Legal update: new European data privacy law comes into force on May 25, 2018

On May 25, 2018 the European Union’s General Data Protection Regulation (GDPR) will come into force. The GDPR will create new requirements for Canadian companies that handle the personal information of European individuals. The GDPR also allows for heavy penalties to be imposed on organizations that fail to comply with this new regulatory regime. Based on this, Canadian companies who are involved in M&A transactions should be sure to determine whether the GDPR applies to a target and carefully consider the risks associated with non-compliance.

The GDPR regulates the processing by an individual, a company or an organization of personal data relating to individuals in the EU. Similar to Canadian privacy law, “personal data” is constituted by any information that relates to an identified or identifiable living individual and “data processing” captures a wide range of manual and automatic operations performed on personal data. Importantly, the GDPR applies to activities that take place outside of the borders of the EU and also applies regardless of the size of the organization.

Given the broad scope of activity the GDPR captures, it is safe to assume that most Canadian businesses that sell to Europeans or have operations in Europe should obtain legal advice in order to determine whether the GDPR applies to them.

This is especially important when considering that organizations who are found to be non-compliant can face large fines of up to four per cent of their global revenue or €20 million, whichever is higher. The GDPR also gives individuals the right to seek compensation for damages caused by violations of the GDPR.

Given the magnitude of these penalties and the wide scope of organizations and activities that are caught by the GDPR, both potential targets and acquirers should be aware of the impact the GDPR could have once it is in force. Targets should conduct an analysis to determine which, if any, of their operations may be caught by the GDPR and document any compliance measures that are implemented. Acquirers, on the other hand, should familiarize themselves with the GDPR in order to put themselves in the best position to identify any possible issues with the GDPR in a transaction. For more on the due diligence process related to the GDPR, see our previous blog post on this topic.

In Canada, Norton Rose Fulbright recently rolled out an artificial intelligence legal chatbot called Parker for clients seeking to know if they are affected by GDPR. Parker uses natural language processing to answer a variety of questions businesses in Canada may have about GDPR.

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M&A activity in Canada’s upstream oil and gas sector remains slow in 2018

Following our update during the last quarter of 2016, M&A activity in Canada’s upstream oil and gas sector continued to decline in 2017 and has remained slow during the first quarter of 2018. Globally, there was a strong start to 2017 followed by a significant decline, in terms of both deal count and overall deal value, during the balance of 2017, with a notable increase in deal activity during the first quarter of 2018.

 According to Deloitte’s Oil & Gas Mergers and Acquisitions Report–Yearend 2017, after the increase in deal spend in Q4 2016 and Q1 2017, the rest of 2017 saw a significant decline in upstream M&A spend. Deloitte noted the following themes that emerged during the year: (1) continued portfolio optimization as larger exploration and production (E&P) companies divested non-core acreage to reduce debt levels and focus on core locations and assets, (2) consolidation through larger-scale deals to combine portfolios, and (3) a slowdown in deal activity in the Permian Basin.

 The total value of upstream deals worldwide reached USD 37 billion in the first quarter of 2018 according to Evaluate Energy’s recent report (Evaluate Energy’s Report), suggesting that confidence is returning to the E&P sector. Evaluate Energy’s Report indicated that the number of “significant deals” (i.e. deals with a value of USD 50 million or more) was its highest in the last quarter than any quarter since the initial oil price collapse in mid-2014. This uptick following a slow latter half of 2017 has been attributed to a higher average West Texas Intermediate (WTI) oil price and reduced price volatility. The average WTI oil price during the first quarter of 2018 was USD 62.81, representing the first time the average quarterly WTI price has exceeded USD 60 since the initial price collapse. Further, price volatility was its lowest during the first quarter 2018 than during any quarter since 2004. The industry expects to see continued oil price stability in 2018 given OPEC’s extension of its production cut to the end of the year.

While deal activity has been strong globally in Q1 2018, only one of the top ten upstream deals worldwide took place in Canada with Suncor Energy Inc.’s acquisition of Mocal Energy’s 5% interest in the Syncrude oilsands mining project for USD 750 million. During the same quarter last year, Canada saw USD 24.5 billion of oilsands deals but has only seen USD 1.5 billion during the first quarter of 2018. Deal activity in the United States has taken the lead with an aggregate of USD 18.7 billion in new deals in Q1 2018 representing $411 million more than all other countries combined.

