As expected, 2021 was a blockbuster year for M&A transactions in Canada, with parties adapting to the impact of the COVID-19 pandemic and seeking opportunities in the economic recovery. Canadian M&A activity hit record highs in terms of aggregate value. Private equity and venture capital activity also exceeded pre-pandemic levels.

However, the outlook for 2022 is highly uncertain. In January 2022, many jurisdictions in Canada re-imposed the most severe forms of COVID lockdown to address the Omicron variant and the Bank of Canada promised to increase interest rates in the face of significant inflationary pressures.

Appallingly, on 24 February 2022, Russia invaded Ukraine, leading to a devastating humanitarian crisis and a significant upheaval of the global economy, including unprecedented sanctions by Canada and other Western nations. The impact of these events on capital markets and M&A in Canada is yet to be determined. Refinitiv has reported that M&A activity in Canada declined 45% in the first quarter of 2022 and equity financings plummeted 81%. However, the impact varies by sector, as gaming, energy, and financial services had stronger starts to the year. Private equity M&A is expected to make up a larger portion of M&A activity overall and shareholder activism is expected to increase in 2022.

Key factors affecting M&A activity in Canada in 2021 included the following.

• Open capital markets, low interest rates, strong commodity prices and a broader economic recovery led to increased and sustained M&A activity throughout 2021, including a return of cross-border activity, mainly with the USA.
• Market participants adjusted to remote work. Increased vaccination rates in Canada through 2021 led to a loosening of cross-border travel restrictions.
• Canadian government pandemic support programmes were extended through 2021.
• ESG continued to be a driver of deal activity. Many publicly traded energy companies are being pressured into divesting fossil-fuel assets.
• The popularity of special purpose acquisition companies (SPACs) in Canada began to recede. While new SPAC listings in Canada decreased, the average value of Canadian SPACs increased. Canadian private companies are still attractive targets for foreign SPACs.
• Large transactions returned to the headlines in 2021, mostly in telecommunications, infrastructure and financial services.

After a record 2021 for M&A in Canada, the outlook for 2022 is uncertain.

• The continuing imposition of strict COVID measures in January 2022 led to mass protests and the blockade of major Canada–USA border crossings, resulting in significant losses for many industries, including an estimated USD1 billion loss for the auto industry alone.
• Mask, vaccine and physical distancing mandates have been significantly reduced. Though border measures have been relaxed since February 2022, travel restrictions for most unvaccinated international travellers to Canada remain in place.
• So far in 2022, the Bank of Canada has raised its key interest rate by 0.75% as inflation rose to above 5%. The Bank of Canada is expected to continue to increase rates in 2022.
• Supply chain disruptions and a labour shortage resulting from the pandemic will continue to limit growth aspirations.
• Stock market valuations, particularly in the technology sector, have taken a big hit so far in 2022, with Shopify, one of several Canadian "darlings", seeing its market capitalisation cut by over half.
• Many Canadian businesses are ceasing operations in Russia, regardless of whether legally mandated to do so by sanctions.
• There is a real potential for a full-scale war in Europe and beyond.

While many of these factors will likely lead to a cautious approach to deal-making, some industries may see rapid changes as a result of market volatility, in particular the sudden rise in commodity, and oil and gas prices triggered by war in Ukraine.

Mining and Minerals

Approximately 43% of all publicly traded mining companies in the world are listed on a Canadian stock exchange. Mining production and M&A activity declined significantly in the early days of the pandemic but picked up into 2021 on rising commodity prices. One notable transaction was Agnico Eagle’s acquisition of Kirkland Lake Gold for CAD13.5 billion, announced in September 2021 and completed in February 2022.

Looking ahead, strong commodity prices support a positive outlook for M&A activity. The mining sector may continue to be constrained, however, by labour shortages and the expectations to deliver on ESG commitments.

The impact of Canadian sanctions on Russian individuals and entities is still unfolding. Alrosa, a Russian partially state-owned diamond producer, and Evraz PLC, a steel manufacturer tied to sanctioned Russian oligarch Roman Abramovich, both have operations in Canada.

Oil and Gas

The oil and gas sector, which is of significant importance to the Canadian economy (Canada is the world’s fourth-largest producer of oil), was struggling pre-pandemic but has recently seen some signs of recovery, although climate-related issues are still a challenge.

Increasing oil and gas prices, along with the plans of the Organization of the Petroleum Exporting Countries to increase oil production, point towards a positive outlook for M&A activity in this sector. However, ESG-driven pressure to increase climate-related disclosure and reduce carbon emissions may constrain the ability of oil and gas companies to access low-cost capital. In September 2021, Caisse de dépôt et placement du Québec, one of Canada’s largest pension funds, announced the disposal of its oil-producing assets by the end of 2022.

Following Russia’s invasion of Ukraine, Canada announced a ban on imports of Russian crude oil. Canada has not relied on Russian crude oil imports since 2019, so this ban may not have much impact. However, as the EU looks to reduce its dependence on Russian energy sources, European countries may look to Canada for additional supply.

Cannabis

Canada legalised cannabis in 2018, becoming one of the first countries to do so. As the marketplace has matured, Canadian cannabis companies have been active in M&A – initially to build scale, and more recently to consolidate assets and hunt for bargains in light of valuation declines. With increasing adoption by American states of some form of legalisation (despite cannabis remaining illegal at the federal level in the USA), and the ability for a cannabis company to be publicly traded in Canada while building assets in the USA, the stage is set for more cross-border M&A opportunities in this industry.

