Guide to Canadian M&A

Transcription

1 Guide to Caadia M&A

2 Guide to Table Caadia of Cotets M&A caadia m&a frequetly asked questios (faqs) 1 plaig a m&a trasactio 1 executig a m&a trasactio 2 regulatory approvals 6 asset acquisitios 8 iteratioal assets 9 tax matters 9 other cosideratios 11 Gowligs at a Glace Gowligs is oe of Caada s largest atioal full-service law firms. Gowligs employs over professioals ad has 910 offices worldwide. Gowligs is recogized for its expertise i M&A particularly i the eergy, miig ad techology idustries. Gowligs is focused o highly resposive, high-quality cliet service ad places tremedous value o relatioships. We act quickly o matters as they arise ad allocate the ecessary, most efficiet ad cost-effective persoel to each matter. Disclaimer: This guide is a summary ad iteded for geeral iformatio purposes oly. It is ot provided ad should ot be viewed as legal advice. Merger ad acquisitio activity i Caada is subject to detailed regulatio ad should be udertake oly with qualified legal cousel.

3 Guide to Caadia M&A CANADIAN M&A FREQUENTLY ASKED QUESTIONS (FAQs) This Guide aswers may frequetly asked questios we receive from our iteratioal cliets as they look at acquirig Caadia compaies or their assets. Caadia M&A is straightforward: Mergers ad acquisitios with Caadia compaies ca be straightforward ad ca be accomplished quickly ad efficietly. Caadia M&A rules favour the acquirer. For example, poiso pills ad other defece strategies by a target are very limited. Govermet approvals are limited. If a approval is required, i most cases, it is routiely grated. Caada is a busiess-friedly eviromet ad cosistetly raks at the top of the best places to do busiess. PLANNING AN M&A TRANSACTION We would like to acquire 100 per cet of a TSX-listed compay. Ca we buy some of the target s stock i the market (called a toehold ) before we make our approach? How much toehold stock ca we buy? Yes, acquisitio of a toehold is permissible, subject to some limitatios. The take-over bid rules (discussed below) do ot come ito play util the acquirer accumulates 20 per cet or more of the target s votig or equity securities or securities covertible ito votig or equity securities (collectively equity shares ). Acquirers sometimes accumulate a toehold to: (i) lower the overall purchase price for the target (the acquirer avoids payig a premium for shares purchased i advace of a formal offer); (ii) establish a edge agaist a competitive bidder; ad/or (iii) provide a gai if the target is lost to a competitor at a higher price. Will we have to publicly report our toehold? Caadia securities laws require early warig public disclosure of holdigs of 10 per cet or more of ay class of the target s equity shares. Additioal public disclosure is required for accumulatios of 2 per cet or more thereafter. Accumulatios of a toehold uder 10 per cet would ot require disclosure uder Caadia laws (uless the target is already the subject of a ogoig take-over bid or sale trasactio, i which case the disclosure threshold is reduced to 5 per cet). (Note that U.S. laws, whe applicable, always require early warig disclosure at 5 per cet). Typically, a acquirer may accumulate a toehold that is just below the disclosure level i order to prevet speculatio about a possible bid (ad possible upward price movemet) before it is made. Are there ay disadvatages to acquirig a toehold? Acquirig toehold stock ca potetially impact the bid price. Subject to a exemptio for certai ormal course purchases over a stock exchage, the highest price that the acquirer pays for the securities of the target withi 90 days of lauchig a take-over bid (icludig the cash value of ay o-cash cosideratio paid for such securities) sets the floor for the lowest price that the acquirer is permitted to offer to shareholders uder a take-over bid (the pre-bid itegratio rule ). Similarly, the miimum percetage of outstadig target securities subject to the bid must be equal to the highest percetage of outstadig target securities purchased from ay oe shareholder i the 90 days prior to a bid. What is the sigificace of the 20 per cet threshold? Ca we avoid it through affiliates or i side deals? A acquirer caot accumulate more tha 20 per cet owership of a class of equity shares uless the offer to acquire securities is made to all of the holders of the class. Outside of a offer made to all of the holders of a class, accumulatios i the secodary market over 20 per cet ca oly be made uder limited exceptios (see below). Side deals are ot a effective meas to avoid crossig the threshold. Caadia securities laws cotai ati-avoidace provisios, the effect of which is to iclude i the calculatio of whether the 20 per cet threshold has bee met (ad whether the 10 per cet threshold for the early warig disclosure metioed above has bee met): shares ad covertible securities owed directly, or idirectly, through affiliates or omiees; ad shares owed by persos or compaies actig joitly or i cocert with a bidder uder a agreemet, commitmet or uderstadig. How ca we fid out iformatio o the target or about the target s major shareholders? Publicly dissemiated iformatio about Caadia public compaies, icludig early warig reports filed by shareholders who hold more tha 10 per cet of the compay s outstadig equity shares, is posted olie at I additio, isider reports that provide curret tradig iformatio for large shareholders ad other Caadia public compay isiders, such as directors ad officers, ca be foud olie at Ca we egotiate directly with major shareholders? Ca we buy a large stake from a major shareholder group without havig to make a offer to all shareholders? Yes, subject to specific rules, if a target has several large shareholders, it is possible to egotiate a private sale for their shares. I certai 1

