m&a torys’ top trends for 2011 pdfs... · torys’ top trends for 2011. when foreign...

M&A TORYS’ TOP TRENDS FOR 2011

The year 2010 saw a resurgence in mergers and acquisitions activity, both in North America and internationally. But accompanying this increase in activity were rising concerns – some old, some new – about the way M&A deals are done: What are the appropriate limits (if any) on foreign investment? Who should ultimately decide whether to sell a company or allow it to be transformed? And if shareholders decide, how do you know that their votes are cast and captured correctly?

Global concern about unbridled foreign acquisitions has re-emerged. As we saw in the failed BHP Billiton/Potash transaction in Canada, governments are well aware of these concerns. If foreign investment in Canada is going to continue to grow in 2011, investors and acquirors will have to be creative and flexible in structuring transactions to satisfy the legal and the political aspects of their deals.

The increase in M&A activity has also highlighted the growing tension between boards of target companies and their shareholders. Who should have the final say in respect of transformative corporate transactions? Unlike courts and regulators in the United States, those in Canada are struggling with this question, and their past inconsistent decisions have led to unpredictable results. We expect that in 2011 the debate over this issue will intensify.

Given the expanding role of shareholders in decision making, we expect that the process by which shareholders exercise their votes will come under greater scrutiny in 2011. Regulators on both sides of the border are being urged to review the mechanics of the proxy system and the growing influence of proxy advisory firms. In 2011, we will see regulators and M&A advisers focus on the authenticity and accuracy of shareholder voting.

Torys’ M&A lawyers are looking ahead to 2011 and this is what they see.

© 2011 Torys LLP. All rights reserved.


When foreign investors target Canada, politics may matter

Alternative transaction structures will continue to be popular for sovereign wealth funds and other investors from emerging markets

“Let the shareholders decide”

Target boards will consider more aggressive defensive tactics when facing a hostile bid

The spotlight will shine more brightly on shareholder voting processes in M&A

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The Canadian M&A story of the year was undoubtedly BHP Billiton’s hostile bid for Potash Corporation of Saskatchewan and the federal Minister of Industry’s rejection of the deal under the Investment Canada Act (ICA). Although the deal’s rejection may reflect unique circumstances, its outcome is likely to affect the way foreign investors handle high-profile acquisitions in Canada.

Transaction backgroundWhen it announced the bid in August, BHP outlined the commitments it proposed to make in order to meet the ICA’s “net benefit to Canada” test. The commitments were reasonably strong and consistent with those given in other large natural resource acquisitions, such as Rio Tinto/Alcan, Vale/Inco and Xstrata/Falconbridge.

Although both the federal and the Saskatchewan provincial governments initially seemed unopposed to the transaction, concerns soon developed about its financial impact on the province of Saskatchewan. According to some reports, more than 10% of Saskatchewan’s revenue is derived from potash-related royalties. As the weeks passed, the Saskatchewan provincial government also became worried that the ICA framework was not sufficiently robust to protect either provincial or national interests. The provincial government pointed to a history of breached undertakings in other transactions.

BHP tried to alleviate these concerns by increasing its commitments, and said it would

• preserve provincial revenues by retaining membership in the Canpotex export cartel and forgoing tax benefits;

• agree to a monitoring regime, including a C$250 million performance bond;

• list BHP on the Toronto Stock Exchange; and

• increase employment in its Canadian businesses by 15%.

When foreign investors target Canada, politics may matter By Omar Wakil and David Chaikof

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After rejecting the transaction in November, Industry Minister Tony Clement stated that BHP had failed to satisfy the statutory net benefit test. However, to most observers, politics was clearly the deciding factor. By that time, popular and political opposition to the transaction had mounted, particularly in Saskatchewan, where the minority Conservative federal government holds 13 seats – a factor that will be critical to a victory in the next federal election. The hostile nature of BHP’s bid, and what some regarded as a low-ball offer price, also meant that the transaction had few commercial supporters: Potash management was opposed to the deal and the company’s shareholders were indifferent. Had any one of these factors favoured BHP, the outcome could have been different.

M&A LessonsThere can be little doubt that the federal government’s rejection of the bid for Potash will have implications for high-profile inbound M&A transactions. Under an overarching theme of “politics matters,” several noteworthy M&A lessons are evident from the bid, some old and some new.

• Foreign investors should prepare for more rigorous “net benefit” commitments. BHP offered a strong set of ICA undertakings. This may raise the bar for commitments that foreign acquirors will have to provide in future transactions. Key areas of government concern appear to relate to transparency and enforceability. There may be a move to make undertakings public, and the independent monitor and performance bond that BHP offered may be sought in future deals.

