Facilitation payments exception repealed in Canada

Last week, we covered the topic of facilitation payments and discussed some implications should the exception of facilitation payments be officially repealed in the Corruption of Foreign Public Officials Act (CFPOA). The repeal has now come to fruition. Global Affairs Canada has announced the removal of the facilitation payments exception from the CFPOA, with the repeal to come into force October 31, 2017. This exception was repealed by Bill S-14: An Act to amend the Corruption of Foreign Public Officials Act.

What was the exception?

The following is the facilitation payments exception in the CFPOA that has been repealed:

Facilitation payments

(4) For the purpose of subsection (1), a payment is not a loan, reward, advantage or benefit to obtain or retain an advantage in the course of business, if it is made to expedite or secure the performance by a foreign public official of any act of a routine nature that is part of the foreign public official’s duties or functions, including

(a) the issuance of a permit, licence or other document to qualify a person to do business;

(b) the processing of official documents, such as visas and work permits;

(c) the provision of services normally offered to the public, such as mail pick-up and delivery, telecommunication services and power and water supply; and

(d) the provision of services normally provided as required, such as police protection, loading and unloading of cargo, the protection of perishable products or commodities from deterioration or the scheduling of inspections related to contract performance or transit of goods.

Greater certainty

(5) For greater certainty, an “act of a routine nature” does not include a decision to award new business or to continue business with a particular party, including a decision on the terms of that business, or encouraging another person to make any such decision.

How will facilitation payments be treated?

Facilitation payments are no longer legal in Canada and will now be considered bribes under the CFPOA, which carry high maximum penalties. As a reminder, the following is the bribery offence provision:

Bribing a foreign public official

3 (1) Every person commits an offence who, in order to obtain or retain an advantage in the course of business, directly or indirectly gives, offers or agrees to give or offer a loan, reward, advantage or benefit of any kind to a foreign public official or to any person for the benefit of a foreign public official

(a) as consideration for an act or omission by the official in connection with the performance of the official’s duties or functions; or

(b) to induce the official to use his or her position to influence any acts or decisions of the foreign state or public international organization for which the official performs duties or functions.

Compliance policies

As mentioned in our previous post, while compliance policies are not mandatory under the CFPOA, they can be of great importance to fighting corruption within your business, as well as avoiding hefty penalties and possible reputational damage. In addition to ensuring your business has policies in place that prohibit facilitation payments, it would be prudent to make sure any business you seek an international partnership with also abides by these policies. By doing so you can help reduce the risk of contravening the CFPOA.

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Facilitation payments and considerations for Canadian businesses

As previously reported, the growth in cross-border transactions has been significant in 2017 thus far. This, coupled with the growing importance of anti-corruption and anti-bribery legislation on an international level, serves as a reminder to companies that laws surrounding the governance of foreign bribery and corruption are still evolving.

The Corruption of Foreign Public Officials Act (CFPOA) is of particular importance to Canadian businesses, as it applies to all businesses (including not-for-profit organizations) formed under the laws of Canada or any of its provinces or territories. In 2013, the Canadian government amended the CFPOA in an attempt to address criticisms from international institutions and strengthen its stance against bribery and corruption. Included in these amendments was the commitment to phase out the “facilitation payment” exemption at a date that has yet to be determined.

What is a facilitation payment?

A facilitation payment is a payment made to a public official in order to expedite or secure the performance of routine non-discretionary government actions. While currently permissible, businesses should bear in mind that these payments will be in contravention of the CFPOA if the exemption is repealed. While some countries have already begun prohibiting facilitation payments (for example, the United Kingdom, China, India and Brazil), there is no uniform treatment of such payments. Facilitation payments are still permissible in the United States, and Canada has yet to take any clear steps towards instituting a ban.