Most public company acquisitions in Canada will be conducted by way of:

• a takeover bid, either hostile (unsolicited) or friendly (solicited and/or negotiated); or
• a negotiated, court-approved plan of arrangement.

Companies can also be acquired by way of:

• an asset or share purchase agreement; or
• an amalgamation or other corporate reorganisation.

M&A activity in Canada is primarily regulated by:

• the Canadian federal government, particularly where the target is in a regulated industry or the acquiror is non-Canadian;
• provincial securities regulators; and
• stock exchanges.

Reporting issuers, which includes all issuers with securities listed on a Canadian stock exchange, must file continuous disclosure documents with the applicable provincial securities regulators on the System for Electronic Document Analysis and Retrieval (SEDAR). Reporting insiders – which includes directors, officers and 10% beneficial owners of a class of securities of a reporting issuer – must file trade reports on the System for Electronic Disclosure by Insiders (SEDI) unless an exemption is available.

At the end of March 2021, it was announced that the Canadian attempt at a national securities regulator was paused to allow participating governments to respond to the pandemic and the responsible organisation has since been dissolved. Canada remains the only G20 country without a national securities regulator.

Investment Canada Act (ICA) and National Security Review

Consistent with the approach of most countries, the Canadian government may restrict the ability of a non-Canadian to acquire or start a business in Canada, in particular if the investment relates to a cultural business or raises national security concerns. The government may block proposed foreign investments, allow them to proceed with conditions, or order divestiture if an investment has already been made.

A transaction by a non-Canadian is reviewable if the enterprise value of the target business exceeds certain financial thresholds (for WTO investors that are not state-owned enterprises, the threshold is an enterprise value of CAD1.141 billion). If reviewable, the government will determine if the transaction is of “net benefit” to Canada. If not reviewable, a notification under the ICA must be filed within 30 days after commencing a new business activity or acquiring control of an existing Canadian business.

The Canadian government may review any acquisition on national security grounds under the ICA, whether or not it is subject to net benefit review. There is no definition of “national security” in the ICA, nor are there specific monetary thresholds that automatically trigger a national security review.

Enhanced Scrutiny

As a result of the COVID-19 crisis, certain foreign investments into Canada have been subject to enhanced scrutiny, regardless of the value of the transaction.

In March 2022, the Canadian government announced that foreign direct investments in Canada with ties to Russian persons will be subject to in-depth scrutiny and extended timelines.

Sanctions

Canada imposed sanctions on Russia in 2014 following the attempted annexation of Crimea. The sanctions include a freeze on assets and dealings with designated individuals and entities, including several large Russian banks, financial elites and their families, and political and governmental members. Furthermore, any person in Canada and Canadians abroad are prohibited from dealing in new debt and new equity financing with such persons, as well as from exporting, selling, supplying, or shipping certain goods to Russia or to any persons in Russia for their use in offshore oil, shale oil, or Arctic oil exploration and production.

In response to the invasion of Ukraine in February 2022, Canada has added an increasing number of individuals and entities to the sanctions list. Canada also cancelled all existing export permits for controlled goods and technology to Russia and halted the issuance of new permits, subject to narrow humanitarian and medical supply exceptions. Canada was also the first country to revoke Russia and Belarus’s “most-favoured nation status” as a trading partner, resulting in a mandatory 35% tariff on imports from the two countries.

Canada has also imposed sanctions in relation to 20 other countries, including China, Iraq, Iran and North Korea.

Industries with Limits on Foreign Ownership

Ownership by non-Canadians is restricted in certain sectors, including the airline, banking, telecommunications, insurance, broadcasting, newspaper, magazine, and periodical industries.

Competition Act

Foreign investment is also subject to pre-merger notification under the Competition Act if it meets both of the size thresholds summarised below:

• size of parties – the parties to the transaction, together with their affiliates, have combined assets in Canada or total annual gross revenues from sales in, from or into Canada with a value in excess of CAD400 million; and
• size of transaction – the aggregate value of the Canadian assets or annual gross revenues from sales in or from Canada of the target exceed CAD93 million.

In any event, the government reserves the right to review any transaction for up to one year post-closing to determine if it is likely to lessen or prevent competition substantially. In addition, all business activity in Canada is subject to scrutiny for anti-competitive behaviour.

In February 2022, the Canadian government announced a comprehensive review of the Competition Act and the Competition Bureau published a number of recommendations that if adopted would potentially have a significant impact on competition law in Canada.

Employment legislation varies by jurisdiction in Canada. Minimum statutory employment standards, such as notice requirements on termination, generally cannot be contracted out of or waived. For example, an employment agreement providing for “termination at will” would not be enforceable.

Acquirors should conduct detailed due diligence on a target’s employment arrangements to understand the potential severance costs associated with its key employees and consider if any future plans (for example, the relocation of a plant) could be construed as constructive dismissal requiring payment of termination pay or severance.

Other legislation applies to the employment relationship, including the applicable human rights code, pay equity statute and occupational health and safety legislation.

Canada supports the principles of collective bargaining. Each jurisdiction in Canada has a labour code.

In late 2021, Ontario became the first province in Canada to prohibit non-competition provisions in employment agreements, and to require certain employers to have a written policy with respect to “disconnecting from work”.

See 2.3 Restrictions on Foreign Investments.

Cineplex v Cineworld

In December 2021, an Ontario court held that Cineplex could not be held in default of the ordinary course covenant under an arrangement agreement with Cineworld when Cineplex was prevented by government mandate from conducting normal day-to-day operations.