As indicated in CanOils monthly reports for the first quarter of 2018, upstream M&A deal activity continues to fall in Canada as global benchmark oil prices continue to rise. Despite falling deal values, companies continue to list significant asset packages for sale, the majority of which have resulted from companies initiating strategic review processes. Another trend observed since the initial price collapse has been a change in the ownership structure of the Canadian oilsands to bring more of these assets under the control of Canadian companies as international players exit the market.

Canada’s oil and gas industry continues to face challenges relating to insufficient pipeline capacity despite the oil price recovery in the United States and globally. As recently announced, Kinder Morgan’s CAD 7.4 billion Trans Mountain Pipeline Expansion Project, the latest in a long line of maligned proposed Canadian pipeline projects, remains under threat as a result of the BC government’s opposition to the project. Kinder Morgan has announced that it will shelve the project on May 31, 2018, if it does not receive assurances that the project will be able to proceed.

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

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The deemed dividend dilemma: structuring your cross-border credit support

We frequently act as Canadian counsel to lenders and borrowers in cross-border transactions where credit support is provided to a US parent company by one or more of its Canadian subsidiaries. In structuring the deal, a considerable amount of time can be spent determining the extent to which the collateral of the Canadian subsidiaries should secured.

The reason for this dilemma is because of section 956 of the US Internal Revenue Code, which creates a deemed dividend on the income of any controlled foreign corporations (CFCs) irrespective of whether or not the dividend is in fact papered and paid back to the US parent. A CFC is defined as any foreign company of which more than 50% of the total combined voting power of all classes of shares are entitled to vote or more than 50% of the total value of its shares are owned by US domiciled shareholders. Each “US Shareholder” of a CFC is required to include in their gross income as a deemed distribution their pro rata share of the amount determined under section 956 for that year. Typically, the US parent (or one of its US subsidiaries) would own 100% of the foreign company, which can trigger section 956 in the circumstances set out below.

By way of background, before section 956 was enacted in 1962, income produced by the foreign subsidiaries of a US company was only subject to US taxation if the foreign income was repatriated to the US entity by way of a dividend. Congress recognized that US companies were obtaining the economic benefit of this foreign income despite the fact that the income was not taxable in the US, and as a result enacted section 956 on the basis of the benefit received by the US parent on all past and future earnings of the foreign subsidiaries. Under section 956, when a foreign subsidiary provides credit support to its US parent, the accumulated earnings and profits of the foreign subsidiary are deemed to have been distributed to the US parent and therefore subject to US corporate tax.

The section 956 dilemma discussed between borrowers and lenders when structuring a credit deal largely revolves around the level of security a foreign subsidiary will grant to the lender in respect of the obligations of the borrower. If the CFC is a pledgor or guarantor of such obligation, the CFC is treated as holding an obligation of a US person and if one of the following three events occur, section 956 is triggered:

  • The foreign subsidiary grants a security interest to the lender in its assets to secure the obligations of the US parent;
  • The foreign subsidiary guarantees the obligations of the US parent; or
  • If 662/3% or more of the voting stock of the foreign subsidiary is pledged to the lender.

In many cases, having considered the tax implications, all three of the above occur in any event. The tax implications of section 956 will not necessarily be significant, however they can be, particularly if the business of the foreign subsidiary forms a material part of the company’s consolidated EBITDA.

In recent years, there have been calls for the repeal of section 956 and many observers expected a repeal to be included with the recent Tax Cuts and Jobs Act as a result of the House and Senate committees’ proposals to overhaul the US international tax regime. However, the final version of the Tax Cuts and Jobs Act which became law on December 22, 2017 did not include such repeal and we continue to be faced with section 956 considerations when credit deals are negotiated.

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The fallacy of the fully paid share

Often I will review agreements where clients are making representations that shares are fully paid upon their issuance. This practice has developed from US law and migrated north of the border over time, but the basis for it as a concern here is rather limited, even putting it charitably. Under Canadian law, shares cannot be issued at all unless fully paid. You may want a representation that the shares have been validly issued, but once you have that, asking for one saying they are fully paid does not actually get you any further. They can’t be the former without the latter.

