Cross-Border M&A

Canada is Open for Business

www.gowlings.com

2

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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