Canadian venture capital investment continues to increase in H1 2018

The Canadian Venture Capital & Private Equity Association recently published its 2018 first half (H1 2018) report on Canadian venture capital (VC) and Canadian private equity (PE) investment. While Canadian PE investment remains feeble, Canadian VC investment has continued to climb to incredible heights.

A review of the increasing trends in Canadian VC investment, with respect to the volume and size of deals as well as the stages and sectors engaged, reveals that VC investment in Canada is very robust and showing no signs of slowing down. With H1 2018 already outpacing last year, VC-seekers should be excited and motivated by the current state of VC investment in Canada and the innovative environment that it is cultivating.

Significant findings

  • Canadian VC investment continues its five-year ascent: At the close of Q2, the year-to-date Canadian VC investment stands at CAD $1.7B, representing a 7% increase from the first half of 2017.
  • ICT sector continues to receive majority of Canadian VC funding: information and communication technology (ICT) attracted just under two-thirds (64%) of total VC dollars invested in H1 2018.
  • Increased investment in later-stage companies: later-stage companies received 54% ($901M) of total VC dollars invested in H1 2018, compared to only 41% last year.

Overview of Canadian VC investment activity

In H1 2018, approximately CAD $1.7B had been invested across 308 deals, representing an average deal value of CAD $6M—a 13% increase over the CAD $5.3M average deal size in the five-year period between 2013-2017. In total, there were seven CAD $50M+ mega deals – amounting to almost CAD $500M. This parallels the volume of mega deals evident over the previous two-year period.

Ontario continues to be the primary jurisdiction for deal activity with both the quantity of investments (116 deals) and deal amounts (CAD $907M) exceeding the combined total for all other provinces, excluding Quebec. Toronto-based companies (CAD $793M over 89 deals) accounted for over a quarter of the deal volume (29%) and nearly half the total funding (47%). Montreal (CAD $254M over 64 deals) and Vancouver (CAD $264M over 38 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 (CAD $1B over 189 deals) with the total funding (64%) and deal volume (61%) greater than the cumulative totals for the life sciences (CAD $204M over 48 deals), CleanTech (CAD $192M over 28 deals) and agribusiness (CAD $79M over 15 deals) sectors. In fact, of the nine largest deals by value in H1 2018, six were within the ICT sector.

Early- and later-stage companies continue to receive significantly more funding compared to seed companies, despite being involved in a fewer number of deals (106 deals involved seed companies compared to 97 apiece for both early- and later-stage companies). Interestingly, there was a noticeable predilection towards later-stage companies, which received 54% (CAD $901M) of total dollars invested compared to only 41% from last year. This investment shift resulted in early-stage companies receiving only 37% (CAD $612M) of investment dollars, down markedly from 52% in 2017.

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

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Grow on! Examining the forces behind increased M&A activity in Canada

The Canadian market has seen a surge in M&A activity since 2017 and it looks as though 2018 will follow suit. According to a PwC Canada 2018 M&A mid-year review, in the first half of 2018 alone, Canada hit CAD$93 billion  in M&A activity and outbound deals increased by 8% as compared to the first half of 2017, largely due to a surge in cannabis sector deals. While we have noted this increase previously, recent legislative changes regarding cannabis warrant another look to determine the robustness of this trend. For example, in health-care, overall deal value and deal volume have increased by 233% and 48%, respectively, which is significant given that cannabis falls into this category.

More notably, the coming into force of the Cannabis Act on October 17, 2018, and the recent announcement of the Ontario government regarding the privatization of the cannabis industry, may explain current and future increases in M&A activity. Both of these developments have attracted excitement at the prospect of new opportunities. There have already been 48 cannabis deals in the first half of 2018, valued at CAD$5.2 billion, which demonstrates the magnitude of this opportunity. It is also being speculated that an increase in supply may force underfunded cannabis companies into bankruptcy or to exit the market, which would provide opportunities for better funded companies to acquire assets or merge in order to support growth.

The federal legalization of cannabis is far-reaching and everyone wants a piece of the pie. The government of Ontario recently announced on August 13, that it will follow suit and has plans to immediately introduce online retail channels for cannabis, which will be followed by a private retail model by April 1, 2019, all of which will aim to eliminate the illegal market for cannabis. The government of Ontario plans to work with private sector businesses to build  a safe and reliable system for consumers. For instance, it is proposing to introduce Official Ontario Cannabis Retailer Seals to help consumers identify legitimate retailers where federally quality assured products can be found. This presents an opportunity to retailers to obtain such seals, thereby increasing their legitimacy and the value of their businesses, and to use this for growth and for leverage in M&A transactions.