This does, however, raise a question of what a fully paid share should look like, not in terms of the appearance of the certificate, but when you can count a share as fully paid so that it can be issued and you can close your transaction. Let’s take a look at the three most common ways to pay for shares:

  • Certified cheques: Certified cheques are cheques that, historically at least, included a certification by the bank that the funds are in the account from which the cheque is being drawn. Unlike regular cheques, this means that in theory, the money is available on the day the cheque is provided, as opposed to the up to 30 day hold period that can be applied to regular cheques. Unfortunately, the “certified” in certified cheque has come to mean less over time. Banks can still place holds on funds deposited or, in cases of suspected fraud, not stand by the certification at all. For this reason, we recommend that clients stay away from receiving or providing funds by certified cheque. It also saves the potential for a person providing funds accidentally providing a regular cheque instead of a certified cheque, which happens more often than one might think.
  • Bank drafts: With bank drafts, the bank also guarantees that the payor has the requisite funds in his or her account. However, rather than using the payor’s own personal cheque, the bank essentially issues a cheque on its own account and is thus on the hook to make payment to the intended recipient. Bank drafts are generally non-cancellable, but the deposit of funds is not immediate. Specifically, banks will often apply a hold on the draft for three to five days. As with certified cheques, this possibility for holds may render receipt of the bank draft alone as insufficient proof that shares have been fully paid.
  • Wire transfers: If funds are sent by wire, we often see clients asking to close on the receipt of wire confirmation details rather than the actual landing of funds. This is largely because wires take time to land, depending on how they are being routed. Theoretically, wire confirmations can be recalled, but in my years of practice, I have yet to actually see this happen and most clients don’t even know it can happen. Our preference is always to wait for the wires to land as opposed to closing on confirmations. Often we will suggest that the funds be sent a day early to be held in the account of counsel to the recipient, not to be released until the actual closing has occurred.

For this reason, we are increasingly encouraging clients to rely solely on wires for the payment of shares. We are always available to act as an intermediary for funds and it is a service we are happy to provide, so we or opposing counsel can receive funds and hold them until we are given your express approval to release them.

Of course, all of this could end up looking very different in a few years with the arrival of blockchain. Blockchain technologies such as smart contracts may facilitate and hasten payment for shares by eliminating many of the intermediaries in the payment processing system that may account for delays in receiving and issuing funds. An in-depth discussion goes a little beyond what I usually write about in these posts, but we do have a whole section on our website dedicated to it, so don’t let that stop you from exploring if you’re interested.

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

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A healthy dose of deal-making: M&A trends in the US and Canadian healthcare sector

In the first quarter of 2018, M&A activity across the world hit a 17 year record high according to Mergermarket’s Q1 2018 Global M&A Report. This is an 18 percent increase in value compared to the first quarter of 2017. This increase was affected by the surge in deal-making seen at the end of 2017 which carried over into 2018 as the US experienced mega US healthcare deals. In fact, US M&A activity during Q1 2018 was reported to represent 44.2% of the total global share. According to data from Bloomberg, the healthcare sector has already reported $156 billion in deals and that this is the busiest start for healthcare M&A in over a decade. Deals have involved various parties, such as pharmaceutical companies, payers, investors, hospitals, and health systems.

So, why did healthcare M&A have such an impressive year in 2017 and a strong start to 2018? Bain & Company has some ideas. Part of it may be due to the blurred lines between sectors as a result of non-healthcare players, such as Apple, Amazon, Samsung, and Tencent, entering the fray. Another factor could be that more traditional forces, such as an aging population, rising prevalence of chronic disease, and continuous development of drugs and medical devices continue to make the healthcare sector an attractive investment. Although corporate deal value in healthcare was not at its ultimate high point, the average annual activity over the past four years in the United States has been nearly double the level of the previous four years and is reshaping the industry.

Disruptive market forces have affected the sector and we are now starting to see the effects of some of these trends. Bain & Company lists 5 forces that have affected the healthcare sector:

  • The Amazon Effect: Amazon announced a partnership in January 2018 with JPMorgan Chase and Berkshire Hathaway to deliver healthcare to their employees and plans to grow its medical supplies business.
  • The Digital Revolution: Healthcare companies are recognizing the impact of technology in the industry. To learn more about how technology acts as a driver of M&A, look to our post from earlier this month.
  • Regulatory Change: Major economies are experiencing regulatory changes which directly affects healthcare industry.
  • Consumerism: Consumers can pick among a variety of delivery models across healthcare channels.
  • Personalized Medicine: Investors are looking at companies that are developing personalized treatments, patient testing for biomarkers, and ways to integrate and analyze patient data.

