Recent M&A Trends. Presented by:

Transcription

1 Recent M&A Trends Presented by: Marlo Kravetsky, TD Bank Group Shlomi Feiner, Blake, Cassels & Graydon LLP Bradley Freelan, Fasken Martineau DuMoulin LLP Walied Soliman, Norton Rose Fulbright Canada LLP September 27, 2017

2 Agenda Canadian M&A market overview M&A process for public company boards Role of fairness opinions in M&A transactions Securities regulators and the public interest jurisdiction 2

3 H M&A Market Overview Number of Canadian transactions increased 10% from H Value of Canadian transactions increased 6% from H ,607 deals with aggregate value of US$141.9-billion most active target sectors were materials/mining (338), consumer staples (288), financials/real estate (277), technology/software (181), energy/power (163) 55% of deals are cross-border (any country with Canada): number of outbound deals increased 18% from H number of inbound deals increased 1% from H

4 H M&A Market Overview 4

5 [TBC] H M&A Market Overview 5

6 H M&A Market Overview Major Transactions Acquisitions of Canadian entities/assets: Cenovus Energy acquisition of Conoco Phillips Canadian conventional natural gas assets for $13B Canadian Natural Resources acquisition of Athabasca Oil Sands project from Shell for $8.2B Pembina Pipeline acquisition of Veresen for $5B Vista Equity Partners acquisition of DH Corp for $3.4B Acquisitions by Canadian entities abroad: AltaGas acquisition of WGL Holdings for $6.2B Consortium including bcimc acquisition of Endeavour Energy for $5.6B Consortium including CDPQ acquisition of USI Holdings for $4.3B Brookfield Asset Management acquisition of TerraForm Power for $3.8B 6

7 Multilateral Instrument Protection of Minority Security Holders in Special Transactions Establishes a securities regulatory framework for conflict of interest transactions Mitigates risks to minority security holders where a related party of the issuer, who may have significant influence or superior access to information, is involved in the transaction Underlying principle: that all security holders be treated in a manner that is fair and that is perceived to be fair Implements procedural protections for minority security holders: formal valuations enhanced disclosure approval by a majority of minority security holders Mandates the involvement of a special committee of independent directors in limited contexts (insider bids) 7

8 Published in July 2017 CSA Staff Notice Clarifies the role of the board and special committees of independent directors in negotiating, reviewing and approving or recommending material conflict of interest transactions, including disclosure obligations Material conflict of interest transactions includes insider bids, issuer bids, business combinations and related party transactions does not include transactions that are incidentally captured by MI (e.g., transactions that are business combinations only as a result of employment-related collateral benefits) 8

9 CSA Staff Notice (cont d) Provides guidance that must now inform the conduct of issuers party to material conflict of interest transactions: a special committee of independent directors should be constituted enhanced disclosure obligations, including meaningful discussion of the analysis provided by advisors and how such advice was considered by the board and special committee board and special committee have responsibility to determine if fairness opinion is necessary to assist in making recommendation to security holders Sets parameters for disclosure documents where a fairness opinion is obtained for a material conflict of interest transaction Remedies for non-compliance: timely corrective disclosure, appropriate orders under securities legislation or enforcement action 9

10 InterOil - Background Case has potentially significant implications for current market practice with respect to M&A board procedures, disclosure obligations and fairness opinions InterOil Corp. governed by Yukon Business Corporations Act Canadian reporting issuer and U.S. registrant Agreement of Oil Search to acquire InterOil announced on May 20, 2016 (subsequently terminated for superior proposal) Agreement of ExxonMobil to acquire InterOil announced on July 21, 2016 consideration is C$45 per share plus a contingent resource payment (CRP) of approximately C$7.07 for incremental reserves subject to a cap Former chairman (owner of 5.5%) opposed transaction Security holders representing approximately 10% of the shares exercised dissent rights Morgan Stanley & Co. provided InterOil board with U.S.-style fairness opinion in respect of transaction 10

11 InterOil Background (cont d) Transaction structured as a Yukon plan of arrangement, which requires determination of court as to fairness of transaction Fairness ruling granted by Supreme Court of Yukon on October 7, 2016, but stated reservations about process and governance Ruling overturned by Yukon Court of Appeal (constituting judges of the British Columbia Court) on November 4, 2016 Court of Appeal found the proposed plan of arrangement was not fair and reasonable, despite the fact that it received overwhelming shareholder support (80+% of votes cast) and the board was provided with a market standard form of fairness opinion Process undertaken by InterOil found to demonstrate inadequate shareholder disclosure and deficient corporate governance 11