This is a trend worth tracking. This is only the beginning of the impact of the legalization of Cannabis on M&A activity in Canada – there is much that remains to be seen.

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

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Quebec opens its door to InsurTech: opportunities to grasp

The insurance industry is changing. A more digitally savvy customer base and the emergence of new technologies are reshaping the sector. Enter technology-led companies known as “InsurTechs.”

In Québec, this innovative business approach along with a substantial legislative change is expected to increase M&A transactions.

Mindful of offering a regulatory environment that is flexible and apt to respect the evolution of technologies and consumers’ needs, the province adopted Bill 141, An Act mainly to improve the regulation of the financial sector, the protection of deposits of money and the operation of financial institutions, on June 13, 2018. This legislation, eagerly awaited by industry participants, is meant to modernize the regulation of the financial sector, and more specifically, to help financial institutions adapt to an evolving market and changing consumer needs, all while improving consumer protection.

The adoption of this bill represents an important step forward in the evolution of the InsurTech sector in Quebec. Bill 141 establishes the regulatory foundation upon which this industry will stand, and will shape its development in the years to come. Pursuant to this new regulatory framework, from June 13, 2019 onwards, insurers will be authorized to distribute certain insurance products without the involvement of a representative. This widens the door to the digital distribution of insurance. To that end, however, an insurer will have to meet certain criteria.

The arrival of InsurTech in Quebec will significantly influence insurers’ strategic orientations and should lead to a rise in M&A activity in the next three years, according to a recent KPMG report. Indeed, this new regulatory flexibility provides insurers with the opportunity to modernize their insurance product offering. Insurers will be able to reinvent their products and distribution methods in order to enhance customer experience and tailor their business models to their customers’ digital consumption habits. Industry participants hoping to capitalize on this legislative opening may draw on the experience of their counterparts in the United Kingdom, where the InsurTech industry is burgeoning, as evidenced by the significant investments of some major insurance companies looking to modernize their services.

The author would like to thank Simon Du Perron, Amelie Guillemette, and Pier-Olivier Brodeur, summer students, for their assistance in preparing this legal update.

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Materiality scrapes in private M&A transactions

Representations and warranties in private M&A transactions are typically heavily negotiated, with sellers often attempting to qualify their representations with materiality to avoid being found liable for immaterial breaches and for immaterial damages. It is also common during the course of negotiations for parties to agree to the inclusion of indemnity baskets. These provisions provide that the seller will not be liable for a breach of its representations unless the loss suffered by the purchaser as a result of such breach exceeds a certain minimum (or, “material”) amount.

The Double Materiality Scrape

To counteract the seller-favourable implications of materiality qualifications and indemnity baskets, purchasers often attempt to include a double materiality scrape in the acquisition agreement. Such a clause excludes (or “scrapes”) materiality qualifiers in the seller’s representations for purposes of determining (a) whether a breach of a representation has occurred; and (b) the amount of indemnifiable losses resulting from that breach. An example of such a provision is as follows:

  • For purposes of determining whether there has been a breach of a representation or warranty, and for purposes of determining the amount of losses resulting therefrom, all representations and warranties qualified by “materiality” shall be disregarded.”

Purchaser’s Position

The rationale from a purchaser’s perspective of including such a clause is that materiality is already addressed in the indemnity basket. As such, without a materiality scrape the purchaser would be subject to a “double materiality” standard. In other words, it would first need to overcome the materiality qualifier in the representation, and then prove that the losses sustained as a result of that breach exceeded the minimum amount set out in the indemnity basket. Additionally, purchasers rationalize the inclusion of materiality scrapes on the grounds that they reduce the time spent negotiating materiality qualifiers in the representations and warranties, and can also avoid post-closing disputes over the meaning of “material” if the seller is found to be in breach of a representation qualified by materiality.

Seller’s Position

Sellers, on the other hand, typically resist broad materiality scrapes, arguing that such clauses render the materiality qualifiers in their representations pointless. Moreover, sellers will often contend that these clauses saddle them with an unreasonable burden of having to disclose everything they can possibly imagine in the disclosure schedule to ensure they are not in breach of a representation that would more appropriately be qualified by materiality.