4 Guide to Caadia M&A circumstaces, a cotrol block (over 20 per cet) may be purchased by a acquirer without makig a offer to all shareholders, thus eablig a large stake to be acquired at oe time rather tha through a gradual build up i the market. These rules require that there ot be more tha five sellers, ad that the value of cosideratio paid ot exceed 115 per cet of market price (determied as prescribed). I circumstaces where 100 per cet owership of the target is the objective, a acquirer will ofte egotiate a lock-up agreemet with major shareholders ad, i a friedly trasactio, with the directors ad officers of the target. Uder a lock-up agreemet, the major shareholder(s) agree to teder their securities to the acquirer s offer. I a hard lock-up, the shareholders agree to sell their securities to the acquirer o matter what. I a soft lock-up, the shareholders may sell their securities to a competig superior offer i certai circumstaces. The majority of lock-up agreemets i Caada are soft. Should we lauch a surprise bid ( usolicited bid ) or should we approach the target board of directors i a friedly trasactio? Although friedly bids are more commo, usolicited bids are acceptable ad caot, i most circumstaces, be blocked idefiitely by a target s board of directors from cosideratio by the target s shareholders. A usolicited bid would typically be made with o access to cofidetial iformatio (i.e., due diligece has to be based o the public record oly). I a friedly trasactio, the target will typically allow a acquirer to coduct due diligece prior to lauchig a bid, but will typically require that the acquirer agree to sig a o-disclosure or cofidetiality agreemet ad to refrai from lauchig a take-over bid for the target s securities for a legthy period of time, uless the bid has the support of the target s board (a stadstill agreemet). I a friedly trasactio, the parties will also egotiate a support agreemet that would typically provide the acquirer with a break fee if the target s shares are ultimately purchased by aother third party makig a superior competig offer. If we already ow a large percetage of the target, are there special rules for acquirig additioal securities? Yes, subject to exceptios. A take-over bid lauched by a large shareholder (10 per cet or greater) will be cosidered to be a isider bid ad the cosideratio offered i the bid must be supported by a idepedet valuatio uless a exceptio applies. The exceptios available iclude circumstaces where the large shareholder has had o maagemet represetatio or represetative directors o the target s board i the last 12 moths; where the value of the cosideratio beig offered is accepted ad agreed to by certai other large arm s-legth shareholders; or where the target is the subject of a active auctio (i.e., aother takeover bid or sale trasactio is ogoig). Do we eed to keep our itetios to make a bid secret? Yes. Caada regulates isider tradig ad tippig. Iformatio about a potetial take-over bid for a Caadia public compay could be used by traders for ufair profit. Further, iformatio leaks of a possible bid ted to lead to tradig that drives the stock price up to the disadvatage of the acquirer. It is importat to maage the process of a take-over bid to protect agaist iformatio leaks or improper tradig by persos privy to cofidetial iformatio. Oce the decisio to pursue a potetial acquisitio trasactio i Caada is made, the acquirer s directors, officers, employees, cosultats, professioal advisers ad affiliates should ot trade i the target s securities, or tip or advise others to do so. Oly the acquirer itself (or its joit actors) may purchase securities i advace of lauchig a bid. EXECUTING AN M&A TRANSACTION How are mergers ad acquisitios with Caadia compaies typically structured? There are three mai optios for structurig a acquisitio of a Caadia-listed compay: take-over bid (a offer made directly to shareholders, ot ecessarily with agreemet of the target); I a usolicited offer, the acquirer rus the risk that the target board implemets a tactical shareholder rights pla to delay the bid i order to seek out a superior competig offer. For additioal iformatio regardig the case law i Caada o shareholder rights plas, please search shareholder rights plas o amalgamatio (a merger made by agreemet with the target, filed with a govermet miistry for routie processig after approval has bee obtaied at a special shareholder meetig); ad pla of arragemet (a merger made by agreemet with the target, submitted for court approval after the shareholders approve it at a special meetig). Features of each optio are outlied i the followig chart. The most suitable structure for a trasactio will deped o a variety of factors ad should be discussed with your legal adviser. 2

5 Guide to Caadia M&A Caadia M&A Structures Structure Take-over Bid Amalgamatio Pla of Arragemet Acquirer icorporates a Caadia special purpose compay to make a offer to acquire securities directly to shareholders. Acquirer icorporates a Caadia special purpose compay to merge with the target ad become the sole shareholder. Acquirer icorporates a Caadia special purpose compay to merge with the target ad become the sole shareholder. Shareholder Actio Teder securities to the offer. Vote at special shareholder meetig. Vote at special shareholder meetig. Time Period At least 35 days (although target shareholder Approximately 60 days. Approximately days. rights plas sometimes require a offer to be ope loger typically 60 days). If the terms of the bid are ameded or the bid is exteded, the acquirer will be required to mail a otice of chage or variatio ad the bid will be required to remai ope for at least 10 days. Other Approvals Ay applicable regulatory approvals (i.e., Ivestmet Caada, competitio, etc.). Ay applicable regulatory approvals. Court approval of pla of arragemet, plus ay applicable regulatory approvals. Advatages Gettig to 100% owership Disadvatages Mai Required Documetatio Ca be the fastest acquisitio process. The oly process suitable for usolicited bids. The process is drive by the acquirer. A oe-step process if 90% of the target s securities are tedered to the offer. If 90% of the target s securities are tedered to the offer, the acquirer ca quickly compel the sale of the remaiig shares. If less tha 90% but, typically, more tha 66 2/3% of the target s securities are tedered, the acquirer may carry out a secod-step squeeze out trasactio if it wishes to elimiate the remaiig miority security holders. This secodstep trasactio must offer the same cosideratio. This usually is doe by a amalgamatio, approved at a shareholder meetig ad takes approximately 60 days to complete. See What level of shareholder acceptace is eeded for us to achieve 100% owership? o p. 5. May require a secod-step trasactio to gai 100% owership of the target if less tha 90% of the target s securities are tedered to the offer. Take-over bid circular ad directors circular; otice of chage (if required); support agreemet (if friedly); lock-up agreemets (if applicable); iformatio circular (for secod-step, if required). Oe-step process. Fewer rules tha take-over bid. May be easiest way to achieve 100% owership. Requires approval at special shareholder meetig. See What level of shareholder acceptace is eeded for us to achieve 100% owership? o p. 5. Process drive by target (with oversight by acquirer). May take sigificat time to egotiate ad complete. Acquisitio or combiatio agreemet; lock-up agreemets (if applicable); iformatio circular for special shareholder meetig. Oe-step process. Fewer rules tha take-over bid. Greater flexibility for complex acquisitios ad permits U.S. acquirers to issue security without filig a registratio statemet. Court has sigificat discretio to address trasactio issues, such as the elimiatio of out-of-the-moey optios or debt. Requires approval at special shareholder meetig. See What level of shareholder acceptace is eeded for us to achieve 100% owership? o p. 5. Process drive by target (with oversight by acquirer). Requires court approvals (which ca be a opportuity for objectio by special iterests). May take sigificat time to egotiate ad complete. Acquisitio or combiatio agreemet; lock-up agreemets (if applicable); iformatio circular for special shareholder meetig; various court documets. 3