12 M&A Process for Public Company Boards InterOil InterOil convened a special committee comprised of independent directors to review the plan of arrangement However, the committee did not conduct any separate meetings, review or consideration, or make any recommendations to the Board The plan of arrangement was only considered and approved by the full board, despite the fact that the completion of the transaction would trigger significant financial benefits for two management directors Court of Appeal found that the Board should have obtained independent advice as to financial fairness as it was incumbent on the Board to ensure that the arrangement negotiated by management reflected the fair value of the company The lack of independent consideration and review of the proposed plan of arrangement, including obtaining an independent financial fairness opinion and retaining independent advisors, were all red flags that required the Court to do more than accept the shareholder vote as a proxy for fairness Takeaway: a deficient corporate process for review and approval of the transaction will impact the Court s reliance on a board s recommendation as an indicia of fairness 12

13 M&A Process for Public Company Boards InterOil (cont d) Court of Appeal confirms that final approval of a plan of arrangement is contingent on the three criteria established by the SCC in BCE: the arrangement complies with all statutory and court-mandated requirements; the arrangement has been put forward in good faith; and the arrangement is fair and reasonable Factors that contribute to a plan of arrangement being procedurally and substantively fair to the issuer and its shareholders: plan of arrangement included independent fixed fee expert opinion committee of four independent directors oversaw the procedure prior to unanimous board approval of the plan of arrangement committee retained independent legal counsel and reviewed the past plan of arrangement, the present plan and the options available to the issuer 13

14 M&A Process for Public Company Boards InterOil (cont d) Court of Appeal provides a non-exhaustive list of considerations relevant to a court s assessment of a plan of arrangement: whether the arrangement, objectively viewed, is fair and reasonable whether the arrangement itself (i.e. its terms and impact) is suitable for approval whether the plan has a "valid purpose and is "necessary" to the continued operation of the corporation whether a majority of securityholders have voted to approve the arrangement whether the plan was approved by a special committee of independent directors the "proportionality of the compromise" between various security holders the securityholders' positions before and after the arrangement the presence of a fairness opinion from a reputable expert the access of shareholders to dissent and appraisal remedies Generally, the arrangement must strike a fair balance, having regard to the circumstances of the case and the ongoing interests of the corporation 14

15 M&A Process for Public Company Boards CSA Staff Notice Disclosure document should contain a meaningful discussion of the analysis provided by advisors and how such advice was considered by the board and the committee, including a thorough discussion of: the review and approval process the reasoning and analysis of the board and/or special committee the views of the board and/or special committee as to the desirability or fairness of the transaction reasonably available alternatives to the transaction, including the status quo the pros and cons of the transaction In its review of disclosure documents related to a material conflict of interest transaction, Staff will consider: whether disclosure requirements that enable security holders to make informed decisions have been complied with whether the process employed by the issuer s board in negotiating and reviewing a proposed transaction raises concerns that the interests of minority security holders have not been adequately protected whether the process was adequately disclosed Where board or committee discloses its reasonable beliefs as to the desirability or fairness of a transaction, disclosure should address the interests of minor security holders and not be limited to whether the transaction is in the best interests of the issuer 15

16 M&A Process for Public Company Boards CSA Staff Notice (cont d) In the context of a material conflict of interest transaction, a special committee of independent directors should be formed to ensure interests of minority security holders are fairly considered The special committee should be: formed prior to a proposed transaction being substantially negotiated; comprised entirely of independent directors; operating with a robust mandate, including the ability to negotiate or supervise the negotiations, consider alternatives to the proposed transaction, and make recommendations and engage its legal and financial advisors; and prepared to determine whether a fairness opinion is necessary to assist in making a recommendation to security holders Special committee should be permitted to carry out its responsibilities free from undue influence, coercion or threats, whether express or implied 16

17 Fairness Opinions Background Financial fairness in M&A boards now more careful in considering interests of various stakeholders (post decision of Supreme Court of Canada in BCE) Superior Proposal definition has not changed (still financially superior ) fairness opinions have not changed (still fair from a financial point of view ) however, in context of material conflict of interest transactions, special committee should consider the fairness of a proposed transaction from a broader perspective than just from a financial point of view (Staff Notice ) Reasonable investigation no statutory or common law obligation to obtain a fairness opinion (although in nearly all Canadian public deals, the target obtains one or more fairness opinions) assist the board in establishing that it acted in good faith and conducted a reasonable investigation establishes acting in due care and diligence in approving a transaction opinions are not provided for the benefit of shareholders, although they are typically disclosed and shareholders may take some comfort from them 17