ESW Capital (ESW) v Optiva

In February 2021, the Ontario Securities Commission (OSC) declined to grant an exemption from the 50% minimum tender condition in a bid by ESW for Optiva where ESW held 28% of the shares and two opposing shareholders together held 40% of the shares, therefore making it impossible for the 50% tender condition to be met. The OSC stated that, absent abusive or improper conduct, it will prioritise predictability of regulations.

Re Bison Acquisition Corp.

In July 2021, the Alberta Securities Commission (ASC) intervened in a bid by Brookfield Infrastructure Partners for Inter Pipeline Ltd. (IPL) to increase the minimum tender condition from 50% to 55%. Brookfield had used total return swaps to increase its economic exposure to IPL from approximately 9.75% to 19.65% prior to launching the bid without providing early warning. The ASC stated that Brookfield’s conduct was “clearly abusive” of the capital market.

Rogers Communications and Shaw Communications

On 15 March 2021, Rogers announced a proposed acquisition of Shaw for CAD26 billion. However, in order to receive approval from regulators, Rogers may need to find a buyer for Shaw’s wireless business in advance of the proposed closing date of 30 June 2022.

Takeover Bid Amendments

The last significant amendments to the takeover bid rules in Canada were implemented in 2016. These amendments included:

• the extension of the minimum bid period from 35 days to 105 days (which may be shortened in certain circumstances) to allow target boards adequate time to respond to hostile bids;
• the introduction of a mandatory 50% minimum tender condition (at least 50% of the shares not already owned by the acquiror and its joint actors must be tendered before any shares can be taken up by the acquiror); and
• a mandatory ten-day extension to the bid period if, at the end of the initial deposit period, all terms and conditions of the bid have been complied with or waived and the minimum tender requirement has been met.

Securities regulators are inclined to strictly enforce these rules in order to promote predictability in the takeover bid regime. Exemptions or variations are rare.

It is common in Canada for prospective acquirors to accumulate shares of their target prior to launching a takeover bid or change of control transaction. An acquiror may establish a “toehold” through open market purchases or private transactions with other shareholders.

Acquirors may also seek support from other shareholders through accumulation of proxies or lock-up or voting agreements in support of a transaction.

An acquiror must publicly disclose its ownership of a reporting issuer once it directly or indirectly beneficially owns, or has control or direction over, 10% or more of a class of securities (in contrast to the USA, where the threshold is 5%).

Beneficial ownership of securities is calculated on a partially diluted basis by class and includes:

• all securities of that class that could be acquired within 60 days upon the conversion or exercise of convertible securities; and
• all securities of that class beneficially owned by any joint actors of the acquiror.

Control or direction generally is established by the ability to vote, or direct the voting of, shares or the ability to acquire or dispose of, or direct the acquisition or disposition of, shares.

Equity equivalent derivatives, such as equity swaps, generally are not included in determining whether the 10% ownership threshold has been crossed, although interests in these and other related financial instruments must be disclosed in reporting required once the 10% ownership threshold has been crossed.

The ASC found that the use of swaps by an acquiror to avoid early warning reporting was abusive of the capital markets. The SEC has proposed amendments to the beneficial ownership disclosure requirements in the USA that would include certain cash-settled derivatives in the beneficial ownership calculation. The authors expect continued focus on the use of derivatives in stakebuilding.

Early Warning Disclosure

Upon crossing the 10% ownership threshold, the acquiror is subject to the early warning regime and must file a press release and an early warning report (similar to a Schedule 13D in the USA).

Eligible institutional investors – which includes financial institutions, pension funds, mutual funds, investment managers and SEC-registered investment advisers – may file a less onerous alternative monthly report (similar to a Schedule 13G in the USA).

Insider Reporting

Directors, officers, 10% beneficial owners and other “reporting insiders” of reporting issuers must file insider reports disclosing any change to their beneficial ownership of, or control or direction over, the reporting issuer’s securities or interest in a related financial instrument.

Early Warning Standstill

An acquiror that is obligated to file an early warning report may not acquire any more securities of that class (or securities convertible into such securities) until the expiry of one business day after the early warning report is filed.

Takeover Bid Rules

Once an acquiror has beneficial ownership of, or control or direction over, 20% or more of the outstanding voting or equity securities of a class, any further acquisitions of outstanding securities of that class would constitute a takeover bid that requires an offer to be made to all security holders unless an exemption is available.

Rights Plans/Poison Pills

Before the 2016 takeover bid regime amendments, the primary structural defence mechanism for an issuer in Canada was a shareholder rights plan (commonly known as a “poison pill”). Rights plans are still in use since 2016, with some differences to pre-2016 plans. Typical features of a rights plan include the following:

• upon an acquiror’s acquisition of, or announcement of its intent to acquire, beneficial ownership of a specified percentage (typically 20% or more) of the company’s shares, all other shareholders will be given the right to purchase shares at a significant discount to the market price, substantially diluting the acquiror; and
• rights plans may allow for a “permitted bid”, which typically now means one that is required to stay open for at least 105 days and includes a minimum tender condition.

The primary value of a tactical rights plan adopted following the emergence of a bid traditionally has been to buy time for a board and shareholders to consider an offer and (where appropriate) seek alternatives to the bid.

Because amendments to the takeover bid rules in 2016 now require a takeover bid offer to remain open for at least 105 days (up from the previous minimum of 35 days), it is generally expected that regulators will cease-trade a rights plan after that timeframe. Even where a regulator permits a rights plan to remain in place, certain Canadian stock exchanges require a rights plan to receive shareholder approval within six months of being implemented, which often functions as a de facto termination date for tactical rights plans.

