Canadian Securities Law : Canadian Securities Lawyer & Attorney : Stikeman Elliott Law Firm : Montreal, Ottawa, Calgary, Vancouver, Montreal, Toronto

Transactions of note (announced or completed) included:

• Companhia Vale do Rio Doce’s C$19.9 billion acquisition of Inco;
• Xstrata plc.’s C$19.2 billion acquisition of Falconbridge;
• Royal Dutch Shell’s C$8.7 billion proposed acquisition of Shell Canada;
• Prince Alwaleed’s Kingdom Hotels International’s C$4.5 billion acquisition of Fairmont Hotels & Resorts (with Colony Capital) and C$4.2 billion acquisition of Four Seasons Hotels (with Bill Gates’ Cascade Investment);
• Kinross Gold Corporation’s US$3.2 billion acquisition of Bema Gold Corporation; and
• Nucor Corp.’s C$1.2 billion acquisition of Harris Steel Group.

Hostile bids, deal jumping and shareholder activism

In 2006, prospective acquirors in the Canadian M&A environment demonstrated a continued willingness to launch unsolicited take-over bids and to engage in other assertive behaviour such as “deal jumping”.

Probably the best example of this phenomenon was the battle for control over Canada’s storied mining corporations, Inco and Falconbridge, a complex and multi-faceted transaction which garnered much attention. Inco and Falconbridge announced a friendly cash-and-share deal whereby Inco would acquire Falconbridge by way of public take-over bid. This was followed by a hostile cash-and-share bid for Inco by Teck Cominco Ltd. and a hostile cash bid for Falconbridge by Xstrata. In response, Inco, Falconbridge and Phelps Dodge Corporation announced a three-way US$56 billion combination that was positioned as offering Inco and Falconbridge shareholders higher value than the hostile bids being made by Teck and Xstrata, respectively. However, after Xstrata raised its all cash take-over bid for a second time, Inco allowed its bid for Falconbridge to expire, clearing the way for Xstrata to acquire Falconbridge. Brazil’s Companhia Vale do Rio Doce (CVRD) then entered the fray in dramatic fashion with an unsolicited C$19.5 billion all-cash take-over bid for Inco. A couple of days after CVRD’s bid was announced, with the expiry time of its take-over bid looming and all regulatory approvals in hand, Teck responded to the CVRD offer with a dramatic attempt to raise C$5.7 billion by way of overnight financing, which would have positioned it to trump CVRD’s bid. However, the financing attempt fell short and Teck was forced to withdraw from the contest shortly thereafter. Inco and Phelps Dodge also subsequently succumbed to pressure from institutional and other shareholders and terminated their proposed merger transaction amid indications that Inco would fail to win shareholder support for the deal, making way for CVRD to successfully acquire control of Inco.

Other examples of unsolicited bids launched in late 2005 or 2006 included Barrick Gold’s takeover bids for Placer Dome and NovaGold Resources and Arcelor's unsolicited bid in the context of the bidding contest involving Dofasco.

Another continuing trend in Canadian M&A in 2006 was the presence of activist shareholders and the multiple ways in which they sought to further their agendas.  Canada has in recent years experienced the emergence of a number of activist shareholders (well represented by hedge funds from the U.S.) onto the M&A scene, who appear to be motivated by a highly congested and competitive marketplace and the abundance of attractive opportunities to increase investment returns in Canada.