18 Fairness Opinions Regulation Investment Industry Regulatory Organization of Canada (IIROC) regulates dealer members IIROC Rules a fairness opinion must meet IIROC standards if: prepared pursuant to securities laws or to be published in disclosure document in respect of a subject transaction (including an insider bid, issuer bid, goingprivate transaction, related-party transaction) Advisers must exercise professional judgment technical compliance with prescribed standards not acceptable substitute in some cases, can follow procedures (special committee approval) to exclude competitively and commercially sensitive information must contain disclosure sufficient to enable the directors and security holders of the particular issuer to understand the principal judgments and principal underlying reasoning so as to form a reasoned view Prescribed content includes, among other things: identity, credentials and relevant experience of adviser; financial terms of adviser s retainer; any relationship relevant to the adviser s independence; key assumptions and important factors considered; and any qualifications of limitations 18

19 Fairness Opinions InterOil Former chairman of InterOil challenged the plan of arrangement during the fairness hearing and took issue with the Morgan Stanley fairness opinion Apparently uncontested expert evidence presented on behalf of former chairman that opinion/process was deficient for a number of reasons: opinion failed to address the value of the CRP and the impact of the cap thereon opinion failed to include details of the compensation payable to the financial adviser second financial adviser whose compensation was not dependent upon the success or failure of the transaction should also have been engaged second financial adviser would also have ensured that the transaction negotiated by management reflected fairness in light of the significant compensation the CEO stood to realize upon the transaction s completion 19

20 Fairness Opinions InterOil (cont d) Superior Court determined that, based on three similar fairness opinions, the Morgan Stanley fairness opinion was deficient, as it contained no: reference to the specific documents that it reviewed facts or information to indicate what the opinion was based on analysis of the facts or information Superior Court concluded there was deficient corporate governance and inadequate disclosure, but nonetheless approved the arrangement Court of Appeal agreed with deficiencies identified by the Superior Court, questioning whether the shareholders had been adequately informed regarding the value of their shares and consideration to be received Took issue with the fact that the fairness opinion did not attribute any specified value to the CRP Given that management led the negotiation of the transaction and the CEO being conflicted, the Court of Appeal found that the Board should have sought independent advice as to the financial fairness of the transaction The independent opinion should have been for a fixed fee 20

21 InterOil Transaction No. 2 InterOil board reconvened transaction committee and retained BMO Nesbitt Burns (BMONB) to provide independent opinion on fairness of available strategic alternatives, with result that InterOil and ExxonMobil entered into an Amended and Restated Arrangement Agreement with increased cap on the CRP In connection with the new agreement, BMONB provided independent fairness opinion for a fixed fee that included: details regarding BMONB s compensation; details regarding the scope of items reviewed; analysis of the CRP; and details regarding BMONB s methodology and financial analysis Disclosure of such, and additional disclosure regarding the Morgan Stanley fairness opinion (in original form), was included in a new circular, as well as a report of InterOil s independent committee supporting the transaction Over 91% shareholder approval at the second shareholder meeting Superior Court approved the arrangement and provided further guidance on the approval of plans of arrangement in the Yukon courts noted that the fairness opinion and special committee disclosure provide a minimum standard for interim orders of any plan of arrangement also stated that [i]t is not acceptable to proceed on the basis of a Fairness Opinion which is in any way tied to the success of the arrangement 21

22 Fairness Opinions CSA Staff Notice In context of material conflict of interest transaction, board and special committee have responsibility to determine if fairness opinion is necessary to assist in making recommendation to security holders If an opinion is to be obtained, it is the responsibility of the board and committee to determine the terms of the financial compensation of the fairness opinion provider (flat fee, a fee contingent on the delivery of the final opinion or a fee contingent on the success of the transaction) Special committee should consider the fairness of a proposed transaction from a broader perspective than just from a financial point of view Special committee cannot substitute a fairness opinion for its own judgment as to whether a transaction is in the best interests of the issuer 22

23 Fairness Opinions CSA Staff Notice (cont d) Where a fairness opinion is obtained for a material conflict of interest transaction, the disclosure document should: disclose the compensation arrangement with the financial advisor (i.e. flat fee, fee contingent on delivery of the final opinion or fee contingent on successful completion of the transaction) explain how the board or special committee took into account the compensation arrangement with the financial advisor disclose any other relationship or arrangement between the financial advisor and the issuer or an interested party that may be relevant to a perception of lack of independence provide a clear summary of the methodology, information and analysis underlying the opinion sufficient to enable a reader to understand the basis for the opinion explain the relevance of the fairness opinion to the board of directors and special committee in deciding to recommend the transaction 23