The future of facilitation payments in Canada

While it remains uncertain if and when a prohibition on facilitation payments will materialize in Canada, bribery offences under the CFPOA carry high maximum penalties. These types of offences carry a maximum penalty of 14 years imprisonment, and there is no upper limit on the fines that can be charged under the CFPOA. In addition, unwanted press coverage of a bribery or corruption scandal can cause serious reputational damage. Facilitation payments may eventually carry such negative consequences, and while not mandatory under the CFPOA, it is important to consider compliance policies that align with this change. While your business may have policies in place that prohibit facilitation payments, this approach may not be shared by a business with which you seek an international partnership. Taking a proactive approach with respect to compliance programs can help a company reduce the risk of contravening both domestic and foreign anti-corruption legislation.

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Overnight interest rate update: no change is good news for M&A activity

Today the Bank of Canada (the Bank) released its highly anticipated announcement regarding the overnight interest rate (the Rate). The announcement can be found in its entirety here. After previous successive Rate increases this past summer (as we reported on here), the Bank decided to maintain a steady course by keeping the Rate constant at 1 per cent, indicating a measure of return to normalcy. Apart from successive increases this past summer on the strength of the overall economy, the Rate had otherwise remained unchanged for the preceding seven years.

The broad implications of the decision to maintain status quo remain unclear, but the impact on M&A activity and deal-making in particular will likely be positive. By maintaining the current Rate, and declining to increase it further, investment activity should receive a boost. Though the Rate is just one factor to consider within the context of the broader economic landscape, on balance, and to the extent that deals are contingent on the cost of borrowing, investment activity may enjoy an uptick.

The Bank’s announcement was also accompanied by a full-scale Monetary Policy Report (MPR) outlining the Bank’s outlook for the economy and inflation, which can be found here. Of particular note, projections for Canadian economic growth, as a measure of real gross domestic product, have been increased to 3.1 per cent for 2017, to 2.1 per cent in 2018, with growth of 1.5 per cent forecast for 2019.

The Bank’s next announcement regarding interest rates is scheduled for December 6, 2017.

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

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M&A: the automotive industry’s new fuel?

Automotive technologies are evolving rapidly and impacting not only drivers’ automotive experiences but also, the automotive industry more broadly. From assistive technologies like bicycle sensors and back-up cameras to self-driving technologies, it appears that technological innovation will be critical in order for automotive companies to maintain their relevance and competitive edge in the marketplace. However, such innovation is complicated and largely outside of the auto industry’s wheelhouse. As a result, merger and acquisition (M&A) activity may be just the tool that these companies need for harnessing this innovation and competing effectively.

The automotive industry transformation

As alluded to above, the auto industry faces increasing pressure to offer innovative technologies that transform the traditional driving experience. This is especially the case given the prominence of technology in virtually every aspect of consumers’ daily lives. The difficulty is that automotive companies are generally not adequately equipped with the technological know-how and trained personnel to satisfy these evolving consumer demands. Moreover, as PwC reports, with rather poor total shareholder return, investors are likely reticent to invest in the automotive industry altogether. As a result, to overcome these obstacles, what appears to be happening is that the automotive and technology sectors are converging and one medium presumably instrumental in effecting this convergence is M&A.

Managing the transformation with M&A

M&A may be the key for automotive companies to stay (or become) competitive relative to the other players in the auto industry. According to EY Capital Insights (EY), by acquiring technology companies, establishing licensing deals and/or forming strategic partnerships, joint ventures and other such alliances, automotive companies can better ensure access to the technologies that can equip them with a competitive advantage. More particularly, through M&A, these companies will be better able to recruit the skilled personnel, acquire the associated technological expertise and foster the innovation that is required to attract consumers and distinguish them from their competitors.

From the technology industry’s perspective, acquisitions and partnerships with the automotive industry should appear to be just as strategic and effective. This is because, in contrast to automotive companies, technology companies possess the capabilities necessary for innovating and creating but lack the automotive expertise (and presumably, funding) for manufacturing vehicles anew and hence, implementing the technologies. In this way, M&A between the automotive and technology industries appears to be a mutually beneficial solution.

In the end, as EY suggests, a critical component for achieving success will be accurately predicting the automotive features that consumers will desire in the near future and then partnering with the technology companies that can successfully innovate and implement those features.

