The document summarizes a breakfast seminar that covered recent developments in mergers and acquisitions. It included discussions on:
1. The Investment Canada Act and its net benefit test for foreign acquisitions, referencing the BHP Billiton rejection of PotashCorp.
2. Income trusts returning with recent transaction structures that avoid SIFT taxation rules.
3. The 2011 Canadian budget ending the deferral of partnership income for corporate partners.
4. A Supreme Court of Canada case on a national securities regulator.
5. Proposed changes to Toronto Stock Exchange minimum listing requirements for large resource issuers.
6. Updates on poison pill defenses in takeover bids.
1. FMC Breakfast Seminar
Recent Developments in
Mergers & Acquisitions
Toby Allan
Anne Calverley, Q.C.
Brian Foster, Q.C.
Bill Gilliland
April 20, 2011
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2. Overview
• Investment Canada Act – The Net Benefit Test
• Income Trusts – Back from the Crypt
• 2011 Budget Measures
• Supreme Court of Canada – National Securities Regulator
• TSX Minimum Listing Requirements – Large Resource Issuers
• Poison Pills – Update
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4. Reviewable Transactions
• Acquisition of control of a Canadian business by a non‐Canadian
• Thresholds:
– WTO Investors ‐ $312 million
– Others ‐ $5 million
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5. Net Benefit Test
• Acquisition likely to be of Net Benefit to Canada
• Determined by Minister of Industry
• Factors:
– Effect of investment on level and nature of economic activity in Canada,
including employment, resource processing, utilization of parts, components
and services produced in Canada and exports from Canada
– Degree and significance of participation by Canadians
– Effect of investment on productivity, industrial efficiency, technological
development, product innovation and product variety in Canada
– Effect of investment on competition
– Compatibility of investment with national industrial, economic and cultural
policies
– Contribution of investment to Canada’s ability to compete in world markets
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6. BHP Billiton Takeover of PotashCorp
• Proposed acquisition not likely to be of “net benefit to
Canada”
• Only second transaction to be rejected under Investment
Canada Act
– First was the proposed acquisition by Alliant Techsystems of
Macdonald Dettwiler and Associates rejected in 2008
• National Security Concerns
• Political decision?
• Impact on future acquisitions – TMX/LSE
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9. In T r s a r e aa a k
com e u st B
Income
Trusts
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10. Recent Transactions
• The SIFT rules only apply to income earned by a publicly listed or traded
partnership or trust from a business that is carried on in Canada.
• The SIFT rules do not apply to:
(a) entities that are not publicly listed or publicly traded (i.e. most private entities
funded by private placement); or
(b) publicly listed or traded trusts or partnerships that do not carry on business in
Canada.
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11. U.S. Optimus Real Estate Fund
Structure ‐ 2008 Unitholders
Investors
Distributions from MFT Mutual Fund Trust Units
MFT Optimus
US Real Estate
75% Debt Fund 25% Equity
net rental income
capital gain
Optimus Canadian GP Optimus Canadian LP
75% Debt 25% Equity
rental income
US – Optimus LP
(sheltered by interest
(US real estate)
expense) and capital
gains (subject to 15%
rate of tax).
This transaction was undertaken by way of private placement.
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12. Eagle Energy Trust ‐ 2010
Unitholders
Distributions Promoter
Investment in Units
*
Eagle Energy publicly listed
Trust Mutual Fund
(Alberta Trust) Trust
EEI Holdings Inc.
Investment in (Alberta Co.)
Interest on CT Notes
Commercial Trust
and income and return of
Notes and Units
capital on CT Units
* CT Trustee Eagle Energy Inc.
Eagle Energy
(Alberta Co.)
Commercial Trust
(Alberta Trust)
Investment in LP
Income and
return of capital
Eagle Energy
Acquisition LP General Partner Eagle Energy US GP LLC
(Delaware LP) (Delaware LLC)
* Both trusts elected to be treated as
corporations for US tax purposes. Interest
expense and drilling costs provide significant
tax shelter.
Oil and Gas Assets
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13. New Income Trusts
• Parallel Energy Trust (Final prospectus filed
• Exit Strategy for private owners of assets
• Management / Operations
• Additional acquisitions
• Non‐resident ownership rules
• U.S. ownership
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15. The End of Partnership Deferral
• New rules do not apply to partners with less than a 10% partnership
interest;
• All other corporate members of partnerships will have to accrue
partnership income that is presently deferred;
Example:
A Co.
A Co’s share of partnership
Dec 31 YE
income for its fiscal year
ending Jan 31, 2012 is $10
million.
GP Co
A Co’s “Stub period accrual”
(i.e. income inclusion as at
Dec 31, 2011) is $10 million
Partnership
Jan 31 YE x 11/12.
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16. The End of Partnership Deferral
• The “Stub Period Accrual” will be included in a corporate partner’s income
over a 5 year period, commencing 2012;
• The new rules will come into effect for corporate partners with fiscal
periods ending after March 22, 2011;
• Separate new rules will be introduced for multi‐tier partnerships, the
biggest of which will be to force them to elect a common partnership year‐
end.