6 Guide to Caadia M&A Are there ay differeces to be aware of if the cosideratio offered icludes securities? There are several factors to take ito cosideratio whe a acquirer is offerig its securities as cosideratio or partial cosideratio for the target s shares. First, ay bid circular or iformatio circular will be required to cotai prospectus-level disclosure regardig the acquirer. This is ofte accomplished by icorporatig by referece the acquirer s existig cotiuous disclosure record ito the bid circular or iformatio circular. It should also be oted that a bid circular may be required to be traslated ito Frech if the acquirer s securities are beig offered to more tha a omial umber of shareholders i Québec. Secod, i a trasactio ivolvig a share exchage, the acquirer may iherit the target s reportig issuer status ad may become subject to Caadia cotiuous disclosure requiremets upo completio of the trasactio. For acquirers i several o-caadia coutries icludig, amog others, the Uited States, the Uited Kigdom, Frace, Germay, Australia, South Africa ad Spai, the Caadia cotiuous disclosure obligatios ca geerally be satisfied by filig i Caada the cotiuous disclosure reports that are filed with the securities regulator i the acquirer s home jurisdictio. Third, the sale of a Caadia security i exchage for a security issued by a o-caadia compay will be a taxable evet for the Caadia shareholders, resultig i a capital gai or capital loss that must be reported i the year that the dispositio occurs. I circumstaces where the egative tax cosequeces of the sale may ifluece shareholders approval or acceptace of the trasactio, or i other circumstaces where, for example, the acquirer wishes to motivate certai sigificat shareholders to remai ivested i the combied compay, it may be possible to effect a acquisitio o a tax-deferred basis through a exchageable share structure. The circumstaces of each trasactio will determie whether the additioal complexity ad admiistrative requiremets warrat implemetig a exchageable share structure. A exchageable structure would be desiged to permit Caadia residet shareholders to receive exchageable shares of a Caadia compay o a tax-deferred basis for their target shares. The Caadia exchageable shares would have attributes that effectively mirror the ecoomic rights of the acquirer s o-caadia shares. Over a period of time (ofte five years, subject to egotiatio) Caadia shareholders would be permitted to exchage their exchageable shares for the acquirer s correspodig o-caadia shares, thereby triggerig a taxable dispositio at a time of their choosig. The acquirer s o-caadia shares would be issued to the Caadia shareholders either uder a court order pursuat to a pla of arragemet or uder a U.S. registratio statemet that qualifies the securities for distributio i both the U.S. ad Caada usig U.S. documetatio oly. Fourth, it should be oted that i friedly, egotiated acquisitios where the cosideratio ivolves the issuace of the securities of a U.S. acquirer, the trasactio will almost ivariably be structured as a pla of arragemet. This is because there is a exemptio from the registratio requiremets of the U.S. Securities Act of 1933 i respect of securities issued pursuat to a trasactio, the fairess of which has bee approved by a court, as is the case i a pla of arragemet. Note that this exemptio is ot available for a securities exchage take-over bid. What role does the target s board play i the trasactio? The role of the target s board of directors differs depedig o the trasactio structure used. I a usolicited take-over bid, the target s board role is more limited. It will issue a recommedatio to shareholders i a Directors Circular regardig the offer, ad it will also likely look for competig bids to maximize shareholder value. The target may have or implemet a shareholder rights pla to delay the expiry of a usolicited bid for a few weeks while it looks for a alterative superior trasactio. I most cases, the shareholders will ultimately be provided with the opportuity to make the decisio to either accept or reject the acquirer s offer. I a friedly trasactio, the target s board will typically egotiate ad sig a busiess combiatio agreemet or support agreemet where the target ad its board commit, amog other thigs, to facilitate the acquisitio trasactio, make a positive recommedatio to shareholders, hold a shareholder meetig to approve the trasactio, obtai ecessary regulatory approvals ad, if applicable, pay a break fee if the trasactio fails for specified reasos. Is the target s board of directors required to coduct a auctio? No. Directors owe a fiduciary duty to act i the best iterests of the compay. While maximizig shareholder value will be of primary cocer to directors whe a compay fids itself as a acquisitio target, it is ot ecessarily the sole cocer (as i the Uited States). I a chage of cotrol situatio, directors are required to seek the best value reasoably available to shareholders. While it is ot madatory, whe cosiderig the best iterests of the compay, directors may cosider the iterests of stakeholders other tha shareholders, icludig employees, 4