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

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Competition Act merger filing fees likely to jump in 2018

The Canadian Competition Bureau has started the process to increase the fee that must be paid when filing a pre-merger notification or seeking an advance ruling certificate under the Competition Act.  The fee is currently $50,000, and the Bureau is seeking permission to increase the fee to up to $72,000, effective April 1, 2018.  Any change to the filing fee must be approved by the Minister of Innovation, Science and Economic Development.

Merger notification regime

Proposed transactions that exceed the merger notifications thresholds in the Competition Act cannot be completed until certain steps have been taken.  A pre-merger notification is only required for five specific types of transactions:

  • the acquisition of the assets of an operating business;
  • the acquisition of voting shares of a corporation that will result in the buyer and its affiliates holding greater than (i) 20% of the shares of a publicly traded corporation, (ii) 35% of the shares where none of the shares is publicly traded, or (iii) 50% of the shares if the buyer(s) already owned more than the percentages in (i) or (ii), as the case may be, before the proposed acquisition;
  • the acquisition of a greater than 35% interest in non-corporate combinations;
  • the amalgamation of two or more corporations; or
  • the formation of a combination (e.g., joint venture) of two or more entities which will carry on business otherwise than through a corporation (e.g., a partnership).

In addition, a pre-merger notification is only required when two financial thresholds are both met:

  • Size of parties threshold: the parties, together with their respective affiliates, must have aggregate assets in Canada or annual gross revenues from sales in, from, or into Canada in excess of $400 million; and
  • Size of transaction threshold: the value of the assets in Canada, or the annual gross revenue from sales (generated from those assets) in or from Canada, of the target operating business and if applicable, its subsidiaries, must be greater than $88 million.  In the case of an amalgamation, each of at least two of the amalgamating corporations (together with its affiliates) must exceed the $88 million threshold.

Rationale for fee increase

In its consultation paper, the Bureau identifies a number of reasons why the fee should be increased:

  • The Bureau imposes a filing fee to cover the costs of merger review. There has been no increase in the fee since 2003; had there been annual increases to account for inflation, the fee would currently stand at approximately $65,500.
  • The federal government is currently modernizing its approach to business fees, and under new legislation fees will be adjusted annually based on the consumer price index.
  • Although the number of merger filings each year has remained relatively stable over the past nine years, there has been an increase in the number of complex cases requiring resource-intensive reviews.
  • The Supreme Court of Canada’s decision in the Tervita case, which underscored the need for the Bureau to quantify anti-competitive effects, has increased the time and cost of merger reviews.
  • The additional funds generated by the increased filing fee will allow the Bureau to more frequently hire outside economic, industry and legal experts as well as improve its document management and review processes.

The proposal is open for public comment until November 20, 2017.  Any member of the Norton Rose Fulbright antitrust and competition team would be pleased to assist you if you have questions or would like assistance in submitting a comment.

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CSA, TSX and TSX Venture Exchange provide expectations for reporting issuers with activities in the U.S. cannabis industry

Last year, we discussed predictions of increased M&A activity in the cannabis sector, given the federal Liberal Government’s push to legalize cannabis for recreational use.  That push picked up steam earlier this year with the introduction of the Cannabis Act (which we summarized here).  When implemented, the Cannabis Act will legalize cannabis for recreational use in Canada.  Part of the optimism for increased M&A activity in this space may have been due to perceived opportunities for United States / Canadian cross-border transactions, given the size of the U.S. market generally as well as perceptions of growing acceptance of cannabis use in the U.S., fueled by the legalization of cannabis for medical and/or recreational use by various states, including recently (and significantly), the state of California.

As many are aware however, cannabis for any use (except limited research purposes) remains illegal federally in the United States, and there remains considerable uncertainty as to whether or to what extent the current administration of the United States government will enforce the federal laws. This is because guidance previously issued by the federal U.S. Department of Justice under the Obama administration (known colloquially as the “Cole Memo”) set out certain enforcement priorities which did not include enforcement against cannabis operations in states that have legalized cannabis and which have established strong and effective regulatory programs.  However, these enforcement priorities can be changed or rescinded at any time.

