AMERICAN BAR ASSOCIATION: INTERNATIONAL M&A SUBCOMMITTEE MEETING (BOSTON, APRIL 15, 2011)

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Ethel Wheeler
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1 AMERICAN BAR ASSOCIATION: INTERNATIONAL M&A SUBCOMMITTEE MEETING (BOSTON, APRIL 15, 2011) Foreign Investment Review: The Proposed LSE/TMX Merger Nicholas Dietrich * Ontario lawmakers back TMX-LSE deal front page Report on Business headline (April 14, 2011). Not so fast! First of all, the all-party committee of the Legislature has not yet released its findings following extensive hearings, and the article s conclusions qualify the headline by later stating: according to Queen s Park sources close to the situation. Secondly, while the Ontario Securities Commission has approval authority over the securities regulatory aspects of the deal, the Province, as was the case in the situation of the attempted BHP takeover of Potash Corporation, does not have the power to approve or disapprove applications required under the federal Investment Canada Act for foreign investments by WTO investors greater than $312 million (the new threshold came into effect February 12, 2011). Indeed, no application has yet been filed by the parties to the transaction to commence the formal review period. The proposed LSE/TMX merger of equals should be viewed against the background of a worldwide trend of recent and proposed consolidation of national stock exchanges in Europe, America, Singapore and Australia, involving Euronext, the NYSE, the Deutsche Bourse, Nasdaq and the ASX, in addition to the proposal involving the LSE and the TMX. All of the proposed mergers/acquisitions have received considerable play in the press and proponents and opponents are vociferous in their views as to whether the proposals are beneficial or harmful to national economies and domestic control over such a vital aspect of the financial and business well-being of the countries affected. This is all complicated in Canada, of course, by the ongoing federal election in Canada which may see change when the voters go to the polls on May 2, * Gowlings, Toronto. While Gowlings represented the Premier and Province of Saskatchewan on the BHP/Potash Corporation transaction referred to, any views expressed are personal and not to be attributed to the Firm nor the Province.

First of all, the all-party committee of the Legislature has not yet released its findings following extensive hearings, and the article s conclusions qualify the headline by later stating: according

2 - 2 - The LSE/TMX proposal should also be viewed against the fallout of the proposed BHP/Potash Corporation takeover, which also divided the country when it failed to establish net benefit to Canada under the Investment Canada Act and win approval from the Minister of Industry just five months ago. However, the parties to the LSE/TMX merger obviously were informed by, and benefitted from, the BHP/Potash Corporation experience and in the merger documentation filed with securities regulatory authorities provided an extensive list of proposed federal undertakings they were prepared to offer in order to assuage criticism surrounding the need for transparency, and corporate governance and management of the combined organizations. These proposals included: public disclosure of full text of undertakings following completion of transaction; annual disclosure in public securities filings monitoring compliance with undertakings; co-headquarters in London and Toronto; 7/15 Canadian directors at Holdco level; substantially proportionate representation on committees; 1/3 Holdco board meetings to be held in Canada; Holdco chair to be Canadian; ** Holdco president ** will principally perform his/her duties and be resident in Toronto; Holdco CFO will principally perform his/her duties and be resident in Toronto; Toronto headquarters of Global Primary Markets Business Unit; Toronto headquarters of Holdco Global Finance Function; Montreal headquarters of Global Derivatives Business Unit; Calgary headquarters of Global Energy Business Unit; and additional go-forward protections and disclosure if Holdco Group continues global consolidation. While it may well be the case that the Ontario Legislative Committee report does not recommend killing the deal, as was the case in Saskatchewan s review of the BHP/Potash ** The CEO of Holdco will, however, not be Canadian nor principally perform duties and be resident in Toronto.

However, the parties to the LSE/TMX merger obviously were informed by, and benefitted from, the BHP/Potash Corporation experience and in the merger documentation filed with securities regulatory