Notable transactions in this regard, which highlight some of the strategies that have been employed by activist shareholders to further their agendas, have included:

• Attempts by shareholders of an acquiror to disrupt unwanted transactions: The ultimately unsuccessful litigation initiated by Robert McEwan in an attempt to force a shareholder vote at GoldCorp in the context of its US$8.7 billion acquisition of Glamis Gold and the relentless (but ultimately unsuccessful) actions of Scion Capital to thwart the acquisition of Bolivar Gold by Gold Fields through a dissident solicitation campaign and multifaceted litigation in multiple jurisdictions.
• Attempts by target shareholders to disrupt prospective acquirors or hold out for enhanced consideration: The complex and multifaceted litigation initiated by minority
  investors including Pershing Square in the context Sears Holdings' attempt to take Sears Canada private and the efforts of minority shareholders to extract greater value in the context of the Shell Canada going-private transaction.
• Proposals for financial engineering transactions: The efforts of Paulson & Co. to reconstitute the board of directors of Algoma Steel and to distribute about C$400 million of the company’s excess capital to Algoma shareholders.
• Takeover bids: The investment of Carl Ichan in Fairmont Hotels & Resorts, followed by a take-over bid that put the company into play and ultimately resulted in the sale of the company to Kingdom Hotels International and Colony Capital for a significant premium.

The popularity of hostile bids and shareholder activism are arguably attributable to a number of factors, including the relatively friendly Canadian legal and regulatory environment and the economic forces noted above.  These factors have resulted in more strongly motivated buyers and more reticent buyers (or the need for greater premiums to achieve a friendly deal), as well as greater consideration being given to creative (and in some cases quite aggressive) means to achieve objectives.

Unlike other jurisdictions such as the US, the Canadian regulatory environment is not conducive to a just say no defence. Generally speaking, once a hostile takeover bid for a target company’s shares has been announced, it is quite likely that the sale of the company will ultimately occur, unless the target board can convince its shareholders not to tender to the hostile bid. This is often a difficult task, as it is quite customary for arbitrage investors with a short-term investment horizon to take a large position in the stock post-announcement of the hostile bid. Adding to the target board's dilemma is a limited arsenal of takeover bid defences to fend off the bid as a result of a prevailing regulatory attitude that defensive measures not frustrate a bid or deny shareholders the opportunity to make a decision as to whether to tender. While shareholder rights plans are quite common, they are never used to block a takeover bid as Canadian regulators routinely cease trade them after a modest period of time (generally 40 to 60 days), the theory being that any superior alternative transactions would have realistically surfaced within this time.

Similarly, there are few structural defences available to boards of directors in Canada that can be used to effectively fend off shareholder activism. For example, the concept of staggered boards is ineffective because a target’s shareholders can generally requisition a meeting of shareholders if they own 5% or more of the target’s stock and vote out an incumbent board by way of an ordinary resolution passed with 50% or more of the votes. The Canadian early warning regime is also more relaxed than the U.S. 13-D regime and requires less detailed disclosure at 10% relative to the U.S. model where disclosure is required at 5%. Aggrieved shareholders of a Canadian corporation also have available to them an oppression remedy under Canadian corporate statutes.

The Rise of M&A Activity Involving Private Equity Buyers

In 2006, there was a marked increase in the participation of private equity firms (particularly from the U.S.) in the Canadian M&A environment, with notable transactions including:

• The C$8.9 billion acquisition of Trizec Properties and Trizec Canada by The Blackstone Group and Brookfield Properties Corporation.
• The US$2.8 billion acquisition of Intrawest Corporation by Fortress Investment Group.
• The proposed C$2.3 billion acquisition of Alliance Atlantis Communications by CanWest Global Communications and Goldman Sachs Capital Partners.
• The C$1.5 billion acquisition of Atlas Tube by The Carlyle Group.

Many of the transactions involving private equity firms have taken the form of club deals which involve more than one buyer coming together to jointly bid for a Canadian target as a result of factors such as the ability to share and diversify risk, a greater ability to raise equity and incur leverage, and market factors such as a desire to share expertise, avoid competition and obtain a better price. Transactions involving private equity firms often involve novel and complex elements given the need to negotiate agreements setting out the terms agreed to by the consortium members, as well as other issues stemming from a desire to retain target management and unique terms that private equity buyers tend to request in the context of such transactions, such as financing conditions and capped deal exposure, often leading to requests for reverse break fees.