7 Guide to Caadia M&A customers, suppliers, the commuity at large ad others. May friedly trasactios i Caada are cosummated without a auctio. What level of shareholder acceptace is eeded for us to achieve 100 per cet owership? Uder a take-over bid, if shareholders holdig 90 per cet of the target s outstadig securities (other tha those held by the acquirer) accept the offer, the the remaiig securities ca be compulsorily acquired at the same price i a matter of a few weeks. If the 90 per cet threshold is close to beig reached whe the bid expires, the acquirer will typically take up the shares tedered ad aouce a 10-day extesio to seek additioal teders ad reach the threshold. Typically, a bid is structured so that a acquirer ca accomplish a secod-step squeeze out trasactio whe less tha 90 per cet of the target s securities are tedered to the offer. A secod-step squeezeout trasactio will elimiate the remaiig shareholders for the same cosideratio as the bid. The squeeze-out eeds approval by: (i) a special resolutio passed by, typically, 66 ⅔ per cet of the shares voted i perso or by proxy at the meetig (this ca iclude all of the securities held by the acquirer ad its joit actors); ad (ii) a resolutio approved by a majority of the miority (that is, more tha 50 per cet of the shares voted i perso or by proxy at the meetig, excludig the shares owed by the acquirer ad its affiliates ad joit actors prior to the bid, but icludig the shares purchased by the acquirer ad its joit actors i the take-over bid). Sice the acquirer ca vote the shares it acquires i the bid i the miority approval resolutio, this secod vote oly becomes critical whe the acquirer lauches its bid with a startig poit of more tha 33.3 per cet of the outstadig shares of the class. Note that shares excluded from the miority vote have the effect of reducig the deomiator (thus potetially beefitig the acquirer). Note, the squeeze of threshold ca be up to 75 per cet for certai provicially icorporated compaies. Ay securities acquired prior to the lauch of a take-over bid: (i) may ot be couted towards the 90 per cet threshold; ad (ii) may ot be voted by the acquirer i favour of a secod-step goig-private trasactio that may be proposed to squeeze out miority shareholders i the evet that less tha 90 per cet of the equity shares are tedered to a bid. The size of the toehold acquired i advace of a bid must take ito cosideratio a aalysis of the various thresholds ad approvals required after a bid is completed i order to esure that the acquirer ca successfully purchase 100 per cet of the target s outstadig securities. If a pla of arragemet or amalgamatio structure is used istead of a take-over bid, the approval threshold is the same as previously discussed for a secod-step squeeze-out trasactio. Caada has a disset process where shareholders beig squeezed out ca disset from the trasactio ad demad to a court to be paid fair value. This process is rarely used effectively. What is the typical miimum threshold? What if we do ot get to our miimum threshold? What are other typical bid coditios? I a take-over bid, the acquirer ca specify a miimum umber of shares to be tedered to the offer ad is ot obliged to purchase ay of the target s securities uless this miimum threshold coditio ad other bid coditios are satisfied or waived. Typically, the miimum specified is two-thirds of the outstadig shares ot owed by the acquirer i order to assure that the acquirer ca move quickly to a secod-step trasactio to achieve 100 per cet owership, as discussed above. A more aggressive bidder may be prepared to set the miimum lower for example, 50 per cet plus oe share i order to elimiate competitio ad achieve cotrol, but ot ecessarily with assurace of gettig to 100 per cet. The bidder may the be prepared to attempt to acquire the remaider through bid extesios ad other measures. Other typical coditios iclude the receipt of required regulatory approvals ad o material adverse chage. Ofte a acquirer will exted the bid ad/or raise its cosideratio to reach a successful coclusio. The oly coditio that caot be icluded i a take-over bid is a fiacig coditio. Fiacig must be i place before a bid is lauched. If the fiacig itself is coditioal, the acquirer must reasoably believe the possibility to be remote that, if the coditios to the bid are satisfied or waived, the acquirer will be uable to pay for the securities tedered to the bid due to a fiacig coditio ot beig satisfied. Ca we acquire target shares i the market durig a take-over bid? Yes, up to 5 per cet of the target s shares may be acquired i market purchases durig the course of a bid. I additio, commecig o the third day followig the lauch of the bid, additioal shares may be purchased i the market so log as you comply with a umber of codi- 5