• The core group of M&A advisers has expanded. The traditional advisers on M&A transactions were often seen to be lawyers, investment

bankers and HR consultants. It is clear that sophisticated acquirors now also include specialists in government, media and investor relations within their core group of advisers. Their role is to improve messaging to the media and to those affected by foreign acquisitions, including provincial and federal governments, shareholders, employees, customers and other stakeholders. The Saskatchewan government played a decisive role in the Potash deal, and BHP’s inability to persuade that government of the benefits of the transaction was a critical failure. Media scrutiny was intense: between announcement and withdrawal, the Potash bid was covered in well over 500 news reports in The Globe and Mail, the National Post and The Wall Street Journal alone, reinforcing the need for a well-crafted media strategy that will help shape the thinking of key decision makers.

• The nature and identity of the foreign buyer may be a factor. Media reports speculated that sovereign wealth funds (SWFs) and other state-owned enterprises (SOEs) were interested in launching a bid for Potash, alone or as participants in consortiums. Although there was some provincial political opposition to this possibility, the federal government has made it clear that SWF and SOE investors are welcome in Canada. Nevertheless, such investors should be aware of and be prepared to deal with potential political concerns.

• A hostile transaction has increased political risk. A negotiated transaction, particularly by SWF or SOE investors, will improve the likelihood of regulatory success. Friendly deals allow buyers and sellers to jointly plan and communicate ahead of time with relevant constituents, including

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governmental and regulatory authorities. Friendly transactions also provide support from the target. The target’s and shareholders’ lack of support for BHP’s bid clearly made it easier for the government to withhold its approval.

• Seek enhanced deal protections when there is heightened regulatory risk. Foreign buyers should consider seeking enhanced deal protections from targets when there is a heightened risk of regulatory intervention and non-approval. These protections may include higher than normal transaction break fees, coupled with expense reimbursement if the transaction is not approved. Obtaining those protections will not always be possible because targets may reject the added risk that these protections may bring. A target may be justified in seeking its own enhanced deal protection, including a reverse break fee if the nature of a foreign buyer adds regulatory approval risk.

The federal government is aware of the potential impact of its decision in Potash and has been eager to reassure the business community that Canada remains open to foreign investment. For that reason alone, future non-approvals are unlikely, particularly in the near term. Moreover, the unusual circumstances of the Potash deal are unlikely to occur again soon. Although we expect most transactions to proceed in the normal course, Potash reminds us that in Canada, just as elsewhere, politics can be an important aspect of the foreign investment review process and that on high-profile deals prudent investors should come to Canada well prepared.


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Sovereign wealth funds (SWFs) and other investors from emerging markets have become increasingly significant participants in the Canadian and U.S. M&A landscape in recent years. Notable examples in Canada include Sinopec’s C$8.3 billion acquisition of Addax Petroleum and its US$4.65 billion investment for a 9% stake in oil sands producer Syncrude; the C$1.7 billion investment by China Investment Corp. (CIC) in Teck Resources; and Temasek’s C$500 million investment in Inmet Mining. These transactions have been driven by a confluence of forces, including companies in the resources sector seeking access to capital, companies from emerging markets seeking to secure a strategic source of resources and SWFs seeking to capitalize on the expected long-term strength in commodity prices. Notable examples in the United States include CIC’s US$1.58 billion investment in AES and its earlier significant investments in Morgan Stanley and Blackstone.

We expect this trend to continue in Canada and the United States, in particular with respect to transaction structures such as PIPEs (private investments in public equity) and other minority investments that are alternatives to the acquisition of 100% of a target company. In the resources sector, these types of investments often include innovative arrangements such as ownership participation in the underlying resource assets and offtake agreements (whereby investors obtain the right and/or obligation to purchase over a number of years a set quantity of the production from a specific project, typically at market or otherwise agreed prices).

PIPE transactions and minority investments PIPE transactions offer significant flexibility and can take a variety of forms, including common shares, preferred shares, convertible debt and warrants. While most investments by SWFs and emerging market investors have involved common shares, one of the exceptions is CIC’s US$500 million convertible debenture investment in South Gobi Resources. PIPE transactions can also allow for the acquisition of a controlling interest in a public company, as was the case in Pallinghurst Resources’ US$175 million acquisition of a controlling interest in Platmin, and Severstal’s C$56 million acquisition of a controlling interest in High River Gold (both transactions were completed without the need for shareholder approval under the TSX’s financial hardship rules).