Amidst the absence of clear guidance from the current administration of the U.S. federal government regarding its stance on the U.S. cannabis industry, on October 16, 2017, policy notices were issued by the Canadian Securities Administrators (CSA) as well as Canada’s two largest stock exchanges: the Toronto Stock Exchange (TSX) and TSX Venture Exchange (TSXV). These notices provide the regulators’ expectations regarding issuers engaged in activities in the U.S. cannabis industry.  The notices are summarized in more detail below but, in short: while the CSA has taken a disclosure-oriented approach to issuers with exposure to the U.S. cannabis industry, both the TSX and TSXV have gone further, warning that issuers listed on their exchanges with exposure to the U.S. cannabis industry and that are conducting activities in violation of U.S. federal law may be subject to de-listing.  This approach is in contrast to that taken by the Canadian Securities Exchange (CSE), which has been and continues to be receptive to issuers who have exposure to the U.S. cannabis industry, provided that the material risks to investors are adequately disclosed.  The CSE expressed their support of the CSA’s approach, which is in line with CSE’s own approach.

The result will likely be a chill on any Canadian / US cross‑border M&A activity among issuers in the cannabis space that are listed or seeking a listing on either the TSX or TSXV, and may possibly result in additional listings on the CSE by issuers operating or seeking to operate in the U.S. cannabis industry.

CSA Staff Notice 51-352 – Issuers with U.S. Marijuana-Related Activities

The CSA recognize the conflict between the U.S. federal and state law relating to cannabis practices and activities, and noted that the Cole Memo is subject to change, rescission or alteration at any time. Given this, the CSA recognize that Canadian reporting issuers with exposure to the U.S. industry may face material consequences should U.S. federal law be enforced, and have reminded reporting issuers with exposure to the U.S. cannabis industry of their obligation to disclose all material facts and risks relating to such operations.

The CSA also provided specific disclosure expectations for reporting issuers with exposure to the U.S. cannabis industry, noting that the failure to adhere to such disclosure expectations may result in regulatory action being taken, including receipt refusals in prospectus offerings, requests for restatement(s) of non-compliant filings and, where warranted, enforcement action.

The CSA expect that reporting issuers with U.S. cannabis activities will clearly and prominently disclose the following in prospectus filings and other continuous disclosure documents:

  • a description of the nature of the issuer’s involvement in the U.S. cannabis industry;
  • an explanation that cannabis remains illegal under U.S. federal law, and that approaches to enforcement is subject to change, with a discussion of the resultant risks;
  • a discussion of whether and how the issuer’s U.S. cannabis activities are conducted in a manner consistent with any U.S. federal enforcement priorities; and
  • given the illegality of cannabis under U.S. federal law, a discussion of the issuer’s ability to access private and public capital and what financing options are / are not available in order to support continuing operations.

In addition, the CSA has outlined additional disclosure expectations for issuers depending on whether they have direct, indirect or ancillary involvement in the cultivation or distribution of cannabis in the U.S.

For reporting issuers who are directly engaged in the cultivation or distribution of cannabis in the U.S. in accordance with a U.S. state licence, the CSA expects issuers to outline the regulatory framework(s) for the U.S. states in which they operate, and confirm the issuers’ compliance with applicable U.S. state regulatory and licensing requirements, as well as discuss how the issuer monitors U.S. state regulatory compliance, describe internal compliance procedures, and disclose any material non‑compliance, citations or notices of violation received by the issuer.