• All Partnerships will have a one time opportunity to elect to change their
fiscal period to any selected date.
• If no election filed, partnership fiscal year‐end becomes December 31st.
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17. Continuing Benefits of Partnership
Structures
1. Tax Consolidation
Parent Co.
CEE/CDE/COGPE
GP Co
P1 P2
Startup losses Profitable Business
Income and losses are consolidated in Parent Co. Resource deductions are
also deducted by Parent Co.
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18. Continuing Benefits of Partnership
Structures
2. Tax “Bump” for “after‐acquired Property”
Parent
GP Co GP Co
$100M ACB
Partnership A
increase in tax basis
increase in tax basis
Tax free rollover
of disposition
assets
Sub Co Partnership B
• On the wind‐up of Partnership A the $100M ACB of its partnership units
can be used to increase the tax basis in shares of Subco and/or units of
Partnership B regardless of when either subsidiary entity was formed
and regardless of when either entity acquired assets.
• Where a corporation is wound‐up, such an increase is only available in
respect of assets owned at the time that Parent acquired control of the
corporation.
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19. Continuing Benefits of Partnership
Structures
A Co. B Co.
contributes
resource
property contributes cash
Partnership
• A Co may be allocated deductions relating to contributed resource
property (i.e. COGPE (oil and gas property) or CDE (mining property)).
• B Co may be allocated resource deductions relating to its cash contribution
(i.e. CDE (development drilling) or CEE (exploration drilling)).
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22. 2011 Budget Measures affecting Oilsands
Mines and Oil Shale Mines
• Subject to transitional rules, costs incurred to bring oilsands and oil shale
mines into commercial production will be CDE (30%) rather than CEE
(100%)
Transitional Rules for Oilsands and Oil Shale Mines
• Costs incurred to bring oilsands and oil shale mines into commercial
production will continue to qualify as CEE for:
(i) Expenses incurred before March 22, 2011; and
(ii) Expenses incurred before 2015 in respect of new mines on which major
construction began before March 22, 2011.
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23. 2011 Budget Measures affecting Oilsands
Mines and Oil Shale Mines
Transitional Rules for Oilsands and Oil Shale Mines
• For all other expenses the transition of the treatment of these expenses from
CEE to CDE will be phased in, during which time the amount of such expenses
will be required to be allocated between CEE and CDE on the following basis:
Year 2011 2012 2013 2014 2015 2016
CEE proportion 100% 100% 80% 60% 30% ___
CDE proportion ___ ___ 20% 40% 70% 100%
5742200
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28. Contingent Resources Requirement
• Contingent resources requirement consistent with exemptions
granted to date
• Intended to set high standard
• Certain resources may be excluded based on the nature of the
contingency
– e.g. where the technology under development is not sufficiently
advanced to extract the resource
• Calculated as net present value of future cash flows before
income taxes, prepared on a forecast basis, and discounted at
10%
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32. NATIONAL POLICY 62‐202
TAKE‐OVER BIDS – DEFENSIVE TACTICS
• Canadian securities regulatory authorities appreciate that
defensive tactics, including those that may consist of some of
the actions listed in subsection (4), may be taken by a board of
directors of a target company in a genuine attempt to obtain a
better bid.
• Tactics that are likely to deny or limit severely the ability of the
shareholders to respond to a take‐over bid or a competing bid
may result in action by Canadian securities regulatory
authorities.
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35. MDC Corporation and Regal Greetings & Gifts
Inc. (1994 LNONOSC 211)
In our view, our determination of where the public interest lies required us,
in this case, to consider two principal questions.
– If the Plan is permitted to remain in effect for a reasonable further
period, is there, on the evidence, a reasonable possibility that a better
offer will come along during the period so that, whether or not this
results in MDC raising its bid, the shareholders of Regal will be
advantaged?
– If the Plan is not terminated prior to the end of the current period for
the acceptance of the bid, is it likely that RGG will not extend the
period for acceptance for such "reasonable further period", and thus
deprive the Regal shareholders of the opportunity to decide whether
they wish to accept the RGG bid?
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41. Royal Host Real Estate Investment Trust
(1999 LNONOSC 594)
– whether there is broad shareholder support for the continued
operation of the plan;
– the size and complexity of the target company;
– the other defensive tactics. if any, implemented by the target
company;
– the number of potential, viable offerors;
– the steps taken by the target company to find an alternative bid or
transaction that would be better for the shareholders;
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42. Royal Host Real Estate Investment Trust
(1999 LNONOSC 594)
– the likelihood that, if given further time, the target company will be
able to find a better bid or transaction;
– the nature of the bid, including whether it is coercive or unfair to the
shareholders of the target company;
– the length of time since the bid was announced and made;
– the likelihood that the bid will not be extended if the rights plan is not
terminated.
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43. Pulse Data Inc. (2007 ABASC 895)
• Bid for all.
• Plan put in place in face of offer.
• Permitted bid definition included 50% tender by independent shareholders.
• Overwhelming recent informed shareholder approval of plan ‐ in face of the offer –
shareholders new the offer would be lost.