Other Hurdles to Stakebuilding

Acquisitions of shares generally cannot be made while in possession of material non-public information.

Most private companies have restrictions on share transfers in their articles or in unanimous shareholder agreements that would prevent a third party from acquiring shares without board or shareholder approval.

For reporting issuers with a public float, it would not be possible to restrict share transfers in the articles or by-laws but individual shareholders may agree to a standstill as part of a negotiated transaction.

Dealings in derivatives are permitted in Canada.

Disclosure by 10% holders must be made of the material terms of any “related financial instrument” involving the issuer’s securities as well as any other “agreement, arrangement or understanding that has the effect of altering, directly or indirectly”, the investor’s economic exposure to the issuer’s securities. Disclosure is also required of any securities lending arrangements.

Early warning reports and alternative monthly reports require disclosure of, among other things, any plans or future intentions that the investor and any joint actors may have relating to, or that would result in, among other things:

• the acquisition or disposition of securities of the issuer;
• a corporate transaction involving the issuer;
• a sale or transfer of a material amount of the assets of the issuer;
• a change in the board of directors or management of the issuer;
• a material change in the issuer’s business or corporate structure;
• a class of securities of the issuer being delisted from a marketplace or the issuer ceasing to be a reporting issuer in any jurisdiction of Canada; or
• a solicitation of proxies from security holders of the issuer.

An eligible institutional investor will be disqualified from filing alternative monthly reports if the investor:

• intends to make a formal takeover bid;
• proposes a plan of arrangement or similar business combination; or
• solicits proxies in support of the election of directors other than those nominated by management, in support of a plan of arrangement or other business combination not supported by management, or opposed to a plan of arrangement or other business combination supported by management.

Reporting issuers must immediately disclose all “material changes”. In the context of a proposed transaction, the threshold for a material change requiring disclosure is typically met when both parties have decided to proceed with a potential transaction and there is a substantial likelihood that the transaction will be completed. There is no bright-line test for this determination.

Issuers listed on certain Canadian stock exchanges must immediately disclose all “material information”, which generally includes both material changes and material facts and may, in some cases, require earlier disclosure.

Confidential material change filings and trading halts may be made in certain circumstances.

The acquisition by a reporting issuer of a private company will require disclosure only if the transaction is a material change for the reporting issuer. A transaction between two private companies where neither has continuous disclosure obligations under securities laws carries no public disclosure obligation.

Most acquisitions are announced publicly only once definitive acquisition agreements are signed. Companies tend to avoid disclosing a potential transaction at the non-binding letter of intent stage because it could affect the share price or give potential competitors or stakeholders time to mobilise in opposition. If the transaction is announced before there is a definitive agreement and then it fails to be entered into, the target could suffer reputational harm or face questions from regulators.

Significant business combinations usually involve a thorough scope of due diligence. Such diligence often includes searches of public registries and databases, including a corporate profile as well as business name, bankruptcy, lien, and litigation searches, and a review of public filings on SEDAR, SEDI and other databases.

Searches would typically be run against the target company and its management and material subsidiaries; for privately held companies, they would also be run against the selling shareholders.

Diligence documents – such as financial statements, material contracts and licences or permits – will typically be supplied by the target to the buyer and its counsel via an electronic dataroom.

Common factors that can affect the scope of appropriate due diligence can include the nature of the target’s industry, the jurisdiction where assets are located, whether the target competes with the buyer, and the access to sensitive information the target is willing to grant.

Most letters of intent and acquisition agreements include exclusivity obligations on the target. Acquirors will usually want to know that the target has ceased all negotiations and is not shopping their deal to third parties.

Most targets will want a standstill arrangement in place with the acquiror, in particular where the acquiror already owns target shares.

Fiduciary Outs

For the acquisition of a reporting issuer, it is common for exclusivity obligations to contain a “fiduciary out” clause allowing the target to terminate the agreement and accept a superior proposal if to do so would be consistent with the target board’s fiduciary duties. The acquiror would typically have a right to match the superior proposal or would be entitled to be paid a break fee if the agreement is terminated.

A “superior proposal” will typically need to satisfy very specific conditions, including that it is for all the target’s shares (or in some cases substantially all assets); that it is reasonably capable of being completed without undue delay with regard to all financial, legal, regulatory and other aspects of the competing transaction; that it is not subject to any financing condition; and that the target board make a determination that it is a more favourable transaction.

The existence of “hard” lock-up agreements (ie, the shareholder is not permitted to tender their shares to any other bid or vote in favour of any other transaction) with one or more target shareholders holding a significant percentage of shares could render an offer incapable of being a “superior proposal” because it is not reasonably capable of being completed.

The documentation used to set out the terms of a deal is determined by the nature of a transaction.

If the transaction is a hostile takeover bid, the acquiror must publicly file a takeover bid circular that describes the terms of its offer and includes other required disclosure. The target must then publicly file a directors’ circular, prepared by its board, which includes the board’s recommendations regarding the bid and other information. If the terms of the takeover bid subsequently change, further notices must be filed. For friendly takeover bids, the acquiror would typically enter into a support agreement with the target prior to launching the bid setting out the process of the bid, conditions and certain deal protections.

If the transaction is a plan of arrangement or other negotiated business combination, the acquiror and the target would enter into an arrangement or combination agreement. The agreement would set out the process of the transaction (including shareholder, court and other approvals), conditions and certain deal protections.

Negotiated Transactions

Parties typically will first enter into a non-binding letter of intent setting out the proposed deal terms with binding provisions regarding exclusivity, expenses and confidentiality.