For reporting issuers who are indirectly involved in the cultivation or distribution of cannabis in the U.S. (i.e., where the issuer has a non-controlling investment in an entity that is directly involved in cultivation or distribution of cannabis in the U.S.), the CSA expects the issuer to outline the regulations for U.S. states in which the issuer’s equity investee operates, as well as provide reasonable assurance, through either positive or negative statements, that the investee’s business is in compliance with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. state(s).  Reporting issuers who have only ancillary involvement in the U.S. cannabis industry (i.e., where an issuer provides goods and/or services to third parties who are directly involved in the U.S. cannabis industry) are also expected to provide reasonable assurance regarding compliance of the customer’s or investee’s business.

TSX Staff Notice 2017-009 and TSX Venture Exchange Notice to Issuers

The TSX and TSX Venture Exchange have stated that issuers listed on their exchanges that conduct business activities in violation of U.S. federal law are not complying with their listing requirements, and accordingly may be subject to a de-listing review.  The TSX and TSX Venture Exchange have also stated that financial transactions involving proceeds generated by, or intended to promote, cannabis‑related business activities in the U.S. may be in violation of applicable money-laundering legislation.  Business activities that TSX and TSX Venture Exchange have identified may be in violation of their exchange listing requirements include:

  • direct or indirect ownership of, or investment in, entities engaged in activities related to the cultivation, distribution or possession of cannabis in the United States (U.S. Cannabis Activities);
  • commercial interests or arrangements with entities engaged in U.S. Cannabis Activities, that are similar in substance to ownership of, or investment in, such entities; and
  • ancillary services activities, consisting of:
    • the provision of services or products specifically designed for, or targeted at, entities engaged in U.S. Cannabis Activities; and
    • commercial interests or arrangements with entities engaging in the business activities described above.

Norton Rose Fulbright Canada LLP is a leader in providing legal services to clients operating in the cannabis space as well as other highly-regulated industries.

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Friends, consumers, stakeholders: lend me your ears

The importance of a clear and well executed public relations strategy can sometimes be overlooked when a corporation is in the middle of negotiating a merger or acquisition. However, involving your PR team early on in the transaction can pay off in the long run. In a study done by City University London’s Cass Business School, researchers found that the chances of closing a deal successfully can be increased by having a PR team involved during the early stages of deal rather than waiting until the ink is dry and an announcement of a successful merger has to be made. The study found that when the parties to a proposed transactions publicly announced an offer, the transaction closed successfully 84% of the time, compared to just 50% for deals in which the parties failed to make a public announcement and instead merely responded to press inquiries once news of the deal leaked. During acquisitions, when CEOs of both the target and the acquirer made public statements regarding the deal, the success rate of the transaction was as high as 91%, compared to just 67% where public announcements were made without direct quotes from the CEOs of the companies involved.

The importance of a well thought-out public relations strategy can go beyond just getting the deal closed. Increasingly consumers are paying attention to combinations of large corporations and how such mergers or acquisitions may affect them in their day-to-day lives. In the past, consumers have been mobilized by corporations opposing a proposed merger between competitors by taking out advertisements and using social media campaigns that claimed the proposed transaction would lead to higher service fees or less choice for consumers. Such campaigns have led to consumers protesting such mergers and writing to regulatory bodies in opposition of the proposed deal. Starting a public relations campaign early that shows the benefits of a proposed transaction can prevent such anti-merger campaigns from taking hold and creating regulatory and PR problems down the road.

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

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Canadian M&A activity: mixed results for Q3 2017

As the Globe and Mail reports, Thomson Reuters has recently released figures for Canadian mergers and acquisitions in the third quarter of 2017.

The figures show that while the volume of deals involving Canadian companies in the third quarter was higher than a year ago, the total value of those deals declined. 672 mergers or acquisitions were announced in the third quarter in 2017, while 605 mergers or acquisitions were announced in the third quarter a year ago. This 11% increase in the total number of deals is tempered by the fact that the value of deals fell from $105.3 billion (U.S.) in 2016 to $37.8 billion in 2017.

The decline in deal value can, in part, be explained by the disproportionate effect of the $43.1 billion takeover of Spectra Energy Corp by Enbridge Inc. in the third quarter of 2016. The Globe further explains that while on the one hand a surging loonie translates into more currency in the pockets of buyers, the increase in purchasing power may be moderated by uncertainty surrounding the North American free-trade agreement, tax reform and high valuations.