In addition to these five disruptors, Bain & Company expects three additional forces to impact deal-making in 2018: evolving laws and regulations, innovation, and the changing nature of total shareholder return. Competitive forces and increasing payer clout affecting bio-pharmaceutical and medtech markets has also driven change in the health care services space according to a report by EY. As we reported on January 31, 2018, EY forecasted possible M&A trends in the life sciences sector while newly implemented policies, such as the US tax reform, growth in emerging markets, and a fragmented biopharmaceutical market, suggested that a more active year of life sciences M&A deals is on the horizon.

Given the ubiquity of these forces, what does this mean for the Canadian M&A market? Is Canada going to enjoy the same increased M&A activity as its southern neighbour? Although Canada experienced a surge of M&A in 2017, which was predicted as likely continue into 2018, healthcare M&A is not expected to be a leading sector for increases in M&A activity in the 2018 year. According to survey responses in Mergermarket’s 2018 report, healthcare was sixth on the list of sectors expected for US buyers to target in Canada in 2018. In regard to sectors in Canada expected to see the biggest increases in M&A activity in 2018, healthcare was tied for third (inbound) and sixth (domestic). According to the Canadian M&A Roundup of Q1 2018, Canada has slowed down relative to Q1 2017 and the total value of deals for domestic and cross-border fell from $62 billion to $27 billion. The healthcare sector only accounted for 7.7% of the volume of M&A by industry in Q1 2018, falling behind the three leading sectors so far: real estate (37.2%), energy and power (14%), and high technology (10%).

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

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What considerations should be made when buying a franchise business?

The acquisition of a franchise business from a franchisor carries with it risks unique to the nature of the business. The aim of this post is to shed light on some of those risks and to highlight mechanisms, the existence of which can comfort a potential buyer that those risks have been mitigated.

Risk of non-compliance with applicable franchise legislation

The provinces of Ontario, Alberta, British Columbia, Manitoba, New Brunswick and Prince Edward Island each have their own franchise regulatory regime. A staple of the franchise regulatory regime is the requirement that, subject to certain exemptions, prospective franchisees receive a franchise disclosure document, devoid of any material misrepresentations or material deficiencies, at least 14 days before the earlier of the (i) signing of any agreement relating to the franchise, or (ii) payment of any consideration by the prospective franchisee relating to the franchise. The purpose behind this requirement is to ensure a prospective franchisee has sufficient information upon which to make an informed investment decision.

The consequences of non-compliance can be significant. If a franchisor has failed to comply with the disclosure requirements of applicable franchise legislation, a franchisee is typically afforded a right of action for damages against the franchisor and may also have the right to rescind a franchise agreement for a period of 2 years after the “grant” of the franchise. Upon a franchisee’s successful initiation of a claim for rescission, the franchisor is required to wholly compensate a franchisee for its investment, whether direct or indirect, in the franchise business, including the purchase price of the franchise, set-up costs, the cost of inventory, supplies and equipment, all royalties and other franchise payments paid to the franchisor (such as advertisement fund payments), all rent payments (and deposits) and any losses that the franchisee incurred in the operation of the franchise.

A potential buyer should therefore review copies of the franchise disclosure documents given to franchisees over the last two years and any dated acknowledgements of receipt of the franchise disclosure document from those franchisees in order to ensure compliance.

Risk of franchisee default or bankruptcy

A potential buyer’s financial diligence should reveal whether at the time of the acquisition, any franchisee has defaulted on royalty payments or is otherwise in a precarious financial position. However, the financial position of a franchisee at the time of the acquisition might not be a good indicator of its financial position in the future. As such, a potential buyer should evaluate whether sufficient mechanisms are in place to protect the business and allow for its continued operation in the event of a future franchisee default or petition for bankruptcy. The following are examples of such mechanisms:

  • a termination right for the franchisor upon a default of the franchise agreement by the franchisee or upon the franchisee’s bankruptcy;
  • a right of first refusal for the franchisor to purchase the franchisee’s business upon a termination of the franchise agreement on account of a franchisee default or bankruptcy;
  • a right for the franchisor to step into the franchisee’s lease upon either the exercise of the abovementioned right of first refusal or upon a default of the lease by the franchisee;
  • a personal guarantee executed in favour of the franchisor; and
  • a general security agreement executed in favour of the franchisor by the franchisee and any guarantors.