The parties then conduct due diligence and negotiate a definitive acquisition agreement over a period of 30–90 days. The time required varies greatly depending on the size and nature of the target and the involvement of third parties, such as lenders.

If the target is a private company, the parties may sign the definitive documents and close the transaction on the same day.

Otherwise, closing may take 30–60 days or longer depending on the extent to which shareholder, court or regulatory approvals are required.

Complex transactions often will have outside dates that may be extended in some circumstances to accommodate regulatory approvals.

Takeover Bid

The timeline for a friendly takeover bid generally is 50–65 days beginning from the start of preparation of the takeover bid circular to the completion of the transaction, assuming the target waives the minimum bid period of 105 days (shortening it to no less than 35 days).

A hostile takeover bid must remain open for at least 105 days. The bid period may be shortened by the target or reduced to no less than 35 days if the target announces an alternative transaction. A mandatory ten-day extension period may apply under certain circumstances. Depending on the defensive tactics used by the target, once a target is “in play”, it is hard to predict how long it might take to successfully complete the bid.

Typically, following a successful takeover bid, the acquiror will conduct a second-step transaction to obtain 100% of the outstanding shares.

A shareholder cannot acquire any outstanding voting or equity securities of a reporting issuer if such acquisition would cause the shareholder to, together with any joint actors, have beneficial ownership of and/or control or direction over 20% or more of the outstanding securities (calculated on a partially diluted basis) unless:

• the shareholder makes an offer to all shareholders by way of a takeover bid; or
• an exemption from the takeover bid rules is available.

The takeover bid exemptions include:

• certain purchases by private agreement from not more than five persons; and
• normal course market purchases of no more than 5% of the outstanding securities in any 12-month period.

Both cash and shares of the acquiror are commonly used in Canada as consideration in M&A transactions.

The takeover bid rules require that identical consideration be provided to all target shareholders, with limited exceptions. Generally, no collateral benefits are allowed to be offered selectively to certain shareholders.

Plans of arrangement offer flexibility on consideration, so long as the arrangement overall is fair and reasonable.

In private M&A, particularly in industries with high valuation uncertainty, tools commonly used to bridge value gaps between parties include holdbacks and earn-outs.

• With a “holdback”, a purchaser will hold on to some of the purchase price until after closing in order to satisfy indemnity or breach of warranty claims. This holdback amount may be provided to an escrow agent, particularly in cases where the seller has concerns about the creditworthiness of the purchaser.
• With an “earn-out”, part of the purchase price will remain subject to performance requirements or other milestones that must be satisfied after closing and may also be used to set off indemnity or breach of warranty claims. The most common criterion is financial performance, but an earn-out may also be dependent on other performance-related criteria.

Some common conditions for takeover bids include the following:

• there is no shareholder rights plan in effect or the rights plan will be waived;
• regulatory approvals (including, where required, approvals under the Competition Act and the ICA) and third-party approvals or consents have been obtained;
• there has not been a material adverse change;
• there is no existing, pending or threatened litigation involving the target that would lead to a material adverse effect; and
• there are no laws that would prevent the bidder from taking up or paying for the securities subject to the bid and there are no laws in effect or proposed that would have an adverse effect on the target.

Takeover bids cannot be subject to a financing condition.

Since 2016, the takeover bid rules in Canada require that all bids, even partial bids, must provide for a mandatory minimum tender condition that 50% of securities owned by security holders other than the bidder be tendered to the bid. This minimum tender requirement must be met before the bidder may acquire any of the securities subject to the bid.

Bids for all of the outstanding shares may include a higher minimum tender condition to ensure that the bidder, through a second-step business combination, can obtain the remaining shares that are not deposited. This condition will usually require a deposit of at least 66⅔% of the outstanding shares and sufficient shares to obtain approval of a majority of the minority shareholders for the second-step transaction. Canadian securities regulations allow securities that were obtained under a lock-up to be voted as part of the majority of the minority vote if the locked-up security holder is treated identically to all others under the offer.

If a bidder is only seeking control, it may include a minimum tender requirement of 51% of the outstanding shares instead. Parties may apply to Canadian securities regulators to waive or vary the minimum tender condition, although this will usually only be done in rare cases.

In an arrangement, amalgamation and other business combinations, there is no regulatory requirement or restriction on financing conditions.

However, in Canada, like in the UK and unlike in the USA, there is a fully financed rule for takeover bids that offer cash consideration. The bidder must have pre-arranged financing before launching the bid. Canadian takeover bid rules provide that the financing itself may be conditional at the time the bid is commenced, if the bidder reasonably believes that the possibility is remote that it will not be able to pay for securities deposited under the bid.

Acquirors may seek a wide variety of deal protection measures, examples of which are described below.

Support Agreements and Lock-Ups

In a friendly takeover, before launching the bid, the bidder and the target may enter into a support agreement whereby the target agrees to recommend that its shareholders tender to the bid and the bidder agrees to launch the bid on terms specified in the support agreement, subject conditions such as a fiduciary out.

The directors, officers or significant shareholders of a target may also enter into lock-up or voting agreements with the acquiror to deposit their shares to the bid or vote their shares in favour of an arrangement. These agreements may be “hard” (ie, the shareholder is not permitted to tender their shares to any other bid or vote in favour of any other transaction) or “soft”.

Break-Up/Break/Termination Fees

A common deal protection measure in Canada is a break-up fee paid by the target to the acquiror if an arrangement or other business combination is not completed. These types of fees usually range from 2–4% of the equity value.

