, and the secured creditors provided consent to such transfer with the intention that the buyer will take title subject to the secured creditor’s security interest, then the secured creditor must file a financing change statement within 15 days of such transfer to maintain perfection in the collateral.

If the debtor transferred the collateral without the secured creditor’s consent, then the secured creditor has 30 days to register a financing change statement or take possession of the collateral from the later date of:

  • the transfer, if the secured creditor had prior knowledge of the transfer and if it had the information required to register a financing change statement at the time of the transfer; or
  • the day the secured creditor first learns the information required to register a financing change statement.

Expiration of registration period

Lastly, secured creditors should note that security interest perfected by registration are effective only for the registration period stated in the filed financing statement. Upon expiration of the registration period, unless renewed by filing a financing change statement, security interest will become unperfected. Therefore, secured creditors should have a system in place to remind them to renew the registration prior to the lapse of registration period.

What happens when you fail to meet the deadlines?

If the secured creditor failed to file a financing change statement or take possession of the collateral to maintain perfection or to renew the registration, then it may reperfect its security interest by filing a new financing statement and its security interest will be deemed to have been continuously perfected from the filing of the original financing statement. The only exception is that the reperfected security interest will not be enforceable vis-à-vis any new secured creditor who perfected its security interest during the lapse period.

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Signs of optimism for mining, oil-and-gas M&A activity in 2018

Overall merger and acquisition deal value involving Canadian companies totalled $216.3 billion in 2017, which was approximately 14% lower than the $251.88 billion seen in 2016, which was a decade-high level. The fall in overall value was primarily caused by a 25% decline in energy deals, according to a report in Bloomberg, which resulted in the first year-over-year decline in total deal value since 2012-2013. Despite this decline, 2017 stands as one only five years since 1995 when deal value exceeded $200 billion, according to a report in the Wall Street Journal.

Outward bound M&A activity was down slightly in 2017, from a record of $176 billion to approximately $122.3 billion, which still remained well above the $72 billion average from the previous five years. Domestic M&A reached its highest level in more than a decade with Canadian firms buying $69.9 billion worth of local companies and assets. The domestic M&A market was mostly driven by the Canadian energy firms purchasing assets as foreign players exited the market – specifically driven by divestitures and restructurings in the oil and gas sector.

While the steady economy, availability of financing, and low interest rates should contribute to a strong environment for M&A activity in 2018, the outcome of any renegotiation of the North American Free Trade Agreement (NAFTA), or even potential U.S. withdrawal from the trade pact, combined with new lower U.S. corporate taxes are expected to impact deal numbers and have left analysts uncertain in their outlook for the coming year. As evidenced by foreign players’ exit from the market in 2017, there is a declining foreign interest in Canadian resources. This decline is caused by the perception in the market that Canada presents environmental regulatory concerns around buying oil-sands assets, has higher-cost bases to produce, and does not have adequate transportation options available for export.

That being said, the continuation of recent rises in in oil and metal prices may increase interest in Canadian targets. According to the Wall Street Journal report, mining and oil-and-gas companies may also continue to be attractive targets for Asian and European companies despite the concerns associated with NAFTA, and that U.S.-based private equity firms may see buying opportunities in Canada. In 2018, deals are expected to consist of consolidations among Canadian mid-sized oil and gas companies or purchase by mid-sized mining companies of smaller precious and base metal companies.

Despite the slight downward trend from 2016 to 2017, Canadian M&A activity in 2018 is expected to be at or above 2017 levels, supported by an optimistic outlook that activity in the mining sector will return to its historical standards.

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

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Don’t be fooled! How traditional M&A differs from digital M&A

Over the past few years, we have seen a rising trend in digital technologies driving tech M&A deals for both tech and non-tech companies.

Technology brings its own set of challenges to the M&A space. The following are some of the many differences between traditional and digital M&A:

  • Wider target list: The list of targets in a digital M&A tends to be longer than in a traditional, non-digital deal. Therefore, a need for new screening methods arises if digital targets are involved.
  • Financing and valuation methods: Digital assets are often considered to be too expensive. Valuing digital assets begins with determining how the acquisition will impact the growth-value profile of the company’s stock and equity profile. As target digital assets tend to be expensive, the avenues for financing an acquisition through the use of shares is limited. That being said, acquisition based on a 100% cash deal may also expose a company to overvalued goodwill and future write-offs.
  • Due diligence process: Due diligence for digital targets is substantively different than traditional targets. For instance, acquirers are required to screen a target before its value has actually been monetized and thus, are faced with a lack of financial information.
  • Integration of digital assets: There are two common ways of integrating digital assets into a traditional company: (1) integrating all aspects of the acquired company and incorporating it into the existing system; or (2) keeping the acquired assets separate from the traditional company to avoid overpowering its spirit. That being said, both approaches have been faced with successes and failures.