24 Public Interest Jurisdiction Under section 127 of the Securities Act, the OSC has the power to make an order if in its opinion it is in the public interest to make the order, including an order: to cease-trade securities prohibiting the acquisition of securities by a particular person requiring an amendment to public disclosure documents Jurisdiction doesn t apply merely where shareholders treated unfairly; rather, must consider capital market efficiencies and public confidence in capital markets should be an abuse, rather than unfairness Public interest jurisdiction is protective and preventative, not remedial or punitive May take jurisdiction even where there is no breach of securities law if the transaction is clearly abusive of investors and capital markets 24

25 Dolly Varden Timeline Date September 2012 June 29, 2016 July 5, 2016 July 8, 2016 July 14, 2016 July 16, 2016 July 20/21, 2016 Event Hecla, an American senior silver mining company, became a significant (19.9%) shareholder of Dolly Varden, a junior Canadian mining company listed on TSX-V Hecla announced its intention to acquire all outstanding common shares of DV DV announced its intention to undertake a private placement to raise gross proceeds of up to C$6-million Hecla applied to the BCSC to cease-trade the private placement Hecla applied to the OSC to cease-trade the private placement; DV undertakes not to complete private placement until BCSC renders decision DV applied to the BCSC and OSC to cease-trade Hecla s bid BCSC and OSC held a joint hearing for both Hecla s and DV s applications 25

26 Dolly Varden Was a Valuation Required? Dolly Varden s application sought to cease-trade Hecla s bid Assertion was that Hecla did not obtain a formal valuation of the Dolly Varden shares (as required by Multilateral Instrument ) Commissions adopted different approaches and produced differing rulings on the matter OSC considered application under MI BCSC considered under public interest jurisdiction, as MI was not adopted in British Columbia at the time of the application 26

27 Dolly Varden Was a Valuation Required? OSC Position Valuation required for insider bid, absent exemption Question whether exemption applicable because Hecla had neither (a) board or management representation at Dolly Varden in the 12 months preceding the bid, nor (b) knowledge of material information concerning Dolly Varden or its securities that had not been generally disclosed board/mgmt. representation may be formal/informal; onus on bidder to demonstrate no such representation material information material fact/change or information that would reasonably affect shareholder s decision to accept/reject bid; again, onus on bidder OSC concluded Hecla had board representation based on Hecla s close relationship to Dolly Varden s interim CEO (she was prior consultant to Hecla; seconded from Hecla to Dolly Varden) Hecla bid was cease-traded until it provided the formal valuation 27

28 Dolly Varden Was a Valuation Required? BCSC Position As MI not adopted in B.C. at time of application, BCSC considered under public interest jurisdiction Given the impact of cease-trading the bid, BCSC considered narrow application of public interest power appropriate Commission did not find Hecla possessed material undisclosed information such that the bid, absent a valuation, would be an abuse of capital markets or investors BCSC considered the valuation placed on the Dolly Varden shares through the private placement, which was the product of an arm s-length negotiation; BCSC concluded that a formal valuation would not have provided better insight to shareholders 28

29 Eco Oro Timeline Date July 2016 November 2016 February 2017 March 10, 2017 March 16, 2017 March 23/27, 2017 April 24, 2017 Event Eco Oro enters into investment agreement with Trexs, with shareholder approval to be sought for second tranche of private placement; similar agreements entered into subsequently with other investors, including executive chair of Eco Oro Shareholder approval not obtained, and Trexs issued CVRs and convertible notes Shareholder meeting requisitioned for reconstitution of Eco Oro board (with meeting scheduled for April 25 and record date of March 24) TSX grants conditional approval for the issuance of shares to satisfy partial prepayment of convertible notes Eco Oro announces repayment of convertible notes through share issuance Dissidents file petition in Supreme Court of B.C.; dissidents apply to OSC and BCSC to appeal TSX s approval; alternative relief sought pursuant to the OSC s public interest jurisdiction under s. 127 of the Securities Act (Ontario) OSC issues order; Supreme Court of British Columbia issues decisions 29