No-Shop/Go-Shop Clauses

No-shop clauses prohibit a target from soliciting other takeover offers or providing information to other third parties that might be used to make an offer. These provisions will typically include a “fiduciary out” that allows directors (in so far as they are required to by their fiduciary duties) to negotiate with a third-party offeror if the alternative offer in the good faith estimation of the directors represents a superior proposal.

Go-shop clauses, on the other hand, allow a target to negotiate or “shop” a transaction with third parties for a specific amount of time after the execution of the agreement. Go-shops are less common but may be desirable if the acquiror wants to publicly announce the deal before the target tests the market.

Matching Rights

While a fiduciary out for the target board to accept a superior proposal is commonly provided for in a friendly acquisition agreement, the acquiror may also be provided the right to match the superior proposal and hence complete the transaction.

Managing Risk during the Interim Period

Once a definitive acquisition agreement is signed or a takeover bid launched, the acquiror is bound to complete the transaction unless one of the expressly stated conditions is not satisfied. The pandemic has put the focus on a number of these conditions.

Definitive acquisition agreements now contain specific COVID-19 provisions, including representations about the impact of public health measures on the business and the extent to which government support has been relied on. Material adverse effect and ordinary course of business provisions are enjoying renewed attention.

If an acquiror is not seeking 100% ownership of a target, it may negotiate for additional governance rights with respect to a target outside its shareholdings. These may include:

• the right to nominate individuals to the target’s board and/or to sit on board committees;
• board observer rights;
• the right to participate in, or require, a public offering of the target’s equity securities; or
• the right to approve of change of control transactions, issuances of shares and other major decisions.

Shareholders are permitted to vote by proxy in Canada.

If an acquiror wishes to obtain 100% of the shares of a target and is not able to do so through the bid process, there are two other methods that can be used to acquire the remaining shares depending on the holdings of the acquiror after the bid is complete.

Second-Step Business Combination/Going-Private Transaction

A second-step business combination or a going-private transaction can be implemented if the bidder holds between 66⅔% and 90% of the outstanding shares after the bid is complete. Following the bid, the bidder will be able to take the company private through an amalgamation or a plan of arrangement.

Such a business combination will need to be approved by a special majority of the shareholders at a shareholder meeting and will be subject to certain minority shareholder protections. For instance, a majority of the minority of the shareholders will be required to approve of the business combination. However, as the majority shareholder, the bidder can participate and vote the shares already held before, or that were acquired under, the takeover bid. Thus, if the bidder holds over 66⅔% of the outstanding shares, it will have sufficient votes to obtain the majority of the minority approval.

Compulsory Acquisition

Under corporate law, if a bidder obtains 90% of the outstanding shares subject to the bid within 120 days of the commencement of the bid, it can acquire all of the shares that remain outstanding for the same price as was offered under the bid. This compulsory acquisition procedure does not require a shareholder vote.

Shareholders that did not tender to the bid are provided with dissent rights that allow them to apply to a court to fix the fair value of their shares.

Before launching a bid, it is common for the bidder to enter into lock-up agreements with major target shareholders whereby the shareholders agree that they will tender to the bid. A “soft” lock-up allows a shareholder the right to withdraw and accept a higher offer, while a “hard” or irrevocable lock-up does not. Hard lock-ups are less common.

A takeover bid in Canada is launched by:

• mailing the bid materials to the target shareholders directly; or
• placing an advertisement in at least one daily newspaper in each applicable province in Canada and concurrently with, or prior to, such publication, filing the bid documents and delivering them to the target.

The advertisement method is typically used in hostile bids when the acquiror does not have access to the shareholder lists to complete the mailing itself and does not want to request the list in advance for fear of tipping off the target. Once the advertisement is placed, the acquiror can request the shareholder list from the target and then mail the circular to target shareholders.

If the consideration for a bid is to be shares or partly shares, the bidder must provide prospectus-level disclosure.

An acquiror providing share consideration must provide its audited financial statements for the past three years as well as interim financial statements if available, and pro forma financial statements that give effect to the acquisition.

The financials must include a statement of the financial position of the issuer as at the beginning of the earliest comparative period for which financial statements that are included comply with the International Financial Reporting Standards (IFRS) in certain cases. If the statements are the first IFRS financial statements prepared by the issuer, the issuer must include the opening IFRS statement of financial position at the date of transition to IFRS.

The pro forma financial statements must be those that would be required in a prospectus, assuming that the likelihood of the acquisition is high and that the acquisition is a significant acquisition for the acquiror.

If the acquiror is a reporting issuer, it may incorporate by reference its existing continuous disclosure.

More generally, securities laws in Canada require that annual and quarterly financial statements of reporting issuers be prepared in accordance with Canadian generally accepted accounting principles (GAAP). GAAP, in the context of Canadian securities regulation, must be determined in accordance with the Handbook of the Canadian Institute of Chartered Accountants.

In the context of a takeover bid, the following transaction documents are required to be disclosed in full:

• the takeover bid circular, including prospectus-level disclosure, if required, and any documents incorporated by reference;
• the directors’ circular;
• any lock-up agreements; and
• any support agreement.

In the context of a plan of arrangement or other business combination, the following documents are required to be disclosed in full:

• the management information circular delivered with the meeting materials, including prospectus-level disclosure, if required, and any documents incorporated by reference;
• any support agreements; and
• the arrangement or business combination agreement.

Reporting issuers are also generally required to provide continuous disclosure of material business developments as they occur and file material contracts on SEDAR. Reporting issuers in certain industries such as mining may also be required to file technical reports and other specific material information.