Nonetheless, the M&A market and Canada’s economy overall remain fundamentally strong. The Globe notes that the slow-down has had a knock-on effect in the equity markets, which are closely tied to merger activity. Fewer public offerings have been required to raise money for deals. Nonetheless, indicators suggest that the IPO market, which came out of the gates flying in January, is set to end the year on a high note. The Report points to the recent Roots Corp. filing to raise $200 million (CAD), as well as multiple new IPOs in the offing in the metals and mining sector, as indicators that the IPO market could be in for a busy fourth quarter to end the year with a bang.

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

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Regulators take aim at cryptocurrencies

The emergence of cryptocurrencies and blockchain technology over the past several years has shaken up the financial services sector in unprecedented fashion, in a corner of the Canadian economy that has been notoriously slow to adopt and adapt to innovative change. This phenomenon has the potential to significantly re-shape many aspects of the modern economy. We have reported on this blog in the past (see here and here) on the evolution of blockchain and cryptocurrency and what it could mean for M&A activity in Canada. It looks like that impact could ramp up in the coming months.

At the end of August, the Canadian Securities Administrators (CSA) signaled that regulation could be on the way for virtual currencies and other technology that approximates “securities” for the purposes of provincial securities laws.

In a Staff Notice released by the CSA regarding cryptocurrency offerings, the group of provincial regulators announced the following:

With the offerings that we have reviewed to date, we have in many instances found that the coins/tokens in question constitute securities for the purposes of securities laws, including because they are investment contracts.

While questions will remain surrounding the lack of clarity on the form and substance of oversight, as it relates to cryptocurrencies, what appears certain is that increased scrutiny for cryptocurrencies through regulation is around the corner.

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

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A growing appetite for food and beverage companies

After a year since we first reported that acquisitions of natural and organic food manufacturers had increased demonstrably, the trend has not wavered. Companies in the food and beverage industry that are branded with a view to promoting health and wellness have garnered an increasing amount of attention. This attention in recent years has not always been the case. This is evidenced by looking at the revenue a food start-up would have had to earn before becoming attractive to a larger acquiring company years ago, compared to nowadays. Roughly 5 to 10 years ago, a food start-up that was branded as a health and wellness company had to earn roughly $75 million in revenue before a company wished to acquire it. Conversely, companies are now interested in a health and wellness food start-up even if it makes $10 to $20 million.

Increased deal activity in food and beverage sector

Food companies geared towards health and wellness are not the only ones in the food and beverage industry to have increased in deal activity. As previously discussed, the “indulgence” category and particularly “super-premium” products have become more attractive to acquirers. “Super-premium” products, such as craft beer, have grown in demand whereas demand for the counterparts, such as commercial beer, have decreased.

However, growth in mergers and acquisitions (M&A) activity is not unique to the above-mentioned categories in the food and beverage industry. Growth in the number of deals has occurred in the entire industry as a whole. What’s more is that the industry is expected to become even busier. It was predicted that 2017 would be very successful year for M&A in the food and beverage industry. An example of the growth in M&A activity in the food and beverage industry is the number of completed transactions during Q2 2017. The 77 completed transactions that occurred in Q2 2017 is a 40% growth from Q2 2016.

Growth expected to continue

It has been predicted that the food and beverage industry growth seen so far will continue for the duration of 2017. The announcement that Dole Food has asked Morgan Stanley and Deutsche Bank to receive potential offers for the sale of the company further fuels this prediction. Dole Food has already received a number of bids during the first round.

Rationale for boom in food M&A

One potential reason for the boom in M&A activity in the food and beverage industry is the aging population in Canada that are looking to sell their businesses. Another reason offered is that consumption tendencies are changing, which in turn is prompting companies to diversify their products.

Reasoning aside, it is evident that food and beverage companies have become more attractive to acquire. It is yet to be seen whether the upward trend of food company acquisitions will continue.

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

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