How U.S. Companies Can Enter the Canadian Market
Friday, October 25, 2019
By Kent Kufeld, partner and national practice group leader, BLG Securities and Capital Markets Group
Canada is an attractive place for businesses interested in establishing a presence in another country. Canada presents a stable economy and a welcoming environment for international investors. In this article, we will discuss the ins and outs of public M&A transactions for any company interested in the Canadian market. From plans of arrangement and takeover bids to acquiring a minority interest in a company and advising on the Investment Canada Act, find out how you can gain a foothold in Canada.
Canada’s Open Economy with Few Significant Regulatory Requirements
As an open economy, Canada has very few limitations on foreign investment. Throughout the years, Canada has seen investment from all over the world into many sectors of the Canadian economy. Not surprisingly, investment from the United States is considerable, but we have also seen many M&A transactions originating from Europe and more recently from Asia.
There are very few significant regulatory requirements that must be satisfied when conducting a public M&A transaction in Canada. Our principal foreign investment review legislation is known as the Investment Canada Act and it applies when a non-Canadian purchases a Canadian business. Over the last number of years, the review thresholds applicable to M&A transactions have been increased so that only high-value transactions are subject to review. In particular, direct investments involving Canadian businesses by investors from WTO member nations are only reviewable where they have an enterprise value in excess of just over $1 billion. Similarly, where the investment originates from a country with whom Canada has in place a multilateral or bilateral trade agreement, transactions only become reviewable when they involve an enterprise value of slightly over $1.5 billion.
There are, however, a few exceptions to these review thresholds. Lower thresholds apply to acquisitions of cultural businesses such as publishing, film, music, and broadcasting. In addition to the Investment Canada Act, certain industries, such as banking and airlines, have specific foreign ownership restrictions.
Should a transaction be reviewable, that review typically takes between 45 and 75 days following the announcement of the transaction. As is the case in the United States, there is also a national security test similar to the US CFIUS process, which can potentially prohibit a transaction that raises national security issues. The national security test is very broad and should always be considered in transactions that have a connection to Canada’s defense industry, sensitive technologies or which involve companies critical to the provision of goods and services to Canadians.
Typical Types of Public M&A in Canada
In Canada, the principal form for a public M&A transaction is what is known as a plan of arrangement transaction. A plan of arrangement is completed under Canadian corporate law statutes and usually involves a negotiated transaction between the purchasing company and the target. A plan of arrangement requires the approval of the target company’s shareholders on a special majority basis (typically two-thirds approval). In addition, a plan of arrangement must be approved by a Canadian court, which assesses the fairness and reasonableness of the transaction. A plan of arrangement is the acquisition structure of choice for almost all negotiated transactions because by its nature, it is a flexible form of transaction that can address securities law, tax law and corporate commercial considerations all in the same transaction. It also has the advantage of resulting in the acquisition of 100% of the target company in a single step as long as the transaction receives the approval of two-thirds of those shares voted at a meeting held to consider the transaction.
Another typical form of public M&A transaction is a takeover bid. Takeover bids are subject to the rules of the Canadian securities regulators and involve an offer made by the purchasing company directly to a target company’s shareholders. Often takeover transactions are negotiated, however, takeover bids can also be conducted on a hostile basis with an offer made directly to a target company’s shareholders without the support of the target company or its board of directors.
Unlike a plan of arrangement, there is a possibility that a takeover will require a two-step process to arrive at 100% ownership, adding time and cost to a transaction. This is because where less than 90% of a target company’s shareholders accept the offer, a second stage plan of arrangement or amalgamation transaction would be required to purchase the remaining shares. The possibility of requiring a two-step transaction process to complete an acquisition has resulted in the plan of arrangement structure becoming the dominant form of M&A transaction in Canada.
Use of Hostile or Unsolicited Acquisitions in Canada
Hostile transactions are permissible in Canada and are generally conducted by way of a takeover bid. Recent changes in our Canadian securities laws have required that an unsolicited takeover bid remain open for acceptance for at least 105 days and that before an acquiring company can take up shares tendered to the takeover bid, at least 50% of the target company’s shares must be tendered in acceptance of the offer. While the 105 days represents a long time to have an offer remain open for acceptance, our Canadian securities regulators have balanced this by severely restricting and monitoring the ability of a target company to conduct defensive tactics that could stop a bid from being considered by its shareholders. In the event that the transaction turns friendly, the target company has the ability to shorten the deposit period.
Considerations for Acquiring a Minority Interest in a Canadian Target
It is common to see investors from outside of Canada undertake minority investments in Canadian businesses prior to undertaking a merger transaction. Like other jurisdictions, acquisitions of minority interests in public Canadian companies can trigger reporting requirements. Any acquisition of greater than 10% of a public company requires the preparation and filing of an early warning report and insider reports similar to the filings required under US securities laws. In Canada, an acquisition through public market purchases of greater than 20% of a company’s issued and outstanding shares will generally trigger the application of our takeover bids rules and the necessity to make an offer to all shareholders. Therefore, it is very common for parties seeking to obtain a minority interest to limit their purchases to no more than 19.9% of a target company’s shares.
Once a decision is made to acquire additional shares, a takeover bid or plan of arrangement transaction can be undertaken by the investor. Depending on the circumstances, special rules may apply to a merger and acquisition transaction conducted by an insider of the Company. These rules can trigger enhanced governance requirements and independent valuation requirements of the shares of the target company.
As the rules regarding minority investments and a subsequent go-private transaction can be somewhat complex, it is always recommended that purchasers looking to undertake a minority investment do so in consultation with Canadian legal advice to ensure compliance with the rules during the acquisition and any follow-on M&A transactions.
Borden Ladner Gervais LLP
As Canada’s largest law firm, BLG is well-organized to assist clients from all over the world who are looking to undertake a public M&A transaction in Canada.
For more information on how U.S. companies can excel within the Canadian market, refer to Borden Ladner Gervais’ Legally Educated – BLG Video Series for valuable insights on today's major news-making industries.
Category: Economic Development