Middle Ground Approach – the Single Materiality Scrape

When parties are at an impasse with respect to the inclusion of a double materiality scrape, one possible “middle ground” approach is to agree to a single materiality scrape. This clause states that the materiality qualifiers will continue to apply to determine if the seller has breached a representation but, if a breach is found to have occurred, the materiality qualifier will be ignored for purposes of determining damages. As a result, subject to the indemnity basket and any other indemnity limitations set out in the acquisition agreement, the purchaser will be entitled to recover the full amount of its damages resulting from such breach.

Materiality Scrapes Trending Higher

According to the most recent Private Target Mergers & Acquisitions Deal Points Studies published by the American Bar Association for Canada and the U.S., materiality scrapes are becoming increasingly common in private M&A transactions. Where the parties agreed to an indemnity basket, only 11% of the agreements in Canada included a materiality scrape in 2012, but by 2015 these clauses were found in 39% of transactions reviewed. Likewise, only 14% of such deals in the U.S. included materiality scrapes in 2004, but by 2017 85% of transactions included these clauses.

In respect of the “middle ground” approach discussed above, the most recent deals studied indicate that their use has been diminishing in favour of the double materiality scrape in recent years. Specifically, in 2014, 100% of the deals studied in Canada with materiality scrapes were single materiality scrapes, and by 2014 that number fell to 43%.  Likewise, in the U.S. 72% of transactions with materiality scrapes were limited to single materiality scrapes in 2006, but by 2017 that number fell to 57%.

These trends suggest that the double materiality scrape is gaining in popularity, perhaps due to the increasingly robust North American M&A market, where purchase price premiums paid by purchasers come with corresponding demands for increased levels of protection.

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Note to investors: tariffs and opportunities abound in metals and manufacturing

Global trade tensions continue to be a source of uncertainty. The role of the United States as one of the most influential economies across the globe has presented limitations on the ability of many business sectors to easily absorb the trickle down effects of recent trade tariffs implemented by the Trump Administration. While this seems to present a problem for most companies that rely on international trade and distribution of products as the crux of their business, tariffs, at least if kept in place only temporarily, could create opportunities for distressed investors.

Two examples of the industries directly impacted are Canadian steel and aluminum producers. The Trump Administration has applied tariffs of 25% on certain steel products and 10% on some aluminum products. These figures would not be as damaging if the size of the US market for Canadian steel and aluminum exports were relatively small. However, 95% of Canadian steel exports and 88% of aluminum exports were destined for the United States in 2017. The negative demand shock triggered by the tariffs, while partially offloaded by increased prices, will decrease revenue and erode operating margins for steel and aluminum producers.

For investors with the view that tariffs are temporary, there was certainly an opportunity to buy the dip in Canadian steel and aluminum. However, if tariffs persist the continued margin pressure could drive especially smaller producers of goods affected by the tariffs into distress. This could be a welcomed opportunity for distressed investors or strategic investors looking to consolidate.

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

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Excess cash, excess tax – what’s on your balance sheet?

Canadian federal income tax law provides numerous benefits to companies that engage in an “active business”. Whether a particular endeavour undertaken is an “active business” is, of course, a question of fact and depends on individual circumstances. Some scenarios are clearly those of an “active business”, such as the case of manufacturing and production, retail, mining, sales and shipping and receiving. Others are clearly more of a passive nature, such as merely owning real estate and collecting rent on the property, without any substantive management. Many could be considered somewhere in between.

When a company is in fact engaged in an “active business” and all or substantially all of its assets (generally meaning 90% or more) are principally used in that business, the Income Tax Act allows the sale of the shares by an individual shareholder to be free of capital gains tax, up to the individual sellers amount of their lifetime capital gains exemption (provided certain other criteria are met). The Act also allows investment in the shares of said company by registered plans, such as RRSPs, RESPs and RRIFs, providing another means to raise capital. The business may also be eligible to claim the small business deduction and thereby pay tax at a considerably lower combined federal and provincial tax rate.

In order to meet the “all of substantially all” test, however, 90% or more of the assets in the business must be used principally in the active business. This can be an issue when it comes to cash and near-cash instruments, such as short-term deposits and investments in securities. After all, unlike the property, plant and equipment of a company, which are much easier demonstrated to be used to carry on the active business, the cash held by a company may not do anything more than sit untouched and earn interest income.