8 Guide to Caadia M&A tios icludig (i) statig the itetio to acquire shares i the market i the take-over bid circular; ad (ii) publicly disclosig daily, by press release, the umber of securities acquired i the market ad the average price paid. A acquirer caot sell ay target shares durig the course of a bid (startig from whe the acquirer aouces a itetio to make a bid). Ca we offer differet cosideratio to differet shareholders or side deals? Take-over bid rules require all shareholders to be offered the same cosideratio or the same choice of cosideratio, ad o collateral beefits or side deals are permitted with select shareholders. Plas of arragemet ad amalgamatios are ot as restrictive. Ca we make a take-over bid coditioal o regulatory approvals required outside of Caada? Yes, for iteratioal acquirers, typical bid coditios iclude receipt of approvals i other jurisdictios, such as atitrust approvals i the U.S. ad elsewhere. What happes if aother offer comes alog to compete with ours? How does deal protectio work i Caada? I a friedly trasactio, a target will typically agree to refrai from solicitig other offers ad to support the offer made by the acquirer. If a competitive bid does emerge, the typically the target s board ca oly eter ito egotiatios with ad ultimately support a competig offer if it is superior. Typically, the acquirer will ask for a matchig right ad a right to a break fee if it loses to a superior offer. The o-solicitatio ad superior-offer provisios of a support agreemet are highly egotiated, with the acquirer attemptig to tightly restrict the target s ability to pursue ad accept aother offer while permittig the target s directors to discharge their fiduciary duties. The target s board will seek as much flexibility as possible without completely hamperig deal certaity. What if the target has a sigificat umber of shareholders i the Uited States? So log as the Caadia target qualifies as a foreig private issuer uder U.S. securities laws, Caadia securities laws will gover the offer made to a U.S. shareholder provided that: (i) less tha 40 per cet of the target s shares are held by U.S. shareholders (calculated at a specified date prior to lauch of the bid); (ii) the bid is ot exempt uder Caadia securities laws; ad (iii) U.S. shareholders participate i the bid o terms that are o less favourable tha those offered to Caadia shareholders. I respect of a o-caadia acquirer, these rules oly apply i the case of a all-cash offer. Where the foregoig exemptio from U.S. requiremets does ot apply, both Caadia ad U.S. rules, which are similar i most material respects, must be complied with i respect of the bid. For offers ivolvig share cosideratio, compliace with U.S. teder offer rules may be required. I may istaces, to avoid U.S. registratio requiremets, istead of deliverig acquirer shares to U.S. shareholders, the cosideratio shares will be sold by the acquirer ito the market o behalf of the U.S. target shareholders, ad the proceeds of sale will be delivered to the U.S. target shareholders. REGULATORY APPROVALS What typical regulatory approvals are eeded for a o- Caadia acquirer to acquire or ivest i a Caadia compay? Acquisitios or ivestmets that exceed certai thresholds are subject to review uder the Ivestmet Caada Act (foreig ivestmet review) ad pre-otificatio uder the Competitio Act. Caadia M&A is geerally based o free market priciples, with miimal regulatory ivolvemet. How does the foreig ivestmet review process apply to a o-caadia acquirer? Foreig ivestmet i Caada is regulated by the Ivestmet Caada Act. Proposed acquisitios of cotrol of a Caadia busiess that exceed certai moetary thresholds are subject to review uder the Ivestmet Caada Act. Acquisitios of cotrol below the applicable threshold are exempt. Thresholds. For WTO ivestors, the review threshold is crossed if the book value of the Caadia busiess exceeds C$330 millio. As a result of some recet amedmets to the Ivestmet Caada Act that are iteded to facilitate additioal foreig ivestmet i Caada, this threshold will soo be icreased to C$600-millio eterprise value, with additioal icreases to follow. Note that a much lower, C$5-millio threshold applies if the target carries o a cultural busiess. For o-wto ivestors, the threshold is exceeded if the book value of the Caadia busiess exceeds C$5 millio. Cotrol. The Ivestmet Caada Act icludes detailed provisios defiig the cocept of a acquisitio of cotrol. I summary, these provisios state that cotrol ca be acquired oly through the acquisitio of: (i) votig shares of a corporatio; (ii) votig iterests of a o-corporate etity (which for parterships ad trusts 6

9 Guide to Caadia M&A meas a owership iterest i the assets thereof that etitle the ower to receive a share of the profits ad to share i the assets o dissolutio); or (iii) all or substatially all of the assets of a Caadia busiess. For the purposes of determiig whether a ivestor has acquired cotrol, the followig geeral presumptios apply: the acquisitio of greater tha 50 per cet of a target s votig shares is deemed to be a acquisitio of cotrol; the acquisitio of oe-third or more, but less tha a majority, of votig shares is presumed to be a acquisitio of cotrol, uless it ca be show that the acquired shares do ot give the ivestor cotrol i fact over the corporatio (e.g., aother shareholder ows a majority of the votig shares); ad the acquisitio of less tha oe-third of the votig shares is deemed ot to be a acquisitio of cotrol. Timig. The iitial review period is 45 days from submissio of applicatio for review. The Miister of Idustry has a uilateral right to a 30-day extesio. Further extesios ca be agreed to betwee the Miister ad the purchaser. (As a practical matter, the purchaser must agree to further extesios if it wishes to complete the trasactio, as the right to close requires affirmative approval, ot just passive expiratio of a waitig period.) I our experiece, the review period for large ad complex trasactios is typically betwee three ad six moths, due to the umber of federal govermet departmets ad affected provicial govermets with which Idustry Caada must cosult. Test. The stadard of the review is whether the trasactio is likely to be of et beefit to Caada. I applyig this test, the Miister of Idustry will review the ivestor s plas for the Caadia busiess (which are required to be set out i its applicatio for review) with a view to assessig: the effect o the level of ecoomic activity i Caada, o employmet, o the utilizatio of parts ad services produced i Caada, ad o exports from Caada; the degree ad sigificace of participatio by Caadias i the Caadia busiess; the effect of the ivestmet o productivity, idustrial efficiecy, techological developmet, product iovatio ad product variety i Caada; the effect of the ivestmet o competitio withi ay idustry i Caada; the compatibility of the ivestmet with atioal idustrial, ecoomic ad cultural policies; ad Possible Outcomes. The Miister of Idustry may either approve the acquisitio or ot approve the acquisitio. Almost all proposed acquisitios are ultimately approved. Prior to 2010, oly oe applicatio had bee formally rejected from the multitude of applicatios filed over the years (ukow others may have bee withdraw before a adverse decisio was redered). Before a acquisitio is approved, there is typically a egotiatio betwee the ivestor ad the Miister of Idustry with respect to udertakigs the ivestor is prepared to give i relatio to the operatio of the Caadia busiess post-acquisitio. Such udertakigs typically relate to the factors outlied above, ad are iteded to satisfy the Miister of Idustry that the acquisitio will be of et beefit to Caada. I the recet ecoomic climate, our experiece has bee that the Miister of Idustry s primary cocer has bee to receive specific udertakigs with respect to employmet levels at the Caadia busiess for a period of time post-closig (typically three years). I November 2010, a secod Ivestmet Caada applicatio was deied. Caada s Miister of Idustry set a otice to BHP Billito idicatig that he was ot satisfied that the applicatio of BHP Billito for approval of the acquisitio of Potash Corporatio of Saskatchewa Ic. is likely to be of et beefit to Caada. BHP Billito was provided 30 days to make ay additioal represetatios ad submit ay udertakigs; however, BHP Billito withdrew its offer. The Miister further stated at the time of the decisio: Caada has a log-stadig reputatio for welcomig foreig ivestmet. The Govermet of Caada remais committed to maitaiig a ope climate for ivestmet. BHP Billito s proposed acquisitio of Potash Corporatio received cosiderable media attetio as oe of the world s largest miig M&A trasactios, with Potash Corporatio, the world s largest potash producer, beig regarded as a asset of strategic atioal sigificace. The Miister subsequetly idicated that the size of the Potash trasactio ad a potetial for log-term reductio of capital ivestmet i the Caadia potash miig idustry geerally as a result of the proposed acquisitio were factors of the BHP Billito decisio. He also idicated that a process would be udertake for providig further clarity to the ivestmet commuity cocerig the acquisitio of strategically sigificat assets uder the Ivestmet Caada Act. the cotributio of the ivestmet to Caada s ability to compete i world markets. 7