Income Trust M&A

Between 2000 and 2006, the Canadian capital markets witnessed an explosion in the popularity of publicly traded income trusts, which were quite popular among retail and other investors seeking their attractive distribution yields owing to the flow-through tax treatment afforded to such structures under Canadian tax laws.

On October 31, 2006, the Canadian federal government sent shockwaves through the sector when it announced that income trusts would be taxed similarly to Canadian corporations pursuant to rules to be implemented in 2007 that are expected to apply to income trusts beginning in 2011.

In the wake of this announcement, the market capitalization of the income trust sector has declined, leading many to speculate about the potential for significant M&A activity. In December 2006, US-based fund Harbinger Capital Partners launched an unsolicited take-over bid for Calpine Power Income Fund, which was successfully completed early this year. This was the first such transaction since the October 2006 announcement by the Canadian federal government and represents what some M&A commentators feel will be the crest of a wave of acquisitions of Canadian business income trusts by US financial buyers.

Other Legal Developments

Shareholder Rights Plans
The historically prevailing attitude of Canadian securities regulators towards shareholder rights plans has been that they cannot be used to prevent a takeover bid and must be struck down after a modest period of time deemed enough for the target board of directors to seek out superior transactions. However, in the 2006 shareholder rights plan hearing in the context of the contest for control over Falconbridge, the Ontario Securities Commission issued a decision that permitted the Falconbridge rights plan to remain in place for longer than the conventional period of time in circumstances where its elimination was likely to facilitate a creeping acquisition by Xstrata that might have ended the auction process.  Some Canadian M&A practitioners see this decision as reflective of a changing attitude towards takeover bid defences whereby target boards should be provided with more deference and a more flexible regime within which to operate.

The decision in Sears
The decision of the Ontario Securities Commission in the context of the Sears Canada going-private transaction was a hot topic of discussion (and debate) in 2006 and offered Canadian M&A practitioners guidance concerning issues such as when Canadian regulators will invoke their public interest jurisdiction, disclosure decisions in the context of takeover bids, what constitutes an illegal collateral benefit for purposes of the Canadian takeover bid regime and how the Ontario Securities Commission expects insider bidders to treat target special committees.

Trends in deal protections
As alluded to above, 2006 gave rise to certain trends in the negotiation of deal protection provisions such as the increased presence of reverse break fees in the context of Canadian M&A transactions involving private equity buyers and the introduction of a go-shop provision in at least one Canadian deal. There was also some noise about break fees in the contested control transaction involving Dofasco which began when Arcelor launched a hostile bid. Dofasco responded by entering into a friendly deal with ThyssenKrupp that contained a 2.1% break fee. After subsequently announced increases by Arcelor, ThyssenKrupp increased its bid significantly and negotiated an increase in its break fee entitlement to 4%. A significant shareholder of Dofasco, P Schoenfeld Asset Management, then voiced its dissatisfaction, claiming that the Dofasco board breached its fiduciary duty in agreeing to the increased break fee. However, no formal legal action was brought and ultimately ThyssenKrupp was paid the break fee by Dofasco when it did not subsequently match a superior proposal made by Arcelor.

The decision in Northgate
A notable 2006 British Columbia Court of Appeal decision has provided M&A practitioners with guidance concerning the enforceability of standstill provisions. The case involved a standstill clause contained in a confidentiality agreement entered into between Northgate Minerals Corporation and Aurizon Mines. Shortly after the confidentiality agreement was entered into, Aurizon terminated discussions which prompted Northgate to send Aurizon a letter outlining its position that its obligations under the confidentiality agreement (including the standstill provision) were at an end as a result of Aurizon's failure to provide Northgate with any confidential information. The letter was never acknowledged or signed back and Northgate subsequently launched an unsolicited takeover bid, which prompted Aurizon to initiate litigation. The courts in British Columbia upheld the enforceability of the standstill provision even though this had the effect of blocking the bid by Northgate. The court ruling confirms that standstills are enforceable and has led Canadian M&A practitioners to more carefully draft standstill provisions to clearly articulate the circumstances in which they are intended to apply.