Directors’ duties in Canada include the following:

• to act honestly and in good faith, with a view to the best interests of the corporation; and
• to exercise the care, diligence and skill of a reasonably prudent person in comparable circumstances.

In discharging their fiduciary duties, directors must exercise their powers for the benefit of the corporation and not for an improper purpose.

These duties are owed to the corporation even in the context of a business combination or a hostile bid. However, the Supreme Court of Canada has confirmed that directors are permitted to consider the interests of a variety of stakeholders in fulfilling their responsibilities. This stakeholder-friendly corporate governance model has been codified in the Canadian federal corporate statute.

The common law provides guidance as to which stakeholders’ interests may be considered by directors, but does not provide guidance on whose interests, if any, should be prioritised. Although directors do not owe a fiduciary duty to shareholders and Canadian courts have rejected the American “Revlon duty” (ie, when a break-up or change of control transaction is inevitable, the board’s fiduciary duty is to sell the company to the highest bidder), directors are not prohibited from taking steps to maximise shareholder value or prioritise shareholders over other stakeholders.

Special committees comprised of target directors who are independent of a proposed transaction are often established to evaluate and consider the terms of the transaction. Their mandate often also includes:

• considering strategic alternatives;
• negotiating the proposed transaction;
• providing a recommendation to the rest of the board about the proposed transaction; and
• if applicable, supervising a valuation or fairness opinion.

It is common for target boards to establish special committees in business combinations involving a related party. Special committees are required by Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions (MI 61-101) in certain circumstances when one or more directors have a conflict of interest. MI 61-101 also encourages the formation of a special committee in a broader range of circumstances than what is legally required.

Special committees and the timing of their formation are important ways to show that directors’ decisions have been made without conflicts. Courts will often consider whether and at what time in the process of a transaction a special committee was formed and the procedures it followed in evaluating the transaction.

Directors are provided a high level of deference at common law. Like in the USA, Canadian courts have recognised the “business judgement rule”. According to the business judgement rule, a court should not substitute its own decisions for those decisions made by directors, and deference should be accorded to business decisions of directors taken in good faith and in the performance of the functions they were elected to perform by the shareholders.

If directors are acting independently, in good faith and on an informed basis in a way that they reasonably believe is in the best interests of the corporation, courts generally will defer to their judgment.

Independent outside advice is commonly given to directors in a business combination from:

• investment bankers;
• outside legal counsel;
• financial and tax advisers;
• public relations firms; and
• proxy solicitation firms.

Corporate and Securities Laws

Both Canadian corporate statutes and securities laws contain conflict of interest provisions.

Under Canadian corporate law, if a director is a party to a transaction with the corporation or is a director or officer of a party to the transaction, the director should disclose the nature and extent of this interest and may be required to refrain from voting on the matter.

In securities law, MI 61-101 regulates transactions where potential conflicts of interest are present. This instrument provides procedural protections for minority shareholders. Depending on the type of transaction, the following may be required under MI 61-101:

• a formal valuation by an independent valuator supervised by a special committee;
• majority of the minority shareholder approval; and
• enhanced disclosure, including disclosure of prior valuations prepared for, and offers received by, the target in the past two years.

MI 61-101 encourages, but does not require, targets to form a special committee for the transaction.

Judicial and Regulatory Scrutiny

Conflicts of interest of directors, managers, shareholders or advisers have been the subject of judicial and regulatory scrutiny as well. Securities regulators in Canada have, in particular, examined the question of whether a party is a joint actor with the acquiror. This is a factual analysis, and its finding may have an impact on whether the transaction is an insider bid and hence subject to enhanced disclosure, formal valuation requirements and majority of the minority approval under MI 61-101.

Hostile takeover bids are permitted in Canada but have not been very common since the implementation of the 2016 takeover bid amendments, which made the takeover bid regime more target friendly.

Canadian securities laws allow directors to use measures to defend against hostile takeovers. Regulators may intervene when defensive measures are likely to deny or severely limit the ability of shareholders to respond to a takeover bid. Directors are permitted to defend against hostile bids but may not deny shareholders the opportunity to consider such a bid.

Shareholder Rights Plans/Poison Pills

Until 2016, shareholder rights plans or poison pills were often used by target companies to defend against hostile bids. Rights plans will not block hostile bids entirely but are instead a way to encourage the fair treatment of shareholders in connection with a bid and to allow the target board and shareholders to respond to and consider the bid. They also allow time for the target board to seek available alternatives and prevent creeping takeovers.

Crown Jewel/Scorched Earth

A target may attempt to restructure or recapitalise so as to provide shareholders with cash value; for instance, by selling a significant asset in order to become less attractive to a bidder. The directors must undertake a “crown jewel” transaction with a view to the best interests of the corporation, and the sale must have a demonstrable business purpose. The board of a target may also decide to substantially increase long-term debt and concurrently declare special dividends to distribute cash to its shareholders.

Defensive Private Placements

Private placements that have the effect of blocking a bid have been recognised by Canadian securities regulators as a possible defensive tactic, but they could be found to be inappropriate if they are abusive or frustrate the ability of shareholders to respond to a bid or competing bids.

Golden Parachutes

Golden parachutes for key employees may be triggered if such employees are terminated after a third-party acquisition.

White Knight

Targets may seek an alternative transaction with a friendly party or a “white knight” who might offer more value (or in some cases more preferential terms or deal certainty) to its shareholders than the original bidder.