30 Eco Oro OSC TSX approval of the private placement is set aside Eco Oro is required to obtain shareholder approval of the private placement at a meeting of shareholders to be held prior to September 30, 2017, seeking to either: ratify the issuance of the shares, or instruct the board of directors of Eco Oro to take all necessary steps to reverse the issuance of the shares If so approved by its shareholders, Eco Oro is required to take all steps to reverse the issuance of the shares Reversing transactions, even at the direction of shareholders, cannot be undertaken lightly in cases where the share issuance in question has closed, the Commission must consider whether there are considerations relating to the affected parties or the public interest that outweigh the benefit conferred on the Applicants by rendering a meaningful decision to require a shareholder vote on the issuance of the new shares any complexity in such a reversal is outweighed by the public interest in that it does not take away the right to have an appropriate vote of shareholders on the composition of Eco Oro's Board and the future direction of the company 30

31 Eco Oro OSC (cont d) OSC sees its role as ensuring that listing standards, which are required to be approved by the Commission as consistent with the public interest, are properly administered The public interest requires an evaluation of whether an issuance of shares by a listed issuer is for the purpose of entrenching management in the face of a proxy contest such a purpose would thwart the justified expectations of shareholders trusting in a system that appropriately promotes shareholder democracy and board accountability Whether a board should be reconstituted is a decision to be made by the shareholders without management being permitted to manipulate the vote to allow a vote to be tainted by such conduct would directly affect the integrity of Ontario capital markets and be contrary to the Commission s mandate and the public interest 31

32 Eco Oro OSC (cont d) OSC identified four factors that it considers relevant in determining whether it is in the public interest to order that a transaction be unwound: whether the issuer afforded those who it knew were likely to object to the transaction an opportunity to raise objections to the TSX in advance of closing, including by means of a press release issued sufficiently in advance of closing; whether those directly affected by the reversal of the transaction entered into the transaction knowing of the likelihood of objections; whether those directly affected by the reversal of the transaction had an opportunity to be heard and/or make submissions; and whether it is impractical for the transaction to be reversed in the circumstances 32

33 Eco Oro Supreme Court of B.C. Dismissed petition brought by dissident shareholders Concluded issuance of shares was not oppressive and was done in accordance with investment agreements previously entered into Primary purpose was to reduce debt of Eco Oro Share issuance was a reasonable exercise of board s discretion and court should defer to business judgment of the board Ordered the Eco Oro shareholders meeting adjourned to a date determined by the board prior to September 30, 2017, in order to address the conflicting determinations by the court and the OSC 33

34 Liquor Stores Timeline Date November 2016 January 2017 January 23/April 7, 2017 June 7/8, 2017 June 8, 2017 June 13, 2017 July 18, 2017 Event Liquor Stores and PointNorth (holding ~10% of Liquor Stores common shares) discuss PointNorth s desired representation on the Liquor Stores Board Liquor Stores forms special committee of independent directors to assist Board in its response to anticipated proxy contest initiated by PointNorth PointNorth rejects Liquor Stores offers of one and two seats on the Board Liquor Stores announces recommendation of advisory firm that proxies be exercised in favour of Liquor Stores candidates, as well as formation of a soliciting dealer group PointNorth issues news release strongly criticizing the soliciting dealer group plan, maintaining the scheme was clearly not in the public interest PointNorth applies to the Alberta Securities Commission (ASC) for orders that would, among other things, terminate the soliciting dealer group plan ASC issues decision 34

35 Liquor Stores ASC has broad but not unlimited powers to act protectively and preventatively in the public interest, even in the absence of a contravention of securities laws Standard test for public interest jurisdiction: whether the impugned conduct was clearly abusive to shareholders and the capital market proper scope of public interest jurisdiction in this case is to determine whether the soliciting dealer group plan was clearly abusive, in that it caused actual or potential harm to shareholders and the capital markets in general there is a necessary element of flexibility to the clearly abusive test, but ASC emphasizes need for caution and awareness of consequences in the context of proxy solicitations, it would create uncertainty if the ASC based its decision on a standard lower than clearly abusive 35

36 Liquor Stores (cont d) Use of public interest jurisdiction unwarranted in this case ASC refuses to speculate in an evidentiary vacuum PointNorth failed to establish actual or potential harm caused by the plan concerns about skewing or undermining the capital market did not equate to actual harm PointNorth failed to provide evidence that brokers would violate their legal and ethical duties Clearly abusive test is only appropriate where securities laws articulate specific acts which constitute misconduct securities regulators have not banned soliciting dealer plans ASC s public interest mandate does not include imposing new policy requirements 36

37 Contact Information Marlo Kravetsky TD Bank Group Shlomi Feiner Blake, Cassels & Graydon LLP Bradley Freelan Fasken Martineau DuMoulin LLP Walied Soliman Norton Rose Fulbright Canada LLP Tel: Tel: Tel: Tel: