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M&A Breakfast Seminar: Recent Trends in Mergers and Acquisitions


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In this presentation, Dentons' Ralph Shay, Bill Gilliland and Adrienne O’Reilly discuss recent trends in Mergers and Acquisitions including:

New Regulatory Proposals on Poison Pills and Defensive Tactics
Advance Notice By-Laws - Management of Board Nominations
Anti-Corruption Due Diligence

Published in: Business, News & Politics
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M&A Breakfast Seminar: Recent Trends in Mergers and Acquisitions

  1. 1. Dentons Presents:Recent Trends in Mergers andAcquisitionsApril 24, 2013Presented by: Ralph ShayBill GillilandAdrienne OReilly
  2. 2. OverviewApril 24, 2013• New Regulatory Proposals on Poison Pills and Defensive Tactics.• Advance Notice By-Laws - Management of Board Nominations.• Anti-Corruption Due Diligence.Dentons Canada LLP 2
  3. 3. New Regulatory Proposals onPoison Pills and Defensive Tactics3April 24, 2013Presented by: Ralph ShayDentons Canada LLP
  4. 4. History4• Prior to 1980s, Canadian securities regulators had no interest inregulating takeover defensive tactics.• In 1980s, standard takeover defensive tactic in Canada: issuance ofshares to a “white knight”.• Ontario Securities Commission expressed concern about defensivetactics, which led to National Policy 62-202 – “Take-over Bids –Defensive Tactics” (NP 62-202) in 1986, before existence of poison pillsin Canada.• Emphasis on shareholder choice; company directors should not depriveshareholders of the ability to respond to a takeover bid.• “Prior shareholder approval of corporate action would, inappropriate cases, allay such concerns” about target companytactics.April 24, 2013 Dentons Canada LLP
  5. 5. History (cont.)5• Poison pill invented by U.S. lawyer Martin Lipton in early 1980s.• Canada jumped on board in 1988 (Inco), and poison pill becamestandard Canadian defensive tactic.• NP 62-202 was not used by securities regulators to interfere with theadoption of a poison pill, unless a target company tried to use it.April 24, 2013 Dentons Canada LLP
  6. 6. History (cont.)6• From 1991 to 2007, “pill must go” – NP 62-202 was basis for a securitiescommission cease trading all poison pills, either immediately or within aspecified amount of time, usually 45-55 days after bid commenced.• Shareholder approval of poison pill did not cause securitiescommissions to permit use of the pill as a “just say no” defence,despite the reference to shareholder approval in NP 62-202.April 24, 2013 Dentons Canada LLP
  7. 7. History (cont.)7• 2007, 2009: Alberta (Pulse Data) and Ontario (Neo MaterialTechnologies) commissions allow poison pill to stay becauseshareholders approved it on an informed basis during the hostile bid.• 2010: BC Commission rejects the new approach adopted by Alberta andOntario, and cease trades the poison pill in Lions Gate.• First problem with current system: securities regulators areinconsistent among themselves.April 24, 2013 Dentons Canada LLP
  8. 8. History (cont.)8• BCE Inc. v. 1976 Debentureholders – Supreme Court of Canada, 2008(not a takeover defensive tactics case, but relevant).• The fiduciary duty of corporate directors is not confined to short-term profit or share value. Where thecorporation is an ongoing concern, the duty looks to the long-term interests of the corporation• There is no principle that the interests of shareholders should prevail over other corporate interests• Second problem with current system: securities commission policyarguably conflicts with corporate law.• E.g. Lions Gate: Two opposite decisions in same take-over contest, onere a poison pill (BC Securities Commission) and the other re a privateplacement to a friendly party (BC courts).April 24, 2013 Dentons Canada LLP
  9. 9. Other Perceived Problems With Current System9• Too bidder-friendly; limits target board’s negotiating power.• Coercive (e.g. partial) bids not adequately addressed; shareholders can’tact collectively.• Arbitrageurs.• “Hollowing out of Canada”.• Lack of certainty (inconsistency even within the same securitiescommission).April 24, 2013 Dentons Canada LLP
  10. 10. Canadian Securities Administrators Proposal10• New rule that would apply only to poison pills, not other defensive tactics.• Greater emphasis placed on shareholder approval.• Out for comment until June 12.April 24, 2013 Dentons Canada LLP
  11. 11. Canadian Securities Administrators Proposal (cont.)11• Board of directors can introduce poison pill at any time (with oneexception discussed later) and it is effective immediately.• Pill must be approved by shareholders within 90 days after adoption,except that if adopted by the board after a take-over bid is commenced,shareholder approval must be within 90 days after bid’s commencement.• Take-over bidder (announced or actual) and its joint actors are excludedfrom the vote.• Pill terminates if not approved by shareholders within required time.• Exemption for pill adopted before company became a reporting issuer.2160008.1 Dentons Canada LLP
  12. 12. Canadian Securities Administrators Proposal (cont.)12• For pill to remain in place it must be approved again by shareholders ateach annual meeting, starting in the financial year following the year inwhich the initial shareholder approval was obtained.• If pill terminated due to failure to obtain shareholder approval, no new pillcan be introduced for one year unless there is a take-over bid (orshareholder approval).• Shareholders can terminate a pill by majority vote at any time (followingcorporate law procedures for holding a shareholder meeting).• Material amendments to a pill treated as adoption of a new pill.April 24, 2013 Dentons Canada LLP
  13. 13. Alternative Proposal of the Quebec Autorité desMarchés Financiers (AMF)13• Although very different from the CSA proposal, introduction to AMFproposal discloses AMF’s commitment “to maintain a cohesive andharmonious approach across the CSA“ regarding the regulation ofdefensive tactics.• Proposal covers all take-over defensive tactics, not just poison pills.April 24, 2013 Dentons Canada LLP
