cross-border m&a: canada is open for business
TRANSCRIPT
Cross-Border M&A
Canada is Open for Business
www.gowlings.com
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Building Your
Acquisition Model
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Building Your Acquisition Model – Due Diligence
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Public company due
diligence
www.sedar.com
www.sedi.com
Building Your Acquisition Model – Toeholds
Toehold
• Permitted: watch out for pre-bid
integration rules
• Stop before you reach 10%: early
warning rules require a toehold
position to be disclosed when the
acquirer’s ownership exceeds
10%
• Takeover bid rules are triggered
when acquirer accumulates 20%
or more ownership
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Building Your Acquisition Model – Early Warning
• Canadian securities laws require “early warning” public
disclosure at 10% or more, plus accumulations of 2%
or more. (Note that U.S. laws (if applicable) require
early warning disclosure at 5%)
• 10% threshold reduced to 5% if the target is already
the subject of a bid
• Typically, an acquirer may accumulate in the market a
toehold that is just below the disclosure level
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Building Your Acquisition Model – Joint Actors
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Watch out for the “joint actor” rules:
Canadian securities laws contain an anti-avoidance
scheme, the effect of which is to include in the 20%
(and the securities subject to the 10% early warning
disclosure), securities owned directly, or indirectly, by,
among others, persons or companies acting jointly
or in concert with a bidder, under an agreement,
commitment or understanding
Tax Losses
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Tax Losses
“Acquisitions of control” gives rise to:
• Restrictions on access to business losses and tax
pools
• Expiring of capital losses
• Write-down to fair market value from of capital and
depreciable property
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The Right Structure
The Right Structure
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• Take-over bid
• offer made directly to shareholders, not
necessarily with agreement of the target
• Amalgamation
• a “merger” made by agreement with the
target, filed with a government ministry for
routine processing, after approval has been
obtained at a special shareholders meeting
• Plan of arrangement
• a “merger” made by agreement with the
target, submitted for court approval after the
shareholders approve at a special meeting
Tax Structuring
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Tax Structuring
Use of cross-border Canco is generally the best
approach for both share and asset purchase
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Tax for the
Shareholders
Withholding Tax
• Withholding tax on dividends is 25%, generally
reduced by treaty to 5% or 15%
• Withholding tax on interest
• 0% if parties are arm’s length
• 25% reduced to 0% in Canada–US Treaty if parties
are NAL
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Competition Law and
Investment Canada
Act
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Competition Act
Notification Threshold:
Party size exceeds C$400million and acquired business size exceeds C$82 million
• More specifically, the parties, together with their affiliates, have assets in Canada, or annual gross revenues from sales in, from or into Canada, exceeding C$400 million and the assets in Canada of the acquired business, or the annual gross revenues from sales in or from Canada generated by such assets, exceed C$82 million’
• C$82 million threshold likely to be increased to C$86 million soon
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Investment Canada Act
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Review Threshold: Book value of target exceeds C$354 million
• lower thresholds apply to non-WTO investors or if target caries on a cultural business;
• C$354 million threshold to be increased to C$369 million soon
Review Process and Timing
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Competition Act:
• Where prescribed form submitted: 30 days, subject to extension if the Competition Bureau issues a Supplementary Information Request (SIR)
• Where ARC Request Submitted: Bureau will classify as “non-complex” or “complex”
• If “non-complex” Bureau will endeavor but is not required, to complete its review within 14 days; 45 days if “complex”
Investment Canada Act: • 45 days, subject to extensions
• large transactions with significant political implications tend to take several months
Tests in assessing a transaction
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Competition Act:
• Is the transaction likely to prevent or lessen competition substantially?
Investment Canada Act: • Is the transaction likely to be of net benefit to
Canada? (Finding based on undertakings given by investor. Tend to focus on employment, capex, and Canadian involvement in management)
Competition Act
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Possible Outcomes:
• Competition Bureau does not challenge transaction (vast majority)
• Competition Bureau does not challenge transaction based on concessions made by the parties, such as the divestiture of certain assets (rare)
• Competition Bureau challenges transaction (very rare)
Investment Canada Act
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Possible Outcomes:
• Most transactions are approved. Very few have been formally rejected
• For transactions that could raise significant political concerns, investors should not underestimate the importance an effective government relations strategy
• SOEs: Special rules apply
• National Security: Government can review and reject or condition any investment that could be injurious to national security
• It appears to have exercised this power conservatively
Take-Over
Bid ?
Plan of
Arrangement?
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Take-Over Bid
• Compulsory Acquisition
• If reach 90% acceptance, then the rest of the shares can be compulsorily acquired at the same price relatively quickly
• Second-Step Transaction
• Step One: acquire up to 66-2/3% of shares
• Step Two: shareholder meeting to acquire the balance
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Take-Over Bid
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Bid Conditions
In a take-over bid, the acquirer can specify
conditions that must be met or waived before it is
required to complete the offer or the bid lapses,
for example:
Acquisition of shares: Typically the
minimum specified is two-thirds of the
outstanding shares not owned by the
acquirer
Receipt of required regulatory approvals
No material adverse change
BUT
Financing must be in place before a bid is
launched
No “side deals”
Plan of Arrangement
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• Court-approved
• 66⅔% security holder approval
(generally)
• Permits a multi-step transaction to
meet tax and corporate objectives to
be completed in a single “step”
• If acquirer is offering shares as
consideration and target US
shareholders, US registration
exemption available
Tax Rules
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Tax Rules
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• Thin cap rules apply if debt:equity > 3:2
• Rigorous transfer pricing rules
• New and complicated foreign affiliate dumping rules
• Anti-treaty shopping rules in Canada-US Treaty
Q&A 29
Thank You
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