Negotiating Competition Act and Investment Canada Act ... PDFs... · Regulatory provisions in M&A...

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Negotiating Competition Act and InvestmentCanada Act Terms in M&A Agreements

Essentials of Commercial Contracts

29 May 2013

Omar Wakil

15435262.1

Introduction

Overview

Competition Act notification and review

Investment Canada Act notification and review

Regulatory Terms

Representations

Conditions

Covenants

Negotiating Competition Act and Investment Canada Act Terms in M&A AgreementsEssentials of Commercial Contracts

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Competition Act Notification and Review

Pre-merger notification may be required where:

Parties’ assets or revenues >$400 MM; and

Target’s assets or revenues >$80 MM

Parties must submit pre-merger notificationor request an exemption (Advance Ruling Certificate)

Parties may close after expiry of waiting periods,receipt of “no action letter” or receipt of ARC

Parties are legally entitled to close after the expiryof waiting periods, but reviews can last longer

Negotiating Competition Act and Investment Canada Act Terms in M&A AgreementsEssentials of Commercial Contracts | 2

ICA Notification and Review

The acquisition of control of a Canadian businessby a non-Canadian may require foreign investmentapproval under the ICA

Whether approval is required depends upon:

Value of the assets of Canadian business

Structure of transaction (direct or indirect)

Nationalities of vendor and buyer (whether or notthey are “WTO investors”)

Whether the Canadian business is “cultural”

National security reviews are also possible


Overview of Regulatory Objectives

Regulatory provisions in M&A agreements:

Identify approval requirements (representations andconditions)

Set out what the parties will do to obtain approval(covenants)

Allocate risks (conditions and covenants)


Regulatory Uncertainty has FocussedAttention on Risk Allocation

Vigorous competition enforcement in Canada andabroad

Agencies have both blocked large mergers andchallenged small, non-reportable transactions

Agencies in developing jurisdictions can require longreviews and impose unusual remedies

Governments have shown an unprecedentedwillingness to block transactions on other grounds

Investment Canada and CRTC in Canada

CFIUS in the US

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Key Regulatory Terms

Representations and Warranties

Conditions

Covenants


Representations

Assurances about the factual/legal characteristicsof the buyer or seller

Typical regulatory representations confirmwhether regulatory approvals are needed to close

Confirmation of approval requirements; or

Confirmation that assets/revenues are belownotification thresholds

ICA representations may also confirm that

the buyer is not a “non-Canadian”

the buyer or seller is a “WTO Investor”

the target is not a cultural business


Conditions - Overview

State of affairs that must exist in order for the buyer orseller to close

Identification of regulatory approvals that are needed toclose

Substance may be set out in the “conditions” section orin the “definitions” section


Conditions

Competition Act conditions typically range from:

no legal impediment to closing (e.g., expiry of waitingperiods), to

positive approval (e.g., ARC or no action letter)

Investment Canada Act conditions require:

“Net benefit” approval


Conditions…cont’d

Other issues

Foreign filings

Material vs. non-material filings

Non-notifiable transactions

No injunction or investigation


Conditions – Negotiating Perspectives

Buyer’s perspective:

Avoid post-closing investigation or remedy

Divestiture/extensive investigation could reduce the value ofacquired business

Seller’s perspective:

“Take the money and run”; or

Secure approval because

Risk of unwinding the transaction

Seller may take shares for consideration and have acontinuing interest in buyer


Covenants - Overview

Obligations of parties in respect of their conductbetween signing and closing

Identification of actions to be taken to satisfy regulatoryclosing conditions

Normally relate to timing of submission of filings and co-operating to complete reviews

Can also specify other actions to be taken to secureapproval, such as asset sales


Covenants

Filing deadlines and ongoing responsiveness

Timing of initial filing and responding to agencies’information requests

Regulatory co-operation

Exchange of information needed to completesubmissions

Treatment of external counsel material

Review and approval of agency submissions

Participation in conference calls and meetings


Covenants…cont’d

Obligations to address regulator’s concerns

Unlimited “Hell or High Water” clauses

Buyer must agree to any remedy

“Best efforts” likely imposes similar obligations

May result in unexpected outcomes: e.g., unusual remedydemands from non-mainstream regulators

Limited covenants that define actions to be taken

Side letters are sometimes used to avoid giving agencies“roadmaps” to potential problems

Commercially reasonable efforts

Likely do not impose a divestiture requirement


Covenants…cont’d

Other issues

Obligations to contest or appeal opposition by regulators

This interacts with the HOHW/efforts provisions as well asoutside date deadlines

long outside date = greater ability to challenge regulators

short outside date = greater pressure to offer remedies

Obligations to pay

filing fees

legal and third party costs (e.g., for responding toSupplemental Information Requests)


Covenants – Negotiating Perspectives

Buyer’s perspective:

Avoid inconsistent communication to regulators

Avoid or quantify maximum scope of remedies

Access information for regulatory processes andintegration planning

Assure seller of ability to obtain approval


Covenants – Perspectives…cont’d

Seller’s perspective:

Ensure expeditious regulatory review/closing

Ensure that buyer is committed to the transaction

Both:

Clarify who is to pay regulatory costs

Avoid deterioration in seller’s business


Non-competition covenants

Are non-compete provisions:

Compliant with the Competition Act?

Enforceable at Common Law?

Under the Competition Act

An agreement between competitors to not competemay breach the criminal conspiracy offence

However, reasonable non-compete provisions in M&Aagreements are unlikely to be a concern

Consideration should be given to whether a non-competemay substantially lessen competition


Non-competition covenants

At Common Law

Restrictive covenants must be reasonable withregard to the interests of the parties and public

Scope (business and geography) and duration

Otherwise compliance with the Competition Act


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Negotiating Competition Act and Investment Canada Act ... PDFs... · Regulatory provisions in M&A...

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