Considerations in
Cross Border M&A
Overview
Canada, similar...but different
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Investment Canada
Competition
Intellectual Property
Public Company Considerations
Labour & Employment
Deal Points: Public and Private Canadian Targets
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Canada, similar...but different
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Canada, similar...but different
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Investment Canada
• Purpose?
• “Provide for the review of significant investments in
Canada by non-Canadians in a manner that
encourages investment, economic growth and
employment opportunities in Canada and to provide for
the review of investments in Canada by nonCanadians that could be injurious to national security.”
• When it applies?
• Acquiring a Canadian business / establishing a
Canadian business by a non-Canadian
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Investment Canada
• Notification – Acquisition of Control
• Stock
• < ⅓ – not control, never notifiable
• ⅓ - ½ – rebuttable presumption of control
• > ½ - control, always notifiable
• Assets
• Substantially all the assets
• Review
• Above dollar thresholds OR National Security concerns
• Dollar threshold depends on various factors
• If Buyer controlled by residents of WTO member state, Review threshold
• $600M (enterprise value) in most cases
• $369M book value of target’s assets - if Buyer is SOE
• $5M if cultural business
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Investment Canada
“Net benefit to Canada” test factors
• Effect on level and nature of economic activity in Canada, including employment
• Degree and significance of participation by Canadians in the business and the
industry
• Effect on productivity, industrial efficiency, technological development, product
innovation/variety
• Effect on competition
• Compatibility of investment with national, industrial, economic and cultural policies
• Contribution of investment to Canada’s ability to compete in world markets
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Investment Canada
Recent Changes
• Nature of review threshold changed and amount
increased ($369M  $600M)
• Notification form requires substantially more
information
• Time for national security review extended (130  200
days)
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Competition (Anti-Trust)
Pre-Merger Notification
• Competition Act: Will transaction prevent or lessen
competition substantially?
• Stock sale:
• Public company target ≥ 20% voting shares OR
• Private company target ≥ 35% voting shares AND
• Target > $77M assets / sales
• Asset sale:
• Parties > $400M assets / sales in Canada AND
• Target’s assets / sales in Canada > $82M
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Competition (Anti-Trust)
• Advance Ruling Certificate (ARC)
• No Action Letter
• Possible Outcomes
• No challenge (majority)
• No challenge based on concessions (e.g. divestiture of
assets) (rare)
• Challenge (very rare)
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Why Is Intellectual Property Important?
Market Value Allocation for S&P 500
100%
80%
60%
Tangible Assets
Intangible Assets
40%
20%
0%
1985 1995 2005 2015
Source – Ocean Tomo 2015 update to the Annual Study of Intangible Asset Market Value
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Types of Intellectual Property
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Intellectual Property Due Diligence
• What IP exists within the company
• Ownership
• IP rights have been maintained ?
• Maintenance fees paid
• Renewals completed
• Ongoing use for trademarks
• Agreements
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Copyright
• Works created by employees in the course of
employment are owned by the employer. Works
created by independent contractors are owned by the
author.
• Assignment must be in writing signed by the owner
• Moral rights
• Right to be associated with the work
• Right to the integrity of the work
• Moral rights cannot be assigned. They must be
waived
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Trademark
• A word, design etc. used to distinguish your
goods/services from those of others in the marketplace
• Valid for 15 years (will be 10 with Trademark Act
amendments) and is renewable
• Must be used
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Patent
• Covers an invention (machine, process, manufacture
etc)
• Grants owner the right to exclude others from making
using or selling the patented invention
• Valid for 20 years from the filing date of the application
• Patent application is available to the public 18 months
after filing in Canada
• 1 year grace period for disclosures
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Agreements
• Agreement affecting the IP of the company and the
IP of others
• Licenses or licensing offers?
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Canada specific IP Highlights
• Quebec – legislation mandates use of the French
language
• Recent amendments to much of Canadian intellectual
property legislation
• Customs Recordal now available in Canada
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Pre-Transaction Preparation – Toeholds
Toehold
• Permitted: watch out for pre-bid
integration rules
• Stop before you reach 10%: early
warning rules require a toehold
position to be disclosed when the
acquirer’s ownership exceeds
10%
• Takeover bid rules are triggered
when acquirer accumulates 20%
or more ownership
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Pre-Transaction Disclosure – Early Warning
• Canadian securities laws require “early warning” public
disclosure at 10% or more, plus accumulations of 2%
or more. (Note that U.S. laws (if applicable) require
early warning disclosure at 5%)
• 10% threshold reduced to 5% if the target is already
the subject of a bid
• Typically, an acquirer may accumulate in the market a
toehold that is just below the disclosure level
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Pre-Transaction Disclosure– Joint Actors
Watch out for the “joint actor” rules:
Canadian securities laws contain an anti-avoidance
scheme, the effect of which is to include in the 20%
(and the securities subject to the 10% early warning
disclosure), securities owned directly, or indirectly, by,
among others, persons or companies acting jointly
or in concert with a bidder, under an agreement,
commitment or understanding
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Pre-Transaction Preparation – Due Diligence
Public company due
diligence
www.sedar.com
www.sedi.com
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The Right Structure
• Take-over bid
• offer made directly to shareholders, not
necessarily with agreement of the target
• Amalgamation
• a “merger” made by agreement with the
target, filed with a government ministry for
routine processing, after approval has been
obtained at a special shareholders meeting
• Plan of arrangement
• a “merger” made by agreement with the
target, submitted for court approval after the
shareholders approve at a special meeting
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Take-Over Bid
• Compulsory Acquisition
• If reach 90% acceptance, then the rest of the shares
can be compulsorily acquired at the same price
relatively quickly
• Second-Step Transaction
• Step One: acquire up to 66-2/3% of shares
• Step Two: shareholder meeting to acquire the
balance
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Take-Over Bid
Bid Conditions
In a take-over bid, the acquirer can specify
conditions that must be met or waived before it is
required to complete the offer or the bid lapses,
for example:
Acquisition of shares: Typically the
minimum specified is two-thirds of the
outstanding shares not owned by the
acquirer
Receipt of required regulatory approvals
No material adverse change
BUT
Financing must be in place before a bid is
launched
No “side deals”
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Proposed Amendments
• Contain a minimum tender requirement of 50% of the outstanding
securities of the class that are subject to the bid;
• Bid must be extended for an additional 10 days after the minimum
tender requirement is met; and
• Bid must remain open for a minimum deposit period of 120 days,
unless:
• The target board states in a news release that a shorter
deposit period (not less than 35 days) is acceptable, in which
case all other concurrent unsolicited bids would be subject to
the shorter deposit period; or
• The target issues a news release that is entering into a
specified alternative transaction.
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Plan of Arrangement
• Court-approved
• 66⅔% security holder approval (generally)
• Permits a multi-step transaction to meet tax and
corporate objectives to be completed in a single
“step”
• If acquirer is offering shares as consideration
and target US shareholders, US registration
exemption available
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Shareholder Activism in Canada
• Shareholder activism continues to grow in Canada,
ranging from behind-the-scenes discussion to hardfought proxy contests.
• Most activist demands are for the appointment of
nominees to the board, either a few or a full slate,
with the objective of bringing about strategic change.
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Shareholder Activism in Canada
• A 5% shareholder may requisition a shareholder meeting at any
time
• A shareholder may solicit proxies without a dissident proxy circular
where:
• the shareholder solicits proxies from 15 or fewer shareholders
• the shareholder solicits proxies though public broadcast, speech
or publication, including press releases and advertisements
(although the shareholder must still provide certain information
regarding itself and its nominees)
• a dissident proxy circular is not subject to regulatory review
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Labour & Employment
• Employment primarily provincially regulated, with some
exceptions (e.g. telecommunications)
• Privacy
• Credit checks
• Criminal context
• Social media
• Employment Contracts
• Restrictive covenants
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Labour & Employment
Ending the Relationship:
• Termination for just cause
• Ontario Court of Appeal has characterized conduct
sufficient to constitute just cause to be “misconduct that
is incompatible with the fundamental terms of the
employment relationship”.
• Termination with notice or pay in lieu
• Constructive dismissal
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Deal Points: Canadian Public Target
D&O Insurance – Premium Caps
Closing Conditions Included
Deal Term
US
CDA
Deal Term
US
CDA
Availability of financing
8%
41%
No cap
9%
43%
Appraisal rights – cash only
6%
84%
300%
46%
23%
Appraisal rights – cash/shares
14%
100%
200%
21%
17%
Superior Proposal Definition – Shares
Deal Term
Superior Proposal Definition - Assets
US
CDA
Deal Term
All or substantially all
16%
67%
> 50% but < all
82%
<50%
0%
US
CDA
All or substantially all
31%
83%
27%
> 50% but < all
66%
10%
6%
<50%
3%
7%
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Deal Points: Canadian Public Target
Board Recommendation – Fiduciary Out
No Shop - Fiduciary Out
Deal Term
US
CDA
Actual superior proposal
2%
28%
May reasonably lead to a SP
98%
72%
Deal Term
US
CDA
For superior proposal
22%
65%
For SP or intervening event
47%
0%
If fiduciary duties requireꞋ
29%
29%
Target Break Free Triggers
Match Right
Deal Term
US
CDA
Naked no vote
25%
17%
100%
No vote & acquisition proposal
87%
96%
21%
70%
Drop dead date & acquisition
proposal
77%
37%
40%
11%
Change in board recommendation
95%
99%
US
CDA
Included
89%
5 business days or more
3 business days
Deal Term
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Deal Points: Canadian Private Target
Purchase Price Adjustment
Deal Term
US
PP adjustment included
85%
Working capital adjustment
91%
Debt adjustment incl
44%
Buyer prepares B/S
90%
Prelim closing adjustment
88%
Earnouts
CDA
70%
70%
11%
52%
44%
Deal Term
Earnout included
Based on EBITDA
Based on revenue
US
25%
30%
32%
CDA
21%
8%
15%
Deal Term
Basket included
US
96%
CDA
80%
Deductible
61%
17%
Sandbagging
Deal Term
Baskets
US
CDA
Express provision included
Pro-sandbagging
51%
80%
33%
73%
Anti-sandbagging
19%
27%
Threshold and deductible
5%
8%
Scope-indemnity and walk
50%
0%
First dollar
33%
74%
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Deal Points: Canadian Private Target
Knowledge
No Shop
Deal Term
No shop / no talk included
Fiduciary exception
included
US
85%
15%
Material Adverse Effect
Deal Term
US
MAE defined
96%
Prospects included
17%
Forward looking standard
93%
MAE carve-outs specified
91%
Indemnification Cap
Deal Term
US
Equal to purchase price
5%
> 50% but < purchase price
0%
< 15% of purchase price
89%
CDA
42%
12%
CDA
83%
35%
62%
70%
Deal Term
Knowledge defined
Constructive knowledge
Persons identified
US
98%
80%
96%
Survival Periods (Generally)
Deal Term
US
12 months or less
26%
24 months or more
11%
Most frequent
18 mths
44%
CDA
83%
69%
78%
CDA
21%
55.5%
24 mths
47%
Legal Opinions
CDA
40%
14%
10%
Deal Term
Required
US
19%
CDA
55%
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Thank You
Bryce Kraeker
519-575-7545
Bryce.kraeker@gowlings.com
Martha Savoy
613-786-0180
martha.savoy@gowlings.com
Lorne Segal
613-786-0141
lorne.segal@gowlings.com
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