  14. 14. Alternative Proposal of the Quebec Autorité desMarchés Financiers (cont.)14• NP 62-202 to be amended so that securities regulators would givedeference to decisions of target boards of directors.• Regulators would not intervene to stop take-over defensive tactics ifdirectors follow an appropriate process to address conflicts of interest,i.e. special committee, etc., and there are no circumstancesdemonstrating abuse of shareholder rights or a negative impact on theefficiency of capital markets.• Likely effect would be no securities regulator intervention in the vastmajority of hostile bidsApril 24, 2013 Dentons Canada LLP
  15. 15. Alternative Proposal of the Quebec Autorité desMarchés Financiers (cont.)15• Change take-over laws to make “permitted bid” concept mandatory.• Would remove coercion element from bids.• Irrevocable minimum tender condition of more than 50% of theoutstanding shares owned by persons other than the bidder and jointactors.• Extend bid for 10 days following public announcement that minimumtender condition has been met.• Also out for comment until June 12.April 24, 2013 Dentons Canada LLP
  16. 16. Advance Notice By-Laws –Management of Board Nominations16April 24, 2013Presented by: Bill GillilandDentons Canada LLP
  17. 17. What is an Advance Notice Bylaw/Policy?17• Bylaw that requires that a corporation be notified a specified number ofdays before a shareholders meeting of nominees for election as director.• Adopted as part of a corporation’s constitution.• Bylaw or a Policy, depending on corporate statute.• Common in US.• Come to Canada in last year.April 24, 2013 Dentons Canada LLP
  18. 18. Why Have an Advance Notice Bylaw/Policy?18• Nominations for directors can be made at a shareholders meeting.• Organized dissident can “ambush” a board with quiet proxy solicitation.• Only shareholders at the meeting have opportunity to vote.April 24, 2013 Dentons Canada LLP
  19. 19. Why Have an Advance Notice Bylaw/Policy?19• Advance Notice Bylaw/Policy:• All shareholders given disclosure and opportunity to vote for all nominees.• Provides a transparent, structured and fair director nomination process.• Allows shareholders to fully participate in director election process in informedmanner.April 24, 2013 Dentons Canada LLP
  20. 20. Approval Process20• Board adopts bylaw/policy – has immediate effect.• Shareholders approve bylaw/policy – 50%+.• ISS and Glass Lewis support advance notice bylaws/policies, withincertain parameters.• Must allow nominations to be made as close to the meeting date asreasonably possible and within the broadest window possible,recognizing the need for to allow sufficient notice for company, regulatoryand shareholder review.April 24, 2013 Dentons Canada LLP
  21. 21. Advance Notice Bylaws/Policies – Issues21• Circumstances of adoption.• Exercise of discretion under the bylaw/policy.April 24, 2013 Dentons Canada LLP
  22. 22. Anti-Corruption Due Diligence inM&A Transactions22April 24, 2013Presented by: Adrienne OReillyDentons Canada LLP
  23. 23. Offence: Bribing a Foreign Public Official23Canada: Corruption of Foreign Public Officials Act.• Applies to Canadian companies or those with a Canadian subsidiary;currently a ‘real and substantial connection’ test to Canada.• Prohibits payments to officials, from any level of government, to obtain orretain advantage in the course of business – can be to the official oranother person (family member, political association, charity).• Direct and indirect bribes (through agents) are captured under the Act.• Individuals and corporation can be guilty.• United States: Foreign Corrupt Practices Act.• United Kingdom: Bribery Act.April 24, 2013 Dentons Canada LLP
  24. 24. Liability for Foreign Corruption Violations24• Vicarious liability: for actions of employees and agents.• Parent company can be liable for subsidiary’s conduct.• Successor liability, particularly in M&A transactions where counterpartiescan inherit corrupt practices liabilities of each other.April 24, 2013 Dentons Canada LLP
  25. 25. In Business Combination Transactions:25Avoid:• Devaluation.• Paying fines.• Potential ongoing audit requirements.• Investigation and defence costs.• Contract annulment or termination.• Cancelled transactions.• Resulting civil actions, including shareholder lawsuits.• Negative publicity.Aspire to:• Maintain value of combined or acquired entity (including contracts,relationships and personnel).April 24, 2013 Dentons Canada LLP
  26. 26. Due Diligence Steps in M&A Transactions261. Due Diligence Phase, Pre- Definitive Agreement• Perform due diligence on counterparty prior to signing definitiveagreement.• Engage legal counsel and forensic accountants, and educate anyinternal due diligence team members about anti-corruption matters.• Document all due diligence steps taken.• Initiate written due diligence questions and request ASAP.• Search public records (electronic and manual).• Review counterparty’s policies and controls.• Review counterparty’s use of third parties.• Review counterparty’s other interactions.April 24, 2013 Dentons Canada LLP
  27. 27. Due Diligence Steps in M&A Transactions cont272. Definitive Agreement Stage• Include anti-corruption provisions in definitive agreement.3. Post-Closing• Incorporate newly acquired entity into compliance program ASAP afterclosing, including training of directors, officers and employees, andagents and joint venture partners (if applicable).• Conduct ongoing anti-corruption-based audit of newly acquired entity.April 24, 2013 Dentons Canada LLP
  28. 28. The preceding presentationcontains examples of the kinds ofissues companies dealing withMergers and Acquisitions couldface. If you are faced with one ofthese issues, please retainprofessional assistance as eachsituation is unique.Dentons Canada LLP