Dual-class structures
Canada is home to a large number of corporations that have a dual-class share structure consisting of multiple voting and subordinate voting shares. Where such structures were implemented pre-1987, there was no Toronto Stock Exchange listing requirement mandating that so-called coat-tail provisions be included in a corporation’s constating documents so that holders of subordinate voting shares can be assured that they will be offered the same consideration as is offered to holders of multiple voting shares in the context of M&A transactions. This issue garnered much attention (and led to some ultimately unsuccessful lobbying of Canadian securities regulators to intervene) in the context of the 2006 acquisition by Bell Globemedia of CHUM, where the holders of multiple voting shares were offered a premium price over that offered to the holders of the subordinate voting shares.

Takeover Methods

Takeover bid
A takeover bid is an offer to acquire 20% or more (including the securities owned, or over which control or direction is exercised, by the bidder or any joint actors) of the outstanding voting or equity securities of a target company made directly to shareholders of the target. Advantages to a bidder of proceeding by way of a takeover bid include its potential timing advantages (takeover bids must remain open for a minimum of 35 calendar days and a statutory compulsory acquisition procedure is available if 90% of the shares subject to the bid, other than the bidder’s shares, are tendered) and the degree of control it provides to a bidder. Takeover bids are also the principal (and only realistic) means by which an acquiror will seek to acquire control of a target company on an unsolicited basis.

Plan of arrangement
Plans of arrangement are a one-step negotiated form of transaction whereby all aspects of the transaction are court supervised and approved. The plan of arrangement structure is extremely flexible and can be used to facilitate a myriad of different transaction forms, as well as other novel activity such as reorganizations for reasons often related to obtaining a bump for tax purposes and the termination of stock options in consideration for cash or securities. US acquirors often use the arrangement procedure since it provides an exemption from US registration requirements in transactions that involve the issuance of stock to US shareholders of the target. Boards of directors also like this form of transaction since it is perceived to add a layer of independent review and approval. Negative aspects of the statutory arrangement procedure include the time involved to obtain the requisite court and shareholder approvals and the fact that the court process and required shareholder meeting provide a forum to oppose the transaction.

Amalgamation/Capital reorganization
Amalgamations are a second form of one-step negotiated transaction that permit two or more corporations to consolidate and continue as one corporation. Upon the amalgamation, the amalgamated corporation possesses all of the property, rights and privileges and is subject to all of the liabilities of each of the amalgamating corporations. A third form of negotiated transaction worthy of brief mention is the capital reorganization. In a capital reorganization, the share capital of the target company is reorganized to provide for an automatic exchange of securities upon consummation of the merger.

Governing Legislation

Depending on the specific nature of a Canadian M&A transaction, federal or provincial corporate legislation, provincial securities laws and stock exchange requirements might apply and need to be complied with. Unlike other jurisdictions, securities law is regulated by each of the provinces and territories of Canada, although the law is relatively uniform and regulatory processes are coordinated.

Non-exempt take-over bids must generally occur in accordance with the prescribed rules for such transactions in provincial securities statutes. If the securities of a listed company are being issued in connection with a takeover bid (or any other form of M&A transaction) stock exchange approval will also be necessary. Requirements applicable to negotiated transactions in Canada are set out in the Canada Business Corporations Act or the provincial corporate statute under which the Canadian corporation has been incorporated. In addition, certain aspects of provincial securities legislation will apply, including procedural and information circular content requirements related to shareholder meetings. For certain types of transactions involving non-arm’s length parties, the securities regulatory authorities in the provinces of Ontario and Quebec have also implemented heightened disclosure, formal valuation and minority approval requirements.