• No auction.
• Pulse shortened time period under the plan that a bid needed to remain open to the day
before the hearing – takes time out of the picture – only issue is compliance with the terms of
the plan.
• Plan not in the way of the bid so long as in fact shares taken up so as to comply with the
terms of the bid.
• No evidence of coercion or undue pressure on shareholders to approve the plan.
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44. Pulse Data Inc. (2007 ABASC 895)
• In our view, this very recent and informed Pulse Shareholder approval
(less than one week before hearing), given in the absence of any
imminent alternatives to the Offer, demonstrated that the
continuation of the Rights Plan as at 27 September 2007 was in the
bona fide interests of Pulse Shareholders.
• We further clarified that this decision does not preclude any party
from making further applications to the Commission should
circumstances change.
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45. Neo Material Technologies Inc. and Pala
Investments Holdings Limited
• Partial Bid.
• Purpose of the plan was to stop "creeping takeovers".
• Shareholder approval obtained – overwhelming support –institutional
investors voted for the plan even though their general policy was to vote
against plans that precluded partial bids.
• Shareholder Approval needs to be informed – terms of the plan and
implications of vote.
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56. Baffinland Iron Mines Corporation (2010 OSC)
• Unsolicited bid for all shares by Nunavut Iron Ore.
• Outstanding for 57 days.
• Baffinland rights plan already approved by shareholders.
• Baffinland subsequently entered into support agreement with
ArcelorMittal re: a higher bid.
• Support agreement includes covenant not to solicit competing
offers.
• Nunavut says only obstacle to increasing offer price is rights
plan.
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57. Baffinland Iron Mines Corporation (2010 OSC)
• In our view, it is generally time for a shareholder rights plan
"to go" when the rights plan has served its purpose by
facilitating an auction, encouraging competing bids or
otherwise maximizing shareholder value.
• A rights plan will be cease traded where it is unlikely to achieve
any further benefits for shareholders.
• Notwithstanding the principles referred to above, at the end of
the day, there is no one test or consideration that constitutes
the "holy grail" when deciding whether a rights plan should
remain in place or be cease traded.
• Royal Host Factors.
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58. Baffinland Iron Mines Corporation (2010 OSC)
• The auction is not yet over although, as a practical matter, it is unlikely that a third
bidder will be prepared to make an offer.
• Clearly, Nunavut is considering its response to the ArcelorMittal Offer and may
increase that offer.
• Accordingly, in our view, it is not necessary for the Rights Plan to remain in place in
order to facilitate an auction; there are now two competing bids on the table.
• Based on the evidence before us, we have concluded that there is no real and
substantial possibility that Baffinland will be able to increase shareholder choice by
keeping the Rights Plan in place (see Re MDC Corp., 1994 LNONOSC 211).
• Accordingly, there is an obvious potential benefit to Baffinland shareholders if the
Commission immediately issues an order cease trading the Rights Plan: Baffinland
shareholders may potentially receive a higher offer from Nunavut. In our view, the
fact that Nunavut has not disclosed whether and on what terms it would be
prepared to increase its offer does not change that analysis.
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59. Baffinland Iron Mines Corporation (2010 OSC)
• Baffinland has also submitted that we should consider the
factors discussed in Royal Host (see paragraph 30 of these
reasons) "through the lens of deference to the reasonable
business judgment of the target company's directors" as
contemplated in Re Neo Material Technologies. We do not
agree.
• In Neo, the Commission concluded that it would defer to the
wishes of shareholders who had overwhelmingly voted to keep
the relevant rights plan in place in the face of the specific bid
that was before shareholders at the time of the vote.
• The vote was held only two weeks before the hearing.
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60. Baffinland Iron Mines Corporation (2010 OSC)
• Having concluded that it should do so, the Commission then
asked whether there were any circumstances that would lead
it to a different conclusion.
• One such consideration was whether or not the board of
directors of Neo was acting in accordance with its fiduciary
duties in having decided not to solicit competing bids.
• If the board was not complying with its fiduciary duties that
might have led the Commission to cease trade the Neo rights
plan regardless of the shareholder vote (although whether the
Commission would have done so is an open question).
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61. Baffinland Iron Mines Corporation (2010 OSC)
• Accordingly, in our view, Neo does not stand for the proposition that the
Commission will defer to the business judgment of a board of directors in
considering whether to cease trade a rights plan, or that a board of
directors in the exercise of its fiduciary duties may "just say no" to a take‐
over bid.
• Such a conclusion would have been inconsistent with the provisions of NP
62‐202 and the relatively long line of regulatory decisions that began with
Canadian Jorex. To the contrary, the Commission in Neo deferred to the
wishes of shareholders as contemplated by NP 62‐202.
• Neo suggests only that whether or not the board of directors of a target
issuer is acting in the best interests of that issuer and its shareholders, and
is complying with its fiduciary duties, is a relevant, although secondary,
consideration for the Commission in deciding whether to cease trade a
rights plan.
• Whether a board of directors is complying with its fiduciary duties does not
determine the outcome of a poison pill hearing.
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