Risk of damage to the franchise brand

Inconsistency in the operation of any one franchise may in turn harm the brand of the network of franchises. Thus it is essential that a potential buyer ensure sufficient mechanisms are in place for a franchisor to keep the brand consistent across all franchises.

First, a potential buyer should confirm there are contractual obligations to require that franchisees operate in accordance with the franchisor’s standards of operations. Such operational standards should include maintaining a certain franchise layout or design and purchasing from authorized suppliers only, among others. The existence of incentive programs in connection with the franchisor’s standards of operation may serve as an additional mechanism to cause compliance.

Second, a potential buyer should confirm that the franchise agreements prohibit a change of control or sale of the franchisee’s business without the prior written consent of the franchisor. This way, the franchisor is able to maintain complete control over who is operating its franchises, and as a consequence, can better protect its brand.

The above represents only a subset of key risks (and mitigating factors) unique to the acquisition of a franchise business. For more information concerning the subject matter of this post, please contact Norton Rose Fulbright Canada LLP.

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Competition Act Merger Filing Fees Increases to $72,000

Effective May 1, 2018, merging parties will need to dig deeper to cover 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 jumping from $50,000 to $72,000.

In justifying the increase, the Competition Bureau argues that the fee has not increased since 2003, and had the fee been adjusted annual for inflation, it would currently be approximately $65,500. They also suggested that additional funds are required given the increase in the number of transactions considered “complex” and the considerable resources that are required to evaluate those matters.

Additional details of their proposal were described in a previous post and the Bureau’s announcement of the new fees can be found here.

Proposed transactions that meet certain thresholds must be notified to the Bureau in advance of closing and cannot be completed until the expiry of the waiting period under the Competition Act. 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 $92 million threshold.

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M&A or joint venture: key considerations for choosing your path to growth

Choosing to grow your business through an M&A transaction or through a strategic partnership or joint venture can be a difficult decision to make. M&A transactions and partnerships can both drive growth and bring access to new markets or product and service offerings, but they also come with unique challenges. While an acquisition allows the acquirer to gain control over the target, M&A transactions can be costly and the acquirer not only obtains the target’s business but also its liabilities, which can be significant.

Strategic partnerships, on the other hand, do not provide the same degree of control but may be a more viable option if acquiring the target may be too costly. Businesses need to carefully consider whether an acquisition or an alliance is the best achieve their growth. PwC recently released a list of key considerations that businesses need to consider when deciding whether an partnership or an acquisition is the best course of action.

Are you looking to correct a gap in your company’s capabilities or to enhance existing strengths?

If you are looking to correct a deficiency in your company’s ability to perform certain functions, an acquisition may bring in more value, as you will be able to absorb and integrate the target’s strengths into those particular capabilities. However, if the target company has ancillary products or services that the you as an acquirer do not want to integrate into your existing business, a partnership may be the appropriate solution. Partnerships allow for negotiation on the specific components of the target’s business to be integrated. If you are looking to enhance existing strengths, an acquisition is practical only if most of the target’s products or services would align with and enhance your business. Otherwise, there may be too many components of the target’s business that will need to be shut down or sold off, which may lead to a prolonged post-acquisition process.

How much control are you looking to have?

An acquisition is a better option when you are looking to acquire control over how the target’s business is run. This is particularly important for deals involving complex or proprietary products or services, as well as those involving an acquisition of assets that require more time to become profitable. In contrast, a joint venture or a partnership may be preferable when you are looking to gain access to the target’s product or service but do not wish to have control over the operational aspects of the target’s business. It is also a great option for when the target is a large company and a merger would be prohibitive on cost.

Will an acquisition give you the return on your investment that is large enough to offset its costs?

Since the costs of entering into a M&A transaction tend to be much greater than pursuing a joint venture or an alliance,  it is important to consider (i) if the return on the investment will make the deal worth the investment and (ii) the risks that come with an acquisition. In a M&A transaction, value is often derived from combining business operations, including delivery systems, logistics and support systems, which should create efficiencies and reduce the overhead that existed when the acquirer and target were operating as two separate businesses. A partnership may be a preferred option where integrating the two businesses would not produce enough efficiency benefits to outweigh the costs of the transaction.