Depending on matters such as where the securities of the target corporation are listed and posted for trading, the number of non-Canadian target shareholders and the consideration being offered, foreign securities legislation may also need to be complied with, unless an exemption is available or unless (in the case of Canadian-U.S. cross-border transactions) the multi-jurisdictional disclosure system” can be used. The size of the transaction, industry characteristics and/or the location of the parties involved might also necessitate filings or approvals from relevant competition, foreign investment and other industry regulators.

Disclosure requirements/Liability

In the context of Canadian takeover bids, an offer and takeover bid circular containing certain prescribed disclosure must be prepared by the bidder, mailed to the target and its securityholders and filed with the relevant securities regulatory authorities. Within 15 days of the mailing of the takeover bid circular, the board of directors of the target must issue its own circular, in response setting out its recommendation to target shareholders in respect of the bid, and its reasons for it. In the context of an amalgamation, statutory arrangement or capital reorganization, an information circular must be prepared and sent to shareholders, containing enough detail to permit shareholders to form a reasoned judgement concerning the transaction.

In the context of a securities-exchange M&A transaction, a takeover bid or information circular must contain “full, true and plain” disclosure of all material facts relating to the securities being issued.

Where a takeover bid circular, directors’ circular or information circular contains a misrepresentation, a right of action for damages accrues to certain parties, as does a right of rescission where there is a misrepresentation in a takeover bid circular, in each case, subject to certain prescribed defences. Directors of target companies are also potentially subject to actions for breach of fiduciary duties and directors and management of a takeover bid target might be subject to litigation if they act in a manner that is proven to be oppressive, unfairly prejudicial to or that unfairly disregards the interest of any securityholder of the target corporation.

Threshold for Disclosing Bids and Offers

Any person who acquires beneficial ownership of, or the power to exercise control or direction over, 10% or more of any class of voting or equity securities of a target company must promptly issue a press release to such effect and, within two business days, make a public filing with the applicable securities regulators. Similar disclosure must be made in respect of each additional 2% interest acquired, and a trading moratorium is imposed for one business day after the date upon which the report is filed. If there is already a takeover bid outstanding for the target’s securities, the disclosure threshold is lowered from 10% to 5%. Both the press release and the public filing must contain certain prescribed information, including the identity of the bidder and its intentions in purchasing the shares.

Competition/Anti-Trust Regulations

The Competition Act (Canada) is administered and enforced by the Commissioner of Competition who is the head of the Competition Bureau.

Notification Requirements
The Competition Act establishes a regime for compulsory pre-merger notification of certain acquisitions and amalgamations that exceed specified monetary and shareholding thresholds (where applicable). Pre-merger notification triggers a mandatory waiting period before closing. 

The pre-merger notification provisions of the Competition Act apply to several types of transactions, that is acquisitions of assets or shares, amalgamations and the formation of, or acquisition of interests in, unincorporated business combinations. A pre-condition to notification, however, is that the target of the acquisition must own or control an operating business in Canada. Certain exemptions also apply.

Determination of whether a transaction exceeds the thresholds for pre-merger notification under the Act depends on the specific structure of a given transaction. Generally, a proposed transaction is notifiable if it exceeds:

• the size of parties threshold: the book value of assets in Canada or gross revenues in, from or into Canada of all of the parties, together with their affiliates, of greater than C$400 million;
• the size of transaction threshold: generally C$50 million (C$70 million for amalgamations) based on the book value of the acquired assets in Canada, or gross revenues from sales in or from Canada generated by those assets; and
• in the case of share acquisitions, an additional shareholding threshold must be exceeded. As a result of the transaction, the purchaser and its affiliates must hold over 20% of the voting securities of a public corporation or over 35% of the voting securities of a private corporation. If these ownership levels are already exceeded, the purchaser is required to file if its ownership of voting securities of a public or private corporation exceeds 50% as a result of the transaction.