The courts have generally determined that the question to ask is whether the cash, as any other asset, is actually employed in the business, such that it is put at risk and the withdrawal of such may destabilize the business. Cash to provide working capital and pay for running expenses is an example of this. Merely sitting untouched, however, with a remote possibility that it may have to be drawn upon (as in the case of a need to pay back a long-term loan or advance) will not suffice. If faced with the latter, the cash may have to be withdrawn, with potential tax consequences.

Accordingly, numerous taxpayers have been caught off-guard when they seek to take advantage of the aforementioned benefits, but are denied such on the basis of the asset mix on their balance sheet. While strategies are available to reduce this risk, they are best employed early on, and your balance sheet should be kept a close eye on.

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Harmonizing cash collateral perfection rules between Canada and the U.S.

In secured financing transactions, cash is a popular and useful form of collateral. It is fully liquid, readily available and transferrable, and its value is always known. A debtor holding cash in a deposit account may wish or be required to use it as collateral for obligations such as loans, repurchases and derivative transactions. In order to maintain a perfected security interest in this cash collateral, a lender or agent will need to adhere to the applicable methods of perfection as set forth under the applicable provincial personal property security legislation (the “PPSA”). For the reasons outlined below, cash collateral can at times create uncertainty when it comes to perfection.

Methods of Perfection

Generally speaking, the PPSA provides for perfection against collateral by, among other means, “registration”, “control” and “possession or repossession” and the nature of the collateral influences the method of perfection. In most provincial PPSAs, perfection of a security interest in cash collateral (or “money” or “accounts” as it is sometimes referred to in the PPSA) can be perfected by registering a financing statement or by possession or repossession. In Canada, registration is typically the method which is used and relied upon for perfection purposes.

This can sometimes render the use of cash, a liquid form of collateral, impractical from a credit support perspective. Perfection by registration can create uncertainty, including the following issues:

  • Priority rules relating to security interests perfected by registration are less straight forward, meaning that legal opinions containing a priority opinion may not always be clear; and
  • The registration process, while relatively straightforward, can be time consuming and costly if estoppel letters or other types of no-interest or priority agreements are required.

Calls have been made in recent years for a systematic change which would provide legal certainty for secured parties holding cash as collateral. Under the PPSA, “investment property” – which include securities accounts – can be perfected by control. Control over the securities can be obtained by way of physical possession of the certificates representing the securities (in the case of certified securities) or the execution of a “control agreement” in the case of uncertificated securities.

The U.S. Example

Article 9 of the Uniform Commercial Code (the “UCC”) provides for perfection of the cash deposit accounts of a debtor by “control”. In the U.S., each state has adopted Article 9 of the UCC with minor variations. Control of a deposit account will be obtained if (i) the secured party is the bank with which the deposit account is maintained; (ii) the debtor, secured party, and the bank enter into a control agreement; or (iii) the deposit account is in the name of the secured party. This means that if the secured party is a bank which also holds the debtor’s cash deposit accounts, it’s security interest will automatically be perfected as it controls those accounts. In cross-border lending transactions we often see deposit account control agreements used, however a control agreement is only necessary to perfect where the secured party is not the same entity as the bank holding the debtor’s cash deposit accounts. Nonetheless, unlike the current PPSA system registration or other formalities under the U.S. framework are not required to perfect the security interest. This has resulted in a competitive disadvantage for Canada, as secured lenders and swap counterparties have increasingly chosen to escape the Canadian PPSA regime and take their business across the border.

Proposed Changes to the PPSA

In 2012, the Ontario Bar Association proposed amendments to the PPSA which would follow the U.S. example, recommending that the PPSA provide for perfection by control of security interests in cash collateral accounts. The recommendation includes a proposal which would create a type of collateral known as a financial account that would permit perfection by control and provide that a secured party with control of such collateral has priority over another that does not have control. In a 2015 panel led by the Ontario Ministry of Government and Consumer Services, it was similarly recommended that the PPSA be amended to facilitate the use of cash as effective and reliable collateral which could be done in two ways: (i) firstly, by allowing security interests in deposit accounts to be perfected by “control”; and (ii) providing that when so perfected, the security interests have clear and certain priority over competing interests.

Conclusion

Uncertainty can be created by a perfection system where financing statements or possession is required in order to perfect a security interest in cash collateral. Under the changes which have been put forward by various stakeholder groups, a secured party who controls the account would have priority over any other party which does not have control. If the proposed amendments are adopted, the UCC and PPSA regimes would align to create a much-needed consistency in cross-border transactions.