10 Guide to Caadia M&A What is a atioal security review? The Ivestmet Caada Act was ameded i 2009 to provide the govermet with a right to review ay foreig ivestmet that could be ijurious to atioal security. There is o miimum review threshold, ad the atioal security review provisio applies to miority ivestmets ad to the establishmet of ew Caadia busiesses, ot just the acquisitio of cotrol of existig Caadia busiesses. The atioal security review ca also apply to ivestmets that have teuous liks to Caada (for example, a busiess with ay part of its operatios i Caada). The atioal security review process ca take up to 130 days. The govermet may, without givig reasos, prohibit proposed ivestmets, impose coditios o their completio or require divestiture of completed ivestmets. Whe the atioal security review provisios were adopted, may potetial foreig ivestors became cocered that Caada had become, or was becomig, ihospitable to foreig ivestmet. However, experiece to date with the atioal security review provisios shows that this is ot the case. Will the Caadia govermet require that a Caadia parter be ivolved i the trasactio? The geeral rule is that a foreig ivestor is ot required to ivest alogside a majority or miority Caadia parter. Oly i certai regulated idustries that have Caadia miimum owership limitatios, such as uraium, telecommuicatios, bakig ad trasportatio, would a majority parter be required. There is, from time to time, a great deal of media commetary o this issue i the cotext of a high-profile foreig take-over of a major Caadia compay. This commetary is purely speculative. The fact is that the Ivestmet Caada Act does ot require or cotemplate the ivolvemet of a Caadia parter i a foreig acquisitio, ad the Caadia govermet does ot have a historical track record of requirig this. If we are cosiderig ivolvig a Caadia parter, would this elimiate foreig ivestmet review? Foreig ivestmet review uder the et beefit to Caada test would be avoided if the trasactio is structured such that the o-caadia ivestor does ot acquire cotrol. If the o-caadia ivestor acquires cotrol uder the trasactio, the the et beefit test would apply whether or ot there is a Caadia parter. It is possible that the presece of the Caadia parter may ameliorate political cocers i high-profile trasactios; however, as oted above, this has ever bee required as a coditio of approval. How does competitio review apply to Caadia M&A? Notificatio of proposed trasactios that exceed certai moetary thresholds must be provided before closig to the Competitio Bureau, which ca challege ay trasactio that it believes will prevet or lesse, or is likely to prevet or lesse, competitio substatially. Notificatio is oly required if both of the followig thresholds are exceeded: (i) the parties, together with their affiliates, have assets i Caada, or aual gross reveues from sales i, from or ito Caada, greater tha C$400 millio, ad (ii) the assets i Caada of the acquired busiess, or the aual gross reveues from sales i or from Caada geerated by such assets, exceed C$77 millio. Note that i trasactios ivolvig the acquisitio of votig securities, if these thresholds are exceeded, otificatio may be required, eve if less tha a majority of votig securities are beig acquired (for example, the acquisitio of more tha 20 per cet of publicly traded votig securities). The basic waitig period is 30 days from filig the prescribed otificatio form. The Competitio Bureau has the power to issue a supplemetary iformatio request withi the iitial 30 days. A supplemetary iformatio request exteds the waitig period for a additioal 30 days from compliace with such a request, as determied by the Bureau. The Bureau has various other powers to delay closig. The test applied by the Bureau is whether the proposed trasactio prevets or lesses, or is likely to prevet or lesse, competitio substatially. ASSET ACQUISITIONS Our target is a asset owed by a Caadia compay. We oly wat the asset ad ot the whole compay. How is a asset acquisitio typically structured? A asset sale ivolves the egotiated purchase of the assets of a compay without acquirig the etity that ows them. This typically happes whe oly a sigle property or divisio is of iterest, or the ew ower wishes to cap legacy liability exposure. What approvals are eeded for a asset sale? A sale of all or substatially all of a target s assets requires approval of shareholders at a meetig by special resolutio (two-thirds of the 8

