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

Dentons Presents:Recent Trends in Mergers and Acquisitions

April 24, 2013

Presented by: Ralph ShayBill GillilandAdrienne O'Reilly

Overview

April 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

New Regulatory Proposals on Poison Pills and Defensive Tactics

3April 24, 2013

Presented by: Ralph Shay

Dentons Canada LLP

History

4

• Prior to 1980s, Canadian securities regulators had no interest in regulating takeover defensive tactics.

• In 1980s, standard takeover defensive tactic in Canada: issuance of shares to a “white knight”.

• Ontario Securities Commission expressed concern about defensive tactics, which led to National Policy 62-202 – “Take-over Bids –Defensive Tactics” (NP 62-202) in 1986, before existence of poison pills in Canada.

• Emphasis on shareholder choice; company directors should not deprive shareholders of the ability to respond to a takeover bid.

• “Prior shareholder approval of corporate action would, in appropriate cases, allay such concerns” about target company tactics.

April 24, 2013 Dentons Canada LLP

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 became standard Canadian defensive tactic.

• NP 62-202 was not used by securities regulators to interfere with the adoption of a poison pill, unless a target company tried to use it.


History (cont.)

6

• From 1991 to 2007, “pill must go” – NP 62-202 was basis for a securities commission cease trading all poison pills, either immediately or within a specified amount of time, usually 45-55 days after bid commenced.

• Shareholder approval of poison pill did not cause securities commissions to permit use of the pill as a “just say no” defence, despite the reference to shareholder approval in NP 62-202.


History (cont.)

7

• 2007, 2009: Alberta (Pulse Data) and Ontario (Neo Material Technologies) commissions allow poison pill to stay because shareholders approved it on an informed basis during the hostile bid.

• 2010: BC Commission rejects the new approach adopted by Alberta and Ontario, and cease trades the poison pill in Lions Gate.

• First problem with current system: securities regulators are inconsistent among themselves.


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 the corporation 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 policy arguably conflicts with corporate law.

• E.g. Lions Gate: Two opposite decisions in same take-over contest, one re a poison pill (BC Securities Commission) and the other re a private placement to a friendly party (BC courts).


Other Perceived Problems With Current System

9

• Too bidder-friendly; limits target board’s negotiating power.

• Coercive (e.g. partial) bids not adequately addressed; shareholders can’t act collectively.

• Arbitrageurs.

• “Hollowing out of Canada”.

• Lack of certainty (inconsistency even within the same securities commission).


Canadian Securities Administrators Proposal

10

• 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.


Canadian Securities Administrators Proposal (cont.)

11

• Board of directors can introduce poison pill at any time (with one exception 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 excluded from 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

Canadian Securities Administrators Proposal (cont.)

12

• For pill to remain in place it must be approved again by shareholders at each annual meeting, starting in the financial year following the year in which the initial shareholder approval was obtained.

• If pill terminated due to failure to obtain shareholder approval, no new pill can be introduced for one year unless there is a take-over bid (or shareholder approval).

• Shareholders can terminate a pill by majority vote at any time (following corporate law procedures for holding a shareholder meeting).

• Material amendments to a pill treated as adoption of a new pill.


Alternative Proposal of the Quebec Autorité des Marchés Financiers (AMF)

13

• Although very different from the CSA proposal, introduction to AMF proposal discloses AMF’s commitment “to maintain a cohesive and harmonious approach across the CSA“ regarding the regulation of defensive tactics.

• Proposal covers all take-over defensive tactics, not just poison pills.


Alternative Proposal of the Quebec Autorité des Marchés Financiers (cont.)

14

• NP 62-202 to be amended so that securities regulators would give deference to decisions of target boards of directors.

• Regulators would not intervene to stop take-over defensive tactics if directors follow an appropriate process to address conflicts of interest, i.e. special committee, etc., and there are no circumstances demonstrating abuse of shareholder rights or a negative impact on the efficiency of capital markets.

• Likely effect would be no securities regulator intervention in the vast majority of hostile bids


Alternative Proposal of the Quebec Autorité des Marchés 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 the outstanding shares owned by persons other than the bidder and joint actors.

• Extend bid for 10 days following public announcement that minimum tender condition has been met.

• Also out for comment until June 12.


Advance Notice By-Laws –Management of Board Nominations

16April 24, 2013

Presented by: Bill Gilliland

Dentons Canada LLP

What is an Advance Notice Bylaw/Policy?

17

• Bylaw that requires that a corporation be notified a specified number of days 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.


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.


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 informed manner.


Approval Process

20

• Board adopts bylaw/policy – has immediate effect.

• Shareholders approve bylaw/policy – 50%+.

• ISS and Glass Lewis support advance notice bylaws/policies, within certain parameters.

• Must allow nominations to be made as close to the meeting date as reasonably possible and within the broadest window possible, recognizing the need for to allow sufficient notice for company, regulatory and shareholder review.


Advance Notice Bylaws/Policies – Issues

21

• Circumstances of adoption.

• Exercise of discretion under the bylaw/policy.


Anti-Corruption Due Diligence in M&A Transactions

22April 24, 2013

Presented by: Adrienne O'Reilly

Dentons Canada LLP

Offence: Bribing a Foreign Public Official

23

Canada: 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 or another 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.


Liability for Foreign Corruption Violations

24

• 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 counterparties can inherit corrupt practices liabilities of each other.


In Business Combination Transactions:

25

Avoid:

• 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).


Due Diligence Steps in M&A Transactions

26

1. Due Diligence Phase, Pre- Definitive Agreement

• Perform due diligence on counterparty prior to signing definitive agreement.

• Engage legal counsel and forensic accountants, and educate any internal 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.


Due Diligence Steps in M&A Transactions con't

27

2. Definitive Agreement Stage

• Include anti-corruption provisions in definitive agreement.

3. Post-Closing

• Incorporate newly acquired entity into compliance program ASAP after closing, including training of directors, officers and employees, and agents and joint venture partners (if applicable).

• Conduct ongoing anti-corruption-based audit of newly acquired entity.


The preceding presentation contains examples of the kinds of issues companies dealing with Mergers and Acquisitions could face. If you are faced with one of these issues, please retain professional assistance as each situation is unique.

Dentons Canada LLP

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

Business

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