Have you considered the market trends that may predict the success of a M&A transaction or a partnership?

Before embarking on a M&A transaction or a strategic alliance, it is also important to consider market trends and past deals in the industry to look for potential problems or barriers to success. Some industries may see pressure from shareholders or declining prices for their products that may require companies to abandon diversification and focus on a few key product or service offerings, making a M&A transaction less desirable. Past deals can give you a glimpse into how competitors and consumers have reacted to an acquisition versus a partnership in the industry and give insight into any regulatory challenges a deal may face.

Will you have to divest large portions of the target’s business?

A M&A transaction may bring a part of the target’s business that offers little value to the acquirer or may be more profitable if it is sold off post-acquisition rather than integrated into the acquirer’s business. It is important to consider whether a complete sale or spin-off is the right way to divest portions of a target’s business that are underperforming or undesirable for the acquirer. A divestiture into a joint-venture may be preferable over a full sale of the asset, as it keep that portion of the business within the acquirer’s portfolio but brings in another company with expertise in the field as a partner to improve the underperforming asset.

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

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Look to the future: a tip for analyzing corporate culture in an era of evolving shareholder activism

2018 promises to be a year in which corporate culture will likely become an even more important focal point for investors and activists.

There’s no denying that social media has drastically altered the dynamic for public companies. Today, shareholders are increasingly calling upon corporations to take public stances on various social (and sometimes political) issues, some of which may be wholly unrelated to the corporation’s purpose. In a climate where shareholders are increasingly judging corporations based on non-traditional criteria, public companies can no longer spout platitudes about corporate governance and social values without risking being singled out. More than ever, members of today’s interconnected  and increasingly progressive and tech-centric society are capable and ready to pressure companies to address rapidly evolving external events that fall outside the scope of a company’s stated business. At the same time, in some instances, investor pressure may instead force companies to become activists who influence and drive change to the corporate cultures of other public entities.

What does all this mean for companies considering M&A transactions?

In the context of any proposed M&A transaction, the resurgence of shareholder activism focused on non-traditional criteria makes it important to understand and consider a target company’s corporate culture. In other words, it is necessary to not only examine a target company’s existing corporate culture, but also think about how shareholder activism campaigns might necessitate the need to change or evolve the target company’s existing corporate culture post-closing –an event that could introduce added compliance costs that undermine the value of undertaking the transaction. While sociopolitical activism may not always manifest itself in the form of a proxy contest, today’s digital platforms allow well-organized groups to exert sufficient pressure to drive change in a company’s corporate culture. Companies that are contemplating public M&A transactions would be ill advised to ignore (or treat lightly) corporate culture in their pre-transaction analyses.

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

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Canadian Securities Administrators are seeking comments on soliciting dealer arrangements

The Canadian Securities Administrators (the “CSA”) have issued CSA Staff Notice 61-303 and Request for Comment – Soliciting Dealer Arrangements (the “Notice”) on the use of soliciting dealer arrangements. “Soliciting dealer arrangements” generally refer to agreements entered into between issuers and investment dealers under which the issuer agrees to pay to the dealers a fee for each security successfully solicited to tender to a bid in the case of a take-over bid, or to vote in favour of a matter requiring securityholder approval. In many cases, the payment of any fee is contingent on “success” and/or only if votes are cast in a particular manner.

The recent use of soliciting dealer arrangements in the context of contested director elections has raised substantial controversy. For example, in a previous blog, we reported on the decision of the Alberta Securities Commission (the “ASC”) in PointNorth Capital Inc. where the ASC was called upon to consider the appropriateness of a soliciting dealer arrangement that had been entered into in the context of a proxy fight. Pursuant to this arrangement, the issuer agreed to pay the soliciting dealers a fee if the issuer’s slate of incumbent directors was elected. The ASC dismissed the application by the dissident shareholders and allowed the soliciting dealer arrangement to remain on the grounds that it was not “clearly abusive” of the capital markets in general.

In light of the issues raised by soliciting dealer arrangements, the staff of the CSA has published the Notice and is requesting comments to better understand these arrangements to aid the CSA in assessing whether additional guidance or rules in respect of these arrangements would be appropriate. To aid its assessment in this regard, the CSA has also posed a series of questions for market participants .

Comments must be submitted to the CSA by June 11, 2018.

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