Recent competition policy developments
Commensurate with the robust M&A activity generally over the last year, 2006 was a robust year for the Mergers Branch of the Competition Bureau. In addition to the numerous transactions reviewed by the Bureau, it finalized two key Bulletins relevant to merger review. In particular, in September 2006, the Bureau issued its Merger Remedies Bulletin after a lengthy public consultation process. Among other things, the Remedies Bulletin confirms the Bureau’s strong preference for structural over behaviour remedies, the absence of any reserve price in divestiture situations, and its inclination to insist on crown jewels if uncertainty surrounds the implementation of a remedy. 

In June 2006 the Bureau issued its Bulletin on regulated conduct, which articulates the Bureau’s policy on the exercise of its jurisdiction in the context of regulated industries. This Bulletin extends beyond just merger-related issues. Also, during 2006, the Bureau issued Technical Backgrounders in connection with seven transactions it reviewed, including Mittal/Arcelor, PaperlinX/Cascades and Maytag/Whirlpool. Looking forward for 2007, it is anticipated that the Bureau will be releasing a template consent agreement with the objective of bringing greater consistency to the process of negotiating consent agreements.

The Investment Canada Act

The Investment Canada Act (ICA) applies to any acquisition of control by a non-Canadian (that is, by a purchaser whose ultimate control resides outside of Canada) of a Canadian business (that is, a business carried on in Canada that has a place of business in Canada, an individual or individuals in Canada who are employed or self-employed in connection with the business and assets in Canada used in carrying on the business). Where these criteria are met, a proposed transaction triggers an obligation to file either a notification or application for review regardless of whether the Canadian-based business is Canadian-controlled.

A notification is essentially an administrative formality, constituting notice of the investment (with certain required information in respect of the investment) to be filed within 30 days of closing. A review application, on the other hand, is more onerous and generally constitutes a bar to closing until receipt of requisite approval(s) under the ICA. Investments are only reviewable, however, where certain thresholds are met.

Assuming a purchaser is a WTO Investor (that is, controlled by WTO nationals) within the meaning of the ICA, a review application is required for direct acquisitions if the value of the assets (as set out in the financial statements for the most recently completed fiscal year) of the Canadian businesses, and all other entities in Canada the control of which is being acquired (during 2007), exceeds C$281 million. This asset threshold is indexd every January 1st. Indirect acquisitions (that is, the acquisition of a Canadian business by consequence of the acquisition of an entity outside Canada that controls the Canadian business) are exempt from review if either the purchaser or the vendor is WTO-controlled.

The C$281 million threshold in respect of direct acquisitions is reduced to only C$5 million, and indirect acquisitions are reviewable where the value of the assets (as set out in the financial statements for the most recently completed fiscal year) of the Canadian businesses, and all other entities in Canada the control of which is being acquired, exceeds C$50 million, in respect of investments in certain sensitive industries, including uranium production, financial services, transportation services and cultural industries.

In recent years, the ICA process has been gaining greater attention as there has been an increasing concern, in certain circles, regarding the alleged hollowing out of corporate Canada. This has led to more extensive and rigorous binding undertakings being demanded as a condition to clearing a transaction under the ICA process.

Recent Developments
In November 2006 the Minister of Finance issued a policy document entitled Advantage Canada: Building a Strong Economy for Canadians. Within this lengthy policy document, brief references to foreign investment policy are made and, in particular, to the "perceptions that Canada is not fully open to foreign investment” and that “we need to ensure that our approach to foreign direct investment is modern and in line with best practices around the world.” This is supported by the observation that the ICA has not been significantly amended since 1985. Tempering these pro-foreign investment statements, however, is the recognition that there may be occasions where particular foreign investment could damage Canada’s long-term interests. The example provided is foreign investment by large state-owned enterprises with non-commercial objectives and unclear corporate governance and reporting. During 2007, the government will be considering such issues more closely and attempting to balance the tensions between the hollowing out and anti-foreign investment concerns.