Issuer Bid

If a target is unable to find a white knight, it may itself offer to repurchase its outstanding shares.

Pac-Man

A target might flip the script and make a bid for the shares of the hostile bidder.

Advance Notice By-law

A target’s by-laws or other constating documents may be amended to require advance notice of shareholder nominations for members to the board of directors, thereby giving the target the time to strategically respond to a proxy fight in the context of a hostile bid.

Canadian directors owe the same duties when they are enacting defensive measures as in any other context. Boards in Canada owe a fiduciary duty to the corporation, not to the shareholders, and are not required to conduct an auction once a company is “in play”.

Canadian courts have held that the conduct of directors will be analysed on an objective standard of what a reasonably prudent person would do in comparable circumstances. A court generally will not replace the decisions of directors if they acted independently, in good faith and on an informed basis and such decisions were selected from a range of reasonable alternatives.

Target boards in Canada cannot “just say no” in the same way that this strategy is understood in the USA. Canadian directors of public companies, while they may implement defensive measures, are not able to indefinitely prevent a bid from being presented to the shareholders.

M&A litigation in Canada is not as prevalent as in other jurisdictions such as the USA. Class action securities litigation is relatively new in Canada. Parties involved in private acquisitions will often choose arbitration over litigation to provide them with greater efficiency and confidentiality.

Litigation can occur at any stage of a transaction. A plan of arrangement requires court approval, which provides a forum for aggrieved stakeholders. A party may seek a cease-trade order or other relief preventing the consummation of a takeover bid from a securities regulator.

In general, Canadian courts have not permitted acquirors to terminate acquisition agreements solely because of the occurrence of the pandemic, where parties have been shown to have allocated such completion risk to the acquiror. Acquirors should carefully consider all of the risks of a transaction, including completion risk, and negotiate acquisition agreements that allocate the risks as between the acquiror and the target or the sellers appropriately.

As demonstrated in Cineplex v Cineworld, acquirors should be wary that the court will take MAE clauses seriously and may not permit parties to avoid the risk allocations they have assumed.

Although Canada is seen by some as an activist-friendly jurisdiction, levels of shareholder activism tend to lag behind levels of activity in the USA and Europe, particularly among large-cap Canadian issuers.

Certain aspects of Canada’s corporate and securities framework can be advantageous to activist shareholders, such as:

• shareholders holding 5% of a company’s shares can requisition a meeting, and only 1% ownership is required to submit most proposals;
• no disclosure of a shareholder’s identity, holdings or intentions is required until the shareholder beneficially owns 10% or more of a reporting issuer’s shares;
• shareholders are entitled to their company’s shareholder list, and may be reimbursed for costs associated with proxy contests;
• shareholders can communicate with up to 15 other shareholders without needing to issue a dissident proxy circular;
• securities regulators are typically less deferential to corporate defensive tactics such as shareholder rights plans; and
• broad remedial provisions are available in corporate law, such as the oppression remedy that is available to shareholders, creditors and other stakeholders if a corporation has unfairly disregarded their interests.

Although shareholders can only vote “for” directors or withhold their vote (they cannot vote “against” directors), recent introductions of majority voting policies on major stock exchanges such as the TSX and in certain corporate statutes can effectively force directors to resign if more than 50% of votes are withheld from their re-election at a meeting.

Typically, an activist’s first step is to approach a board confidentially with their demands, with the implicit or explicit threat of a public battle if the requests are not met. From there, activism can take many forms.

• Transactional activists sometimes demand strategic reviews, divestitures, share buy-backs or increased dividends. They might requisition a shareholder meeting, wage a public broadcast campaign in the media or on social media, or launch their own competing tender offer. Sometimes the goal is to see an alternative transaction implemented; other times, activists try to improve the terms of the original deal.
• Board activism and proxy fights are prominent forms of activism in Canada, in which shareholders seek to have their nominees put forward for election to the board.
• Shareholder proposals also continue to be an important form of activism. While shareholder proposals on matters within the board’s purview are only advisory and not binding, the publicity they attract can create pressure for change.

Trends in Activism

According to data from Laurel Hill Advisory Group, a leading North American shareholder communications and advisory firm, after an initial pandemic-related pause, shareholder activism among Canadian companies rebounded in the latter half of 2020 and throughout 2021. Some of the key trends include the following.

• ESG – environmental and social proposals alone made up 62% of all shareholder proposals in 2021 (up from 25% in 2020).
• Bigger targets – the average size of targets is on the rise. In 2021, an activist targeted CN Rail, one of Canada’s largest railway companies.
• Board diversity – by the end of 2021, women comprised at least 30% of the boards of a majority of TSX-listed issuers and held 22% of the board seats of all TSX-listed companies, and that number seems likely to grow. As of 1 February 2022, proxy advisory firm Institutional Shareholder Services is advising shareholders of TSX Composite Index-listed companies to vote to remove the chair of any board where women comprise less than 30% of its membership and that has no plan to reach that threshold by next year’s meeting.
• Regulatory engagement – regulators will exercise their public interest powers if necessary. In 2021, regulators applied a higher minimum tender condition to a takeover bid where the acquiror allegedly used swaps to acquire an economic stake in the target without filing early warning reports.
• Say-on-pay – shareholder support for executive compensation dropped significantly in 2021, with a record of six failed say-on-pay votes.

In transactional shareholder activism, announced transactions are frequently a target for campaigns. In some of the most notable recent examples, shareholders issued public broadcasts opposing acquisitions, sought to terminate or modify deals, opposed the acquisition of control positions by other shareholders, and proposed competing bids.