PIPE transactions and minority investments provide a number of key benefits for foreign investors, including these:

• There is increased speed, certainty and relative ease of execution compared with a 100% acquisition of a target company. Transactions can generally be negotiated and completed in as little as one month compared with a typical three- to four-month (or longer) timeline for a 100% acquisition.

• Investments involving the acquisition of less than a 20% voting equity interest can generally be completed without obtaining any shareholder approvals under applicable Canadian and U.S. stock exchange rules. In Canada, these investments can generally be completed without

Alternative transaction structures will continue to be popular for sovereign wealth funds and other investors from emerging markets By Michael Amm and Darren Baccus

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the need to obtain Canadian government regulatory approvals, including the “net benefit” foreign investment review under the Investment Canada Act. In the United States, these investments are generally less likely to raise political sensitivities and are typically subject to less intensive U.S. national security regulatory review.

• There is the opportunity to partner and share risk with the investee company and its stakeholders. This type of “on the ground” partnership and local presence can be a critical factor in making the investment a success for a foreign investor.

Special deal termsA number of the major PIPE transactions involving the acquisition of an interest of between 10% and 20% in Canadian public companies have contained certain of the following notable terms:

Preemptive rights. In most cases, investors have been granted the right to maintain the initial percentage interest of their equity and voting rights in the event of future issuances of securities by the investee company, subject to certain exceptions.

Board representation. In many cases, investors have been granted the right to nominate one or two directors for election to the board of the investee company, provided that minimum securities ownership levels are maintained.

Registration rights. In many cases, the investee companies have undertaken to qualify or register the acquired securities for public resale.

Standstill restrictions. In the Teck and Inmet transactions, CIC and Temasek agreed to broad restrictions on acquiring additional securities of Teck and Inmet or otherwise influencing control, subject to certain exceptions. Standstill restrictions were also provided for in a Japanese consortium’s C$270 million investment to acquire a 19.9% interest in Uranium One.

Disposition restrictions. In the Teck and Inmet transactions, CIC and Temasek agreed that they would not dispose of the securities they had acquired for at least one year. In the Teck and Uranium One transactions, further disposition restrictions continued beyond one year.

Price protection. In the Teck transaction, CIC was granted the right to compensation in the form of a cash payment or issuance of additional shares if, during one year after CIC’s purchase, Teck issued shares for a price lower than CIC’s purchase price (subject to the maximum discount permitted under the TSX rules).

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Innovative arrangements in the resources sectorIn the resources sector, a number of PIPE transactions have included innovative features such as offtake arrangements and the acquisition of a joint venture stake in the investee company’s underlying resource assets. These features allow the investor to acquire both a strategic stake in the public company and direct access to resources; the investment stake in the public company may effectively serve as the “price of admission” to share in the underlying assets.

As part of the C$240 million investment by Wuhan Iron and Steel (WISCO) in Consolidated Thompson Iron Mines, WISCO acquired 19.9% of the shares of Consolidated Thompson and received a 25% joint venture interest in Consolidated Thompson’s Bloom Lake project, together with an offtake agreement providing for WISCO to purchase 50% of the first 8 million metric tonnes of iron ore produced from the project each year and an option to purchase additional amounts.

In the oil and gas sector, CIC’s C$1.25 billion investment in Penn West Energy Trust included the subscription for newly issued trust units representing a 5% interest in Penn West and a 45% interest in a new joint venture to develop Penn West’s oil sands assets in the Peace River area of northern Alberta.

Investors may also acquire a minority joint venture interest in the underlying resource project and offtake rights without acquiring an ownership interest in the parent company. One example is the earn-in agreement that Augusta Resources (listed on the TSX and the NYSE) entered into with a consortium of Korean investors. The agreement provided for the consortium to acquire a 20% interest in Augusta’s Rosemont copper/

molybdenum project in Arizona in consideration for funding US$176 million of the project development expenses. The arrangements included an offtake agreement providing for the purchase, at market rates, of between 20% and 30% of the annual copper and molybdenum production from the project. In the oil and gas sector, Thailand’s PTT Exploration and Production recently entered into a US$2.28 billion agreement to acquire a 40% interest in Statoil’s privately owned Kai Kos Dehseh Alberta oil sands development project. Minority investments will continue to be popular Given the flexibility and potential innovative features allowing for a transaction to be tailored to the specific needs of the foreign investor, together with a significantly lighter regulatory burden in most cases, minority investments such as PIPEs and joint venture arrangements are set to continue to be popular and successful investment structures for foreign investors in both Canada and the United States.