The following are recommendations made by Bain & Company in its article titled “The Changing Rules for Digital M&A” for achieving success in digital M&A:

  • Develop a digital strategy as part of an overall corporate strategy.
  • Consider all financing options, including adapted payment terms such as earn-outs or other deferred payment mechanisms.
  • Consider the scalability of target digital assets in terms of human resources, technology and business models.
  • Nurture and mobilize specific digital experts during the due diligence process.
  • Enhance cultural integration practices to preserve and develop a digital target’s entrepreneurial culture.
  • Understand where and how digital approaches could transform current operations and business model.
  • Consider non-conventional ways to retain talent.
  • Equip investor relationship management with right communication tactics on how the company is embracing digital world.

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

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What’s trending: M&A in the luxury fashion retail industry

The luxury fashion retail industry is no stranger to change, but recent notable mergers & acquisitions (M&A) have further shaped the industry’s landscape as certain luxury brands are looking to expand. A number of factors have encouraged luxury fashion houses to merge. As we mentioned in an earlier article, e-commerce has greatly affected the bottom lines of brick-and-mortar stores. As more consumers are shopping online, the sales of brick-and-mortar retailers have diminished. In fact, there has been a noticeable decrease in the number of consumers who shop at North American malls and department stores. Another factor that has prompted a shift towards M&A is the change in consumer preferences. Before, shoppers gravitated more towards luxury brands that fell in the middle in terms of price and style, which are also referred to as “middle market luxury brands”. Now, consumers have veered towards the opposite ends of the spectrum and seem to be split into two camps, one that is loyal to high-end luxury brands or another that prefers more affordable fashion retailers.

Although wealthier consumers are still purchasing high-end luxury items, competition from online platforms is encouraging some luxury retailers to turn to M&A as a solution. Certain high-end luxury brands have been using M&A to combat changing environmental factors in the industry for years, by merging into “luxury brand super groups” or a “family of brands”. It is predicted that this trend is here to stay. For instance, one of the largest luxury brand conglomerates in the world, LVMH,  is comprised of 70 brands that are in over six various industries, ranging from fashion and leather goods to wines and spirits. Despite the fact that consolidation in the luxury retail sector will likely increase, some heritage brands, such as Chanel and Hermès, are resisting the trend of M&A. One reason why heritage luxury brands would resist attempts to be taken over is that these brands have historically been associated with their founding fashion designers. From a marketing point of view, consumers associate the heritage brand with these iconic figures, which is a selling point that many consumers use to justify paying high prices for these products. If these fashion houses were to merge, the branding of these companies would be diluted and consumers’ perceptions of these brands could diminish. While some heritage brands have been successful in rebuffing the trend of M&A that has been seen in the industry to date, this trend will likely remain in style for a while.

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

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Cannabis: a budding Canadian industry

Last week, we covered EY’s recently released report (the Report) surveying the bourgeoning cannabis sector in Canada.

The impending legalization of cannabis has weighty implications for the Canadian economy, but may also impact the global markets more broadly. Capital markets, the jobs market, mergers and acquisitions activity and intellectual property, among others, stand to be significantly affected.

This is an unprecedented opportunity for the country to be the global leader in the cannabis space, to shape the regulatory framework for cannabis around the world and to spur innovation and economic productivity – The Report


Following the most recent federal election, a task force was created to report on the legalization and regulation of cannabis. This task force delivered its report in November 2016. Shortly thereafter, on April 13, 2017, the federal government released the proposed Cannabis Act (Bill C-45) to legalize the production, distribution and sale of cannabis for recreational purposes, which largely implemented the recommendations of task force in its 2016 report. The target launch for Bill C-45, subject to parliamentary approval is slated for July 1, 2018. Oversight of the industry will be jointly administered by the federal and provincial governments. The federal government will oversee production, packaging and labelling, and licensing matters relating to cannabis while the provincial government will have domain over distribution and retail sales.