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

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Climate change risk is serious business – are you doing your due diligence?

It’s been a hot summer. Cities around the world have experienced record-breaking temperatures and heat waves are now being recorded all over the world. In Eastern Canada alone, there have been nearly 100 heat warnings. In Oman, the town of Quriyat registered the highest minimum temperature in the world in June this year: 42.6 degrees for nearly 51 hours. Bushfires have devastated California, reached the Arctic Circle in Sweden, and at the time of writing, are being battled in in northern Ontario.

Climate change is associated with an increased frequency of extreme weather events and the impact on business is obvious, ranging from physical damage to buildings, products, supplies and equipment to reputational risk. Extreme weather events can also halt manufacturing or prevent employees from getting to work, and businesses affected by droughts or pollution can experience water shortages or the lack of drinking water or food, or be more generally impacted by a reduction in economic activity.

There is no shortage of examples. In Europe, this summer’s heatwave has already caused the shutdown of nuclear power plants in France and Sweden and plants in Switzerland, Germany and Finland have reduced the amount of power they produce, since the river, ocean or lake water used to cool them is too hot to use. Last year, Hurricane Harvey caused the shutdown of refineries and ports in Texas and Louisiana and halted most fuel exports towards Latin America. Closer to home, the Fort McMurray wildfires caused $1.4 billion in revenue loss for producers in 2016.

As a result, investors are considering climate-related risks in making investment decisions and are consequently demanding more disclosure. After all, without effective disclosure of climate-related risks, the financial impacts cannot be correctly determined. Institutional investors, such as Vanguard and BlackRock Inc. are pushing companies for information on their how their assets will fare in a low-carbon economy. The Caisse de dépôt et placement du Québec, Canada’s second-largest pension fund, has taken steps to make climate-related factors central to its investment decision-making process.

Pressure is also coming from shareholders and investor rights groups. For example, NEI Investments successfully put forth a shareholder proposal to enhance Suncor Energy Inc.’s climate-related disclosures. 98% of its shareholders represented at the meeting voted in favour of the proposal.

The Task Force on Climate-related Financial Disclosures (TCFD), founded by Michael Bloomberg, consists of 32 members from across the G20’s constituency, covering a broad range of economic sectors and financial markets. The TCFD seeks to develop recommendations for voluntary climate-related financial disclosures and in 2016, published a report outlining its recommendations.

Securities regulators have responded. The CSA recently undertook a review of climate change disclosure made by reporting issuers, and published its findings on April 5, 2018 in CSA Staff Notice 51-354 Report on Climate Change Related Disclosure Project. The CSA found the following:

  • Disclosure is lacking: Although disclosure of all material risks is required, only 56% of the issuers reviewed provided specific climate change-related disclosure in their MD&A or AIF, with the remaining issuers either providing boilerplate disclosure, or no disclosure at all. Only 28% of respondents to the issuer survey indicated that they provided any climate change-related disclosure at all in their regulatory filings. In addition, when climate change-related risk was disclosed, the risk most discussed was regulatory risk rather than risks specific to the issuer’s business, and very few issuers disclosed their governance and risk management practices.
  • Most industries are underrepresented: The oil and gas industry was most represented in the review sample, with other industries providing significantly less disclosure or no disclosure at all.
  • Investors are dissatisfied with the disclosure: Substantially all of the users consulted, being institutional investors, investor advocates, experts, academics, credit rating agencies and analysts, were dissatisfied with the current state of climate change-related disclosure and believe that improvements are needed.

As a result of this review, the CSA has indicated that it intends to consider mandating new disclosure requirements for non-venture issuers in relation to climate change risks, and will continue to assess whether investors require additional types of information, such as disclosure of certain categories of greenhouse gas emissions, to make investment and voting decisions.

However, given the current state of the public disclosure, investors are best advised to conduct climate change-related due diligence. The TCFD 2016 report provides examples of the types of disclosure companies should provide, which could serve as the basis for engaging in this type of due diligence. For example, the due diligence could inquire into the resilience of the company to climate risks and opportunities, how climate-related issues serve as input into the company’s financial planning process, and how climate change might impact the company’s products and services, supply chain, operations or investments.

Ultimately, if the target company has not developed the necessary strategies, expertise and associated governance structure to manage climate change risks, and does not have a climate change risk management process in place, investors may have to rely on representations and warranties and indemnities in the transaction agreement. Such provisions should be carefully drafted and be appropriate to the target’s industry and size.