11 Guide to Caadia M&A shares voted at the meetig). Less sigificat asset trasactios ca be approved by the target s board. A asset sale typically ivolves trasfers of title ad assigmets of cotracts, so more approvals ad filigs are typically required tha a sale of the shares of a corporatio. See also the previous resposes regardig Competitio Act ad Ivestmet Caada Act. How log does the asset sale process typically take? Sixty to 90 days if a shareholder meetig is required, much less if o shareholder meetig is required, depedig o the complexity of the trasactio. INTERNATIONAL ASSETS Our target is a iteratioal asset owed by a Caadia-listed compay. How does the process differ from buyig a compay with a Caadia asset? Local foreig ivestmet, competitio ad other approvals may be required. The specific mix of such approvals will vary depedig o the jurisdictio ad the ature ad size of the target s operatios i such a jurisdictio. Caadia foreig ivestmet review may ot apply, depedig o the circumstaces. Ca we elimiate the Caadia owership structure after we buy the compay owig the iteratioal assets? Yes, there is full flexibility to elimiate the Caadia owership structure post-acquisitio. However, it is importat to focus o this issue early as part of the implemetatio to optimize tax efficiecies. TAX MATTERS What vehicle should be used for a Caadia acquisitio? Typically, a o-caadia acquirer would establish a Caadia subsidiary to act as the acquisitio vehicle. The use of a Caadia subsidiary serves a umber of purposes, icludig isulatig the acquirer from the activities of the target. Are there ay tax advatages to usig a Caadia subsidiary? Yes, a Caadia subsidiary may provide a umber of advatages to the acquirer from a Caadia tax perspective. These advatages may iclude: (i) facilitatig the deductio of iterest o fiacig for the acquisitio agaist the icome of the Caadia target; (ii) creatig high paid-up capital i the shares of the Caadia subsidiary to facilitate repatriatio of fuds back to the o-caadia paret corporatio free of Caadia withholdig tax; ad (iii) positioig the acquirer for a possible bump i the tax cost of the Caadia target s o-depreciable capital property. To take advatage of some of these beefits, it may be ecessary to carry out a subsequet merger of the acquisitio vehicle ad Caadia target. Care is also required i desigig the share structure of the Caadia subsidiary ad arragig for it to be properly capitalized ad fiaced for the acquisitio. Where assets are beig acquired rather tha shares, it is eve more importat to cosider usig a Caadia subsidiary. If the o-caadia acquirer buys Caadia busiess assets, it will be directly liable for debts ad liabilities that arise from the operatios. It will also be liable for Caadia tax o the icome from those assets ad will have to file Caadia icome tax returs every year, reportig its icome from Caadia operatios. However, by usig a Caadia subsidiary to acquire the assets ad to coduct the Caadia operatios, the subsidiary becomes resposible for reportig the icome ad payig tax o the icome istead of the o-caadia paret. Are there tax advatages to acquirig shares of a target rather tha assets? A sale of shares ca be more tax efficiet for shareholders of the target compay compared to a asset purchase. Therefore, the vedors may be more iclied to agree to a share purchase tha a asset purchase. I some cases the target compay may have advatageous tax pools such as o-capital loss carry forwards, Caadia exploratio expeses, Caadia developmet expeses, scietific research ad experimetal developmet credits, et capital losses or other valuable tax attributes. I geeral, these tax attributes ca oly beefit the acquirer by purchasig the shares of the target compay, ot by purchasig assets from the target compay. Where the target compay has valuable tax attributes, it is importat to structure the acquisitio very carefully. This is because the Caadia tax rules cotai a umber of limitatios o usig the tax attributes of the target followig a acquisitio. Where the target compay has o special tax attributes, or where its assets have a very low tax basis compared to the purchase price, it may 9

12 Guide to Caadia M&A be advatageous for the acquirer to acquire the assets directly rather tha shares of the target. By acquirig the assets, the tax basis for the assets will be equal to the purchase price paid. This creates a high tax basis i the assets for the acquirer, which ca result i tax savigs to the acquirer i the future. Where assets are purchased, it will be importat to allocate the total purchase price betwee the various assets. Amouts reasoably allocated to ivetory or depreciable property ca be more tax efficiet tha amouts allocated to o-depreciable capital property such as lad. How would the Caadia subsidiary be taxed i Caada? A subsidiary icorporated aywhere i Caada is subject to taxatio i Caada o its worldwide icome. A Caadia residet corporatio is subject to both federal ad provicial icome tax. Caadia corporate tax rates have falle over the past several years ad are comparable to the rates i may other coutries. Ofte i the early start-up years of a subsidiary s busiess, operatig losses may be icurred, i which case there would geerally be o icome tax payable by the subsidiary. Furthermore, ay such busiess losses ca be carried forward for 20 years to offset icome eared after the operatios become profitable. Are there situatios where a o-caadia paret would carry o the Caadia busiess directly? I some situatios where a o-caadia acquirer has other profitable operatios, the acquirer may wish to structure the acquisitio as a asset purchase ad carry o the operatios iitially as a brach of the acquirier i order to deduct the start-up losses agaist the earigs from the other profitable operatios. This type of structure is ot commo ad must be implemeted very carefully, especially oce the operatio becomes profitable. For example, ay o-caadia acquirier that carries o busiess i Caada must pay Caadia icome tax o ay icome it ears i Caada through a permaet establishmet. Difficult questios ca arise i calculatig the icome that is derived from a Caadia permaet establishmet, ad there are o clear guidelies for the calculatios uder Caadia law. I additio, the o-caadia acquirier must pay a additioal brach tax based o the profits from the Caadia operatio which are ot reivested back i Caada. As well, the books ad records of the o-caadia acquirier may be subject to audit by the Caada Reveue Agecy. For this reaso, LLCs ad other fiscally trasparet vehicles may be cosidered. The rules are complex ad should be reviewed carefully i every case. The o-caadia acquirer will also be resposible for Caadia payroll taxes ad remittaces o ay employees who work i Caada. What are some of the Caadia withholdig taxes that would apply to paymets by the Caadia subsidiary to a o-caadia corporate paret? Withholdig tax will be payable o the gross amout of divideds paid or credited by a Caadia subsidiary to ay o-residet shareholder. This tax is required to be deducted or withheld by the Caadia subsidiary o behalf of its paret corporatio. The Icome Tax Act (Caada) imposes a geeral 25 per cet withholdig tax rate that may be reduced uder a applicable tax treaty. Caadia withholdig tax also applies to iterest that is paid to a oresidet paret corporatio, or to ay other perso with whom the subsidiary does ot deal at arm s legth. The withholdig rate o iterest is geerally 25 per cet, but may also be reduced uder a applicable tax treaty. Are there situatios where Caadia withholdig tax does ot apply? The withholdig tax o divideds oly applies to paymets that are divideds or similar distributios uder corporate law. However, a retur of capital that is properly made uder Caadia corporate law by the Caadia subsidiary to its o-caadia paret corporatio is ot treated as a divided for Caadia icome tax purposes. As a result, capital ca geerally be repaid free of Caadia withholdig tax. To take advatage of this rule, advace plaig is required ad suitable share rights ad capitalizatio of the subsidiary is ecessary. As well, iterest paid to a arm s-legth leder is ow free from Caadia withholdig tax, as log as it is ot participatig debt iterest. Therefore, iterest o fiacig for the acquisitio from baks or other arm slegth parties outside of Caada directly to the Caadia subsidiary ca be free of withholdig tax i appropriate circumstaces. Fially, the pricipal amout of a loa ca be paid free of Caadia withholdig tax. Where a paymet icludes both iterest ad pricipal, the amout of pricipal should be specified clearly so that withholdig tax is ot payable o that portio of the amout. 10