The Report identifies and discusses two major barriers for the upstart cannabis sector:

  • Unclear regulatory environment: The legislative framework remains unclear and the timelines for implementation and enforcement of Bill C-45 are uncertain. The Globe and Mail recently published an article discussing potential roadblocks to the proposed launch date of July 1, 2018, specifically noting that Bill C-45 may require more time for deliberation in the Senate, which could effectively push existing timelines back.
  • Capacity crunch: A protracted licencing approval process has led to concerns over whether there will be sufficient licenced producers, with adequate capacity, to meet demand once legalization is formalized. Production capacity will need to catch up in order to ensure that the predicted supply shortage is addressed.


The Report fleshes out five key themes that represent potential opportunities for companies in the cannabis space:

  • Strategy and operations: Similar to other industries, cannabis companies will need to foster and sustain competitive advantage, tap into economies of scale where possible, differentiate offerings, maintain stable supply chain management and effectively capitalize on domestic and international opportunities. Branding and marketing initiatives will also require particular attention and will need to be tempered by stringent regulatory constraints mandated by the legislation.
  • Technology and innovation: Given its broad application in the modern economy, technology and innovation-related opportunities can be amorphous, however, three areas primed for significant attention by cannabis companies include: 1. Improvements in cultivation and processing, 2. Improvements in extraction to increase quality and reduce waste, and 3. Improvements in the variety of delivery methods and speed of activation and metabolism of cannabinoids in the human body.
  • Investment strategies: Allocation of capital to build or improve facilities and maximize operations represents one of the keys to success for companies in the cannabis sector. Attracting and retaining top talent will also shape the ability of companies to maintain growth, remain competitive and take full advantage of potential prospects.
  • Consolidation and competition: A high barrier to entry in the cannabis space is the up-front investment required to be competitive. This front-loaded investment, coupled with the slow licence awarding process to cultivate and distribute cannabis, may inevitably lead to consolidation. This may lead to a relatively small but concentrated group of big players that pioneer the future of the industry.
  • Customers and stakeholders: While there are normative and customary barriers to the nascent cannabis industry, opportunities abound to de-stigmatize the consumption of cannabis and shape market sentiment to drive market opportunities.


Legalization of cannabis appears to be around the corner. While many question marks relating to specifics of the industry remain, Canada is primed to play a major role in legally bringing cannabis to market, all the while engineering a new industry that was unthinkable in the not-so-distant past. The final picture that the legislation takes is still up in the air, and stakeholders will need await further certainty to react optimally, but legalization appears to be here to stay and the implications for the Canadian (and perhaps global) economy are anything but burning out.

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

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M&A outlook 2018: find out more

Over the last 18 months there has been substantial global, geopolitical uncertainty, including the run-up to, and the eventual election of President Trump in the US presidential elections, the fall-out from the UK’s “Brexit” referendum, the elections across Europe and the North Korean crisis in Asia. These events have had global implications but somewhat surprisingly global M&A has, on the whole, withstood these turbulent times.

Norton Rose Fulbright’s corporate practice has published an article on global M&A trends and forecasts. Please check it out!

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Data privacy in M&A: looking forward into 2018

With an ever-growing public awareness of the implications of data privacy (or rather, lack of data privacy), increased emphasis on best data practices is likely to influence mergers and acquisitions (M&A) in 2018 and beyond. Different jurisdictions have opted for varying kinds of regulations, each of which may affect transactions in unique ways. In particular, the European Union (EU) is preparing to implement new, strengthened data privacy regulations in 2018.

Looking ahead, the EU is now poised to implement the General Data Protection Regulation (GDPR). Implementation is expected to occur on May 25, 2018. The GDPR purports to regulate the personal data of EU citizens. In the M&A sphere, data privacy due diligence will become even more critical, as acquirers must evaluate how the target company collects, stores, uses, and transfers personal data.

What can acquirers look for to evaluate the target company’s data practices?

During its due diligence, an acquirer should consider whether there is or has been:

  • Complete disclosure and understanding of the movement of the target’s data between different locations, including different jurisdictions which may have different laws;
  • Privacy by design, meaning an approach to design that considers and integrates privacy at all stages of the design process;
  • Maintenance of a comprehensive and up-to-date data security strategy to responsibly manage and protect the personal data collected by the target; and
  • Risk assessments by the target regarding the risks posed by collection, storage, use, and transfer of personal data.

With five months remaining to prepare for the GDPR, now is a critical time for companies anticipating M&A activity involving the EU to brush up on their new legal obligations, and for all potential acquirers or targets to carefully consider their data privacy practices and ensure compliance with applicable data privacy regulations.

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

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