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M&A and the advancement of the RegTech industry

The rapid advancement of technology has moved at an unprecedented pace, offering the ability to automate “trust” and “quality” of the products and services being provided on a daily basis. Nevertheless, after the financial crisis in 2008, billions of fines and penalties were imposed on companies that failed to carry out regulatory standards. This exposed market inefficiencies and focused attention on solutions required to stay on top of compliance matters.

To avoid repeating history, regulators and governmental authorities have reformed the regulations by repealing traditional rules and replacing them with new and efficient ones. These intricate and new regulations can be seen as a hindrance to upcoming technologies. Modern technologies such as blockchain, machine learning, big data or smart contracts have caused an uproar with the regulators as they require rigorous rules on data privacy to be enforced. These compliance requirements have spawned the need for regulatory based technology, commonly known as RegTech.

The average bank has 160 regulations, causing them to undergo continuous pressure to comply with the latest requirements. Regulators are now issuing non-compliance fines through financial regulations that have been enforced such as GDPR, PSD2 and MiFIDII. Some start-up companies are developing smart solutions to solve compliance issues by using cloud computing technology through SaaS (software-as-a-service). RegTech companies are increasingly known to use cloud based software to manage cash, financial risk, liquidity and hedging activities. The industry seems to be rising as a CBInsight report indicates that in 2016 there were 29 M&A transactions and 1 IPO related to RegTech companies.

So how is this new phenomenon going to assist us in the long haul? RegTech aims to assist in assessing and mitigating future risks and cutting back costs. This can be done by automating tasks that are time sensitive, scrutinizing and developing an audit pathway, and discovering non-compliant behaviors.   For example, current regulations can delay the process of integrating  new employees into an organization or familiarizing new customers to products and services. Integrating RegTech in a compliant manner helps curtail the time taken and cuts back costs while generating greater revenue.

Specifically, RegTech companies try to work together with regulatory bodies and financial institutions via cloud computing and big data to share the data quickly at a reduced cost. They simultaneously focus on protecting banks from any potential risks to comply with the rules imposed by the regulators. It’s imperative for any financial institutions to conduct a thorough assessment prior to investing in third party technologies such as RegTech. These assessments should be done prior to providing access to their internal processes to resolve any intricacies.

With the accelerated growth of FinTech, financial institutions may soon start to embrace the concept of RegTech. Fintech Global has recently reported that, in the last 5 years, investment in RegTech companies have dramatically increased. This in turn has drawn significant interest from venture capital firms, who appear to be heavily interested in RegTech companies. Further, RegTech will not only impact the financial institutions, but will also trickle down to affect industries such as the health care and insurance industry.

Frost & Sullivan forecasts that the RegTech industry will reach $6.45 billion by 2020. Such a rise is worth tracking and may bode well for M&A activity going forward.

The author would like to thank Nida Naz, articling student, for her assistance in preparing this legal update.

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Not all bad news amidst African M&A decrease

Recent reports have suggested a precipitous decline in mergers and acquisitions (M&A) in Africa. In the first half of 2018, total deal volumes and values of M&A transactions declined with a 44% decrease in deal volume and a 57% decrease in aggregate value, in comparison to figures in the preceding year. In fact, M&A transactions on the continent have been on a steady decline for a few years now, as their value has dropped from $64.9 billion in 2015 to $32.4 billion in 2017.

Several theories have been posited in the attempt to explain this decline, including corruption and bad governance coupled with strong anti-bribery and anti-corruption laws in investor countries. Other reasons include economic and political instability, and generally poor business climates in the region.

However, despite the decline in M&A activity, opportunities for growth exist on the continent and make it a region to watch for investor countries, Canada being no exception. As Africa’s middle class grows, so too does the market for financial services. Given that the continent is deemed to be lacking communication and banking infrastructure, this makes the region primed for investment in the area of financial services and technology or “fintech”. This may be an opportunity for international banks to cooperate with those in the technology sector and be in the forefront of development in the continent.

Moreover, deal-making in certain African countries including Nigeria and South Africa is anticipated to improve in 2018. This is important news for Canadian companies interested in oil and gas production as well as mining, which are large sectors in these respective countries. In fact, it seems as though some Canadian companies are already looking to the continent for the purpose of tapping into its natural resource markets.

Ultimately, while M&A activity seems to be on a general decline in the African continent, there are still opportunities for investment in particular regions and growing industries and sectors.

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

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