Mergers and Acquisition Laws and Regulations in Canada 2024
From July 1 to September 30, 2023, Canada witnessed a flurry of 576 deals, collectively valued at an impressive $45 billion. These numbers show how mergers and acquisitions are big players in Canada’s economic scene.
Exploring mergers and acquisition rules & regulations reveals how laws balance compliance, strategy, and market forces in Canada. This blog offers insights into the legal frameworks and common practices driving mergers and acquisitions in Canada.
Rules for Foreign Buyers
The Investment Canada Act (ICA) oversees foreign investments, evaluating their net benefit and cultural and national security implications. It pertains to non-Canadian-controlled investors acquiring businesses in Canada. The approval process for economic and cultural reviews can span 75 to 90 days, often involving binding commitments from investors.
National security reviews, which can take over 200 days, lack a pre-clearance process but may require notification post-closure. You should keep the Canadian government in the loop and time your moves strategically. Make sure your plans sync with your business objectives.
Principal Sources of Liability
M&A liability centers on directors’ breaches of fiduciary duties, failure to adhere to securities laws, and misrepresentations in disclosure documents. Breaching technical rules such as take-over bid regulations or conflict of interest guidelines can incur penalties.
Securities laws also govern insider trading and market manipulation, ensuring conduct aligns with the public interest. Companies, along with their directors, officers, and associates, may face both civil and penal consequences for non-compliance.
Alternative Means of Acquisition
In Canada, there are two primary methods for the acquisition of public companies: take-over bids and plans of arrangement, each governed by distinct regulatory frameworks and procedural requirements.
Plan of Arrangement
A plan of arrangement entails a court-approved process allowing companies, typically organized under Canadian corporate statutes, to restructure their share capital. This effectively terminates current shareholders’ interests in exchange for compensation, usually in cash or other securities.
Final court approval necessitates the endorsement of at least two-thirds (66⅔%) of the affected shares at a shareholder meeting, alongside any requisite minority approvals under Canadian securities laws. Dissenting shareholders typically retain “dissent rights,” enabling them to receive a cash payment equivalent to the fair value of their shares.
Arrangements are favored for negotiated acquisitions due to their flexibility in addressing various target securities and the ability to effect a comprehensive transfer of 100% of the target’s securities without the need for subsequent compulsory acquisitions.
Take-over Bids
Take-over bids involve an offer to purchase outstanding voting or equity securities that would increase the bidder’s holdings to 20% or more of the class. These bids adhere to stringent procedural and substantive requirements governing disclosure, timing, and share transactions.
Unlike arrangements, take-over bids may be executed with or without the target’s agreement and must extend to all security holders, offering identical consideration to each. Successful bids for companies organized under Canadian corporate statutes typically trigger compulsory acquisitions or second-step “squeeze-out” transactions to acquire the remaining shares.
Obligations to Purchase Other Classes of Target Securities
In a take-over bid, the bidder must offer to purchase all classes of equity or voting securities unless exempt. Some shares may trigger “coat-tail” provisions, obligating the bidder to extend offers across multiple classes.
For instance, in dual-class structures, bidding for high-vote shares necessitates identical offers for low-vote shares. These provisions are compulsory for dual-class firms listed on the Toronto Stock Exchange. Moreover, debt securities terms may require the target to repurchase them at a set price post-change of control, typically 101% of principal plus accrued interest.
Limits on Agreeing to Terms with Employees
Employee benefit arrangements shape the bidder’s approach. Collateral benefits to employee shareholders are restricted, requiring clarity that benefits pertain to employment, not shareholder status. In take-over bids, specific rules govern such benefits, ensuring fairness and transparency.
Discrepancies in benefits may trigger minority protections under Canadian securities laws, emphasizing the need for equitable treatment of all stakeholders. Handling employee benefits carefully is crucial. It helps follow regulations and ensures a smooth transition after the acquisition, keeping everyone happy and on the same page.
Break Fees
Break fees, typical in Canadian agreements, involve the target compensating the bidder upon certain events. Though no fixed limit exists, fees generally range from 2–4% of the target’s equity value; exceeding norms may raise fiduciary duty concerns. Triggered by target-related events, like entering a superior proposal agreement, they incentivize deal completion.
Conversely, reverse break fees, increasingly prevalent, require bidders to compensate targets for failure to meet post-announcement conditions such as financing or regulatory approvals. Their rise reflects a shift in risk allocation strategies, ensuring accountability and mitigating uncertainties in Canadian M&A transactions.
Commitments to Tie up a Deal
In Canadian M&A deals, non-solicitation clauses and break fees are common for deal security, with fiduciary exceptions. Acquirers often seek additional assurance from target directors, officers, and significant security holders via lock-up agreements. These agreements commit parties to support the transaction, typically voting in favor of arrangements or tendering shares to bids, with certain conditions.
Soft lock-ups usually end with the definitive agreement or at the security holder’s discretion upon agreement termination, allowing support for superior proposals. Hard lock-ups, which are binding on security holders beyond termination without supporting competing bids, are rare. They are primarily used by major controlling shareholders.
Bidder’s Control
In definitive M&A agreements, interim period covenants are crucial for buyer control and target value preservation between signing and closing. These covenants vary based on deal specifics but commonly entail maintaining ordinary business operations, restricting actions like issuing securities or entering significant contracts, and managing personnel matters.
Moreover, provisions grant buyer access to target assets and personnel pre-closing, with both parties committed to exerting commercially reasonable efforts to fulfill closing conditions and obtain necessary consents. Also, parties must promptly disclose any breaches of representations and warranties.
In a take-over bid scenario, once bid conditions are met or waived, and the bidder reaches the prescribed 50% minimum deposit threshold, control shifts to the bidder upon acquiring and paying for deposited shares. Any remaining shares not tendered may be acquired through compulsory acquisition or a second-step squeeze-out transaction.
Conversely, in a plan of arrangement, the buyer acquires all target shares, including those voted against or subject to dissent rights, at closing, ensuring full ownership. Unlike take-over bids, where control hinges on shareholder acceptance, arrangements secure 100% ownership upon completion. This structure simplifies the acquisition process, eliminating the need for subsequent transactions to acquire remaining shares.
Conclusion – Mergers & Acquisition Laws and Regulations in Canada
Mergers and acquisitions are the pulse of Canada’s corporate arena. From the stringent regulations governing foreign buyers under the Investment Canada Act to the intricacies of structuring acquisition deals through take-over bids and plans of arrangement, each aspect shows the complexity and significance of M&A transactions in Canada.
As the market changes, businesses and stakeholders must stay informed and flexible to handle the changing world of mergers and acquisitions in Canada.
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