13 Guide to Caadia M&A Are there ay tax restrictios o how a o-caadia paret corporatio fuds the Caadia subsidiary? Oe key decisio is whether to fud the Caadia subsidiary with debt or equity. A umber of tax rules affect this decisio. For example, iterest is oly deductible to the extet it is reasoable. As well, iterest paid by a Caadia subsidiary to its paret corporatio will be subject to special requiremets uder Caadia trasfer pricig rules. The subsidiary must be able to prove that the iterest rate it pays is the same as the iterest it would pay to a arm s-legth leder, ad it must have suitable supportig documets available to show to the Caadia tax authorities if requested. Uder Caadia tax rules, there is a limit o the amout of debt that the Caadia subsidiary should borrow from its paret. This is because there are restrictios o the amout of iterest the subsidiary ca deduct o debts owig to specified o-residets. I order to have full iterest deductibility, the debt-equity ratio of the subsidiary should be limited to two to oe. This restrictio is kow as the thi capitalizatio rule. A o-caadia shareholder should be midful of the thi capitalizatio rules whe fudig its Caadia subsidiary. OTHER CONSIDERATIONS Does Caada have currecy cotrols? No, Caada has o currecy cotrols. the process. They will also eed to pass a immigratio medical if they are comig to Caada for more tha six moths. Whe the visa office approves a applicatio, it will issue a TRV ad a letter of authorizatio allowig the worker to fly to Caada. The work permit itself is issued at the port of etry i Caada. Accompayig spouses of most foreig atioals workig i Caada may apply for a work permit uder the Spousal Employmet Program. Temporary immigratio documetatio may also be obtaied for accompayig childre. The federal departmets of Huma Resources ad Skills Developmet Caada ad Citizeship ad Immigratio Caada joitly admiister the Temporary Foreig Worker Program ad esure that employig foreig workers has a eutral or positive effect o the Caadia labour market ad ecoomic growth. I some cases where the itra-compay trasferee category is ot available, it is ecessary to first obtai a Labour Market Opiio from the Caadia govermet before the work permit applicatio ca be made. This is doe by way of a applicatio filed i Caada. Several criteria must be met. For example, it must be show that qualified Caadia workers are ot available ad the wage beig offered must meet the prevailig wage rate for the occupatio i the locatio of the work. What process is ivolved i brigig o-caadia workers ito Caada to work at a Caadia compay acquired by a o-caadia paret? Caada s immigratio programs ad rules are desiged to facilitate the etry of busiess people, maagers ad skilled workers. Executives, seior maagers ad techical persoel eeded to work o a project i Caada may apply for work permits to allow them to work i Caada o behalf of a foreig busiess or a related Caadia etity. To be eligible for a work permit, the applicat must qualify uder oe of Caada s work permit categories. Such workers may sometimes be eligible for itra-compay trasfer work permits. These are available to eligible maagerial-level employees or key specialists who are beig trasferred from a employer outside of Caada to a related Caadia etity. Work permit applicatios are filed at a Caadia visa office. Some workers must also obtai a temporary residet visa (TRV) as part of 11

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15 Gowligs is oe of Caada s largest law firms, with over 750 professioals i offices across the coutry ad i Moscow, Lodo ad Beijig. Recogized for excellece i busiess law, advocacy ad itellectual property law, Gowligs offers dedicated idustry expertise i a umber of sectors icludig eergy, miig, ifrastructure, life scieces, govermet, fiacial services, techology ad maufacturig, ad i areas such as corporate fiace ad M&A, trasfer pricig ad tax, patets ad trade-marks, ad occupatioal health ad safety. The firm provides legal services i Caada, the U.K., ad Russia ad the CIS through the etities Gowlig Lafleur Hederso LLP, Gowlig Lafleur Hederso s.e..c.r.l., s.r.l., Gowligs (UK) Ic., ad Gowligs Iteratioal Ic. I 2011, the firm opeed the Gowligs Iteratioal Ic. Beijig Represetative Office. For more iformatio, visit 04/2012