3 - 3 - Corporation proposed takeover, it is likely that the report, once released, will focus on the undertakings the parties to the LSE/TMX merger ought to give in order to protect Ontario s, and therefore Canada s, interests in maintaining a strong national stock exchange. The story will continue to enfold over the coming months. POSTSCRIPT The Honourable Gerry Phillips, Chair of the nine member Select Committee, tabled its Report, including a dissenting opinion from New Democratic Party Member, M. Gilles Bisson, *** on April 19, The release of the Report followed extensive consultations with members of the public and interested organizations, including presentations by witnesses and experts from the parties to the proposed merger as well as the Ontario Securities Commission. The Report makes nine recommendations reflecting the Committee s views after considering testimony from these witnesses and written submissions. Not surprisingly, the consultation process revealed an underlying concern that under the terms of the proposed merger, the centre of gravity in regards to the decision-making ability of Ontario and Canada would move to London. However, the Committee was of the opinion that if the transaction took into account specified principles, including the impact on and net benefit to Canada, including Ontario, its economy and people, Toronto s financial services sector, and Northern Ontario s mining industries, this concern could be addressed. The Committee noted that while it has no power to impose its views on the matter, it is hoped that the recommendations will be taken into consideration by the proponents of the transaction before seeking the necessary approvals by regulatory bodies and governments (including a necessary finding of net benefit by Industry Canada) as they proceed with their reviews and approval processes. The nine recommendations of the Committee are: *** The dissenting opinion, noting the rejection of the foreign takeover of the Australian exchange by the Singapore exchange on the basis of national interest, concluded: No matter what changes are made to the deal, there is no way to absolutely ensure that the basic formulation and implementation of the TMX s capital strategy can stay in Canada for the benefit of Canadians and Ontarians. We fundamentally see this as a takeover and we do not believe it offers the right solution to creating a globally sustainable Canadian based exchange. As the saying goes, why fix it if it ain t broke?

POSTSCRIPT The Honourable Gerry Phillips, Chair of the nine member Select Committee, tabled its Report, including a dissenting opinion from New Democratic Party Member, M.

4 There should be equal representation on the board of directors of the merged entity with the number of directors ordinarily resident in Canada equalling the number of directors ordinarily resident in the United Kingdom/Italy with no limitation in time, to be written into the Agreement. 2. TMX Group shareholders should not be prevented from owning a majority of the shares of the LSE Group, to be written into the Agreement. 3. The terms and conditions of any Ontario Securities Commission approvals should be incorporated into the Agreement. 4. The Ontario Securities Commission s review should address strategic and regulatory issues that may arise respecting the merger and the Commission should make public its findings. 5. There should be no diminution in the continued regulatory oversight role of the Commission on the future operations of the TMX Group, including being subject to recognition orders of the securities regulators, continued oversight of fundamental changes to the business and ownership of the TMX Group and ensuring autonomy of any TMX Group business where it serves a de facto regulatory role, such as the role of the Toronto Stock Exchange. 6. The Agreement should contain an undertaking that the exchanges of the TMX Group continue to meet the needs of the Canadian capital markets, including access to capital, competitive fees, range of listings, trade execution, market data and index products, and the clearing and settlement of derivatives. 7. An undertaking should be provided in the Agreement that the development and introduction of new technology, products and services will be carried out in Canada and the United Kingdom, and benefit both countries. 8. The Agreement should contain an irrevocable commitment that the operations, assets and key staff of the TMX Group and its businesses will continue to reside in Canada (this

the United Kingdom/Italy with no limitation in time, to be written into the Agreement. 2.

5 - 5 - would include listings, trade execution, clearing and settlement, as well as expertise in law and accounting). 9. Undertakings should be provided in the Agreement or to the Commission to preserve the role of the TMX Group as the global leader in equity financing for the mining sector, including measures to award any reduction in Canadian regulatory standards and the necessity for ongoing improvements to services promoted by the TMX Group to the mining sector. These recommendations are clearly intended to draw a line in the sand for impending future review by Industry Canada, notwithstanding that the Committee was careful to emphasize that it took no position on whether or not the transaction should be approved by Industry Canada. This can be contrasted with the position of the Saskatchewan government in the case of the BHP bid for Potash Corporation, where such a position was taken. Whether the parties voluntarily incorporate these recommendations into their transaction and whether Industry Canada obliges them to do so in any event, remains to be seen.

any reduction in Canadian regulatory standards and the necessity for ongoing improvements to services promoted by the TMX Group to the mining sector.

Council of Financial Regulators: Review of Financial Market Infrastructure Regulation

Council of Financial Regulators: Review of Financial Market Infrastructure Regulation 1 December 2011 Manager, Financial Markets Unit Corporations and Capital Markets Division The Treasury Langton Crescent PARKES ACT 2600 By email: CFR-Review-FMI@treasury.gov.au Dear Treasury Council of