Canada - Law Firms The Canadian M&A Transaction: Similarities And Differences

Saturday, October 1, 2005 - 01:00
Sharon C. Geraghty

Editor: Ms. Geraghty, I note that your practice focuses on mergers and acquisitions. Would you tell our readers something about your professional experience and how your practice developed in this way?

Geraghty: I joined Torys' corporate department in 1988, at a time when there was little specialization within the group. During my early years, however, I worked with a number of senior attorneys in the M&A area. That gave me exposure to major complex acquisitions, several involving public companies. One was the Royal Bank's acquisition of Royal Trustco in 1993, which was an extremely complicated global transaction, involving numerous stakeholders and negotiations over several months. This marked the point of my career when I really began to focus on M&A transactions. My practice during my early partnership years continued in that vein - I advised on large public M&A deals in a number of industries, including financial services (the competing bids by Royal Bank and Great-West Life for London Life Insurance), coal (Luscar's hostile bid for Manalta Coal) and media and communications (CanWest Global's hostile bid for WIC and subsequent transactions to divide and divest of some of its assets), as well as numerous private acquisition transactions. While my focus has continued to be in the M&A area in recent years, I also advise clients on corporate governance, general corporate and securities law matters.

Editor: How has your M&A practice evolved over the course of your career?

Geraghty: During the mid-1990s many companies were suffering from financial difficulties, and my M&A work often arose in the context of those restructurings. This was true of the Royal Trustco transaction, as well as the sale of SkyDome (now the Rogers Centre) later in that decade. I had worked on the original financing of SkyDome early in my practice and again for the consortium of private investors who acquired the stadium in 1994 from the Province of Ontario. Then, in the late 1990s, SkyDome began suffering from financial difficulties and commenced a restructuring process. I advised SkyDome on that restructuring and its ultimate sale. Much of this work derived from the bottom of the business cycle, and as it deepened M&A activity quieted down significantly. However, in the last year or two, the cycle has turned and we are seeing a significant increase in acquisition activity. In most sectors, it is a seller's market. Private equity firms have become very active, and we have assisted them in a number of auction transactions, including KKR's acquisition of Yellow Pages here in Canada.

M&A has become increasingly global and cross-border, with our Canadian clients acquiring companies with assets in the United States and all over the world, and our U.S. private equity clients increasingly exploring the Canadian market for acquisitions. With this global practice, we have adapted and used technology to improve our service and efficiency, with highly sophisticated professionals accessing electronic data rooms that contain documentation from all over the world, and trading documents and comments on intranet sites that allow us to communicate and move transactions forward as never before possible.

Editor: What are the recent developments in the Canadian M&A market that are likely to affect U.S. players?

Geraghty: As I mentioned earlier, right now in Canada it is a seller's market. Auctions are common, and it is clear that bidders have to be creative when structuring deals. To be competitive, bidders need to put an offer on the table that contains as few conditions as possible. In some cases, we have helped them do that by preclearing the acquisition with antitrust officials on a confidential basis, so that our clients can remove that standard condition from their offer, making it more attractive and certain than competing bids. This type of creativity becomes particularly important in the public context, where the pressure to make a "clean," condition-free bid is high. I have worked on a number of media transactions, for example, in which our client purchaser obtained permission from the regulator to acquire the business before regulatory approval was obtained, by consenting to have the business held through an independent trustee and agreeing that if regulatory approval were not obtained, the assets would be sold. This allowed our client to launch a public bid without a condition that regulatory approval of the acquisition be obtained (which could take several months). Similar creativity can be seen with so-called reverse break fees, such as the one offered by Whirlpool in the recent Maytag transaction. That merger raises significant concentration issues, and there is therefore a significant risk that antitrust approval may not be obtained. Although the acquiror insisted on the standard antitrust approval condition, it agreed to pay the target a significant "break" fee if it does not obtain approval. This will go some way to compensating Maytag if the transaction fails, and obviously helped its board take the risk of turning down a lower - but much less risky - offer from the private equity fund Ripplewood. Because private equity firms do not present as much regulatory risk, other bidders need to become creative to compete in these auction transactions.

Another trend is the growth and increasing acceptance of the income security vehicle. Its impact on M&A transactions is becoming important. For U.S. players with assets to divest, this vehicle provides much more attractive multiples than a typical IPO. Canada has a corner on this market, and Torys has invested heavily in developing its expertise in this area. We know how to structure these transactions, and we understand the legal issues in implementing them and what the market expects to see in these deals.

We are also seeing U.S. and other foreign private equity firms bid on Canadian assets. The U.S. private equity funds have made inroads in this area. They are active as buyers, and some of the hedge funds are acting as catalysts in forcing transactions. Going in the other direction, some Canadian private equity funds are turning their attention to the United States. We have handled a number of transactions for Canadian clients in their U.S. M&A activity, including the sale by Thomson Newspapers of its North American newspaper business. Our New York office is crucial for those transactions because it has particular expertise in tax (including cross-border tax), private equity, lending and M&A.

Editor: Are there differences between Canadian and U.S. M&A law that U.S. companies should be aware of when making acquisitions in Canada?

Geraghty: There are significant differences. Unlike in the United States, in Canada there is a bright-line test for determining whether the offeror is making an offer that will trigger an obligation to treat all shareholders equally. This means that even where a buyer is acquiring from a small number of sellers (even one), that purchase could trigger the obligation to bid for all the shares at the same price if the purchase is at a premium to market and will result in the buyer owning 20% or more of the shares of that class. Another difference that might take U.S. acquirors by surprise is that in the Canadian market, a public takeover bid must be fully financed, which is not the case in the United States.

Canada also has flexible corporate statutes that allow complex mergers to take place by way of a court-approved plan of arrangement. This approach is well-accepted and understood by our courts, and has provided a useful mechanism for accomplishing a wide variety of business and tax objectives in Canadian M&A deals. For example, the "exchangeable share" transactions that have been used so often to effect mergers between Canadian entities and their U.S. acquirors are typically effected by way of plan of arrangement. Those transactions permit the Canadian shareholders of the target to receive shares of a Canadian entity that "mirror" the shares of the U.S. target. This gives the Canadian shareholders the economic equivalent of shares of the U.S. bidder as consideration for the bid, but it allows them also to receive a rollover and defer tax on the sale (which would not be the case if the share consideration were shares of a non-Canadian entity). As well, the plan of arrangement is a commonly used technique for effecting takeovers in a one-step transaction that allows bidders to acquire 100% of the target at closing. This can often be important not only to reduce closing risk but also to permit financing to be put in place at the target level at closing.

It is also important to be aware that the tools available to Canadian public companies to defend hostile takeovers are narrower than those in the United States. Our law favors the right of public shareholders to receive and accept a proposed offer for the company and generally does not permit directors to block an offer.

Editor: Are there recent legal developments in Canada that U.S. companies should know about?

Geraghty: Amendments have been proposed to the Investment Canada Act that would require review of any foreign investment that might threaten national security. The legislation does not define "national security," but it brings Canada into line with the United States and other G8 countries by providing for government review of foreign investments that may affect national security. The legislative amendments were regarded, in part, as a response to China's pursuit of Noranda, one of Canada's major resource companies.

In addition, there was a recent case (Financial Models) in Ontario relating to the requirement that bids be fully financed. Although the securities regulator did not raise a concern about the conditions in the financing, the court threw out a bid on the basis that it did not meet the financing requirement. Although the court did not find all the conditions to the financing objectionable, the case has caused uncertainty about the types of conditions that would be acceptable in future. Since that decision, the securities regulator has proposed a new rule (not yet enacted) stating that the financing will meet the statutory requirement provided the bidder is satisfied that the chance of the conditions not being satisfied is "remote." Because financed bids are relatively uncommon in Canada, we expect it will take some time before a clear practice evolves regarding what conditions meet this test.

Editor: Where is Torys positioned in the legal market for M&A, and how can the firm particularly help U.S. companies?

Geraghty: We enjoy top ranking among our peers in M&A. We differentiate ourselves from the other leading Canadian firms in this area because of our substantial depth. We do not have just a single team with the appropriate expertise; we can field a number of teams at the same time, with the right background and experience. We also have access to expertise in the key complementary areas needed to handle a complex transaction. That includes corporate finance - and the requisite expertise to aid an acquiror who wants to subsequently access the public markets, including by using income securities - and private equity. Our litigation capabilities are extensive, and we have attorneys who appear regularly before the securities regulators and commercial courts on M&A and securities-related issues. We also possess a deep bench in taxation, IP, real estate, environmental law and antitrust, foreign investment and other regulatory areas. And in all these areas we have extensive cross-border experience and a New York presence that affords ready access to Canada.

We know how U.S. attorneys think, and we are in a position to introduce them and their clients to Canadian law in a way that is easy for them to digest.

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