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3“Let the shareholders decide” By James C. Tory

Canadian corporate and securities regulatory laws are in a state of uncertainty about a fundamental corporate governance question – namely, the relative roles of directors and shareholders in making decisions on transformative transactions for a corporation. Should directors play the primary role as part of their responsibility to manage the business and affairs of the corporation? Or should shareholders, as the owners of the corporation, have the ultimate say? This question arises most dramatically in the context of hostile takeover bids when the target board undertakes defensive tactics that could preclude shareholder access to the offer. (This particular aspect of the issue is the subject of Trend 4, below.) However, the question arises more broadly, as evidenced by the recent Ontario court and securities regulatory decisions regarding the Magna plan of arrangement and last year’s securities regulatory decision in Ontario concerning the “merger of equals” between HudBay Minerals and Lundin Mining.

The current state of the law lacks coherence, resulting in an unfortunate unpredictability. However, the lesson from recent decisions for Canadian boards struggling with controversial transactions would appear to be: when in doubt, let the shareholders decide.

The traditional “shareholder primacy” modelShareholder primacy is embedded in the governance framework established by Canadian corporate statutes. It is shareholders

• who elect directors;

• whose approval is required for “fundamental changes” proposed by the directors;

• who have the right to approve transactions where directors are conflicted and to ratify breaches of directors’ duties;

• who can assume the powers and responsibilities of directors through a unanimous shareholders’ agreement.

Although directors are responsible for the management of the business and affairs of the corporation, in fulfilling this responsibility, they are obliged to act with a view to “the best interests of the corporation.” Canadian corporate law traditionally equated the corporation’s interests with the interests of “shareholders as a whole.” Thus the duties of directors were aligned with and reinforced the shareholder primacy embedded in the governance framework established by corporate law.

Securities regulatory law in Canada has been aligned with the traditional shareholder primacy under corporate law: securities regulators have always placed shareholders’ interests first, having regard to the regulators’ investor protection mandate. The bedrock principles for Canadian securities regulators have been the protection of shareholder choice and the maximization of shareholder value.

BCE and the stakeholder view of the corporationThe traditional shareholder-centric model in Canada under both corporate and securities regulatory laws appeared to have been upset by the 2009 decision of the Supreme Court of Canada in BCE. That decision rejected shareholder primacy in favour of a view of the corporation as an amalgam of different constituencies, or stakeholder groups, each of whose interests must be considered by directors in determining the best interests

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of the corporation. According to the Supreme Court, it is now a mistake for the directors to equate the interests of the corporation with the interests of shareholders alone. It should follow from BCE that it would be wrong for directors, in discharging their responsibilities, simply to defer to the shareholders’ wishes or to delegate to shareholders decision making on a matter that requires a decision by the directors under the statutory division of powers between directors and shareholders. For directors to accept shareholder wishes as a proxy for the best interests of the corporation would be to do the very thing that BCE says is wrong.

The Magna caseThis takes us to the Magna transaction, which came before Ontario courts and securities regulators this year. The transaction involved the collapse of a dual class share structure in return for consideration that included (i) the issuance of subordinate class shares to the controlling shareholder, involving an extraordinary dilution of the subordinate class shareholders; and (ii) the controlling shareholder being given control of (but a minority equity interest in) Magna’s electrification

business, which was spun out into a partnership between the controlling shareholder and Magna. The transaction was to be done by way of a plan of arrangement. This would ordinarily mean three levels of approval: (i) a decision by the board that the transaction was in the best interests of the corporation; (ii) an affirmative vote by shareholders evidencing their view, as the directly affected securityholders, of the fairness of the transaction; and (iii) a decision by the court that the transaction was fair and reasonable.

Very unusually, the board made no threshold determination that the transaction, including the spinout of Magna’s electrification business, was in the best interests of Magna. The board simply determined that it would be in Magna’s best interests for the transaction to be put to shareholders for a vote. This was unusual because a fundamental change transaction is normally not put to shareholders for approval unless and until the board has determined that the transaction is in the best interests of the corporation. It is important that the board make this threshold determination, particularly given the BCE stakeholder view of the corporation, because board decisions are fiduciarily constrained and the directors are accountable for their decisions to all affected stakeholders. Shareholders, in contrast, are free to vote their shares in their own interests and are accountable to no one.

After the Magna arrangement transaction was approved by a substantial majority of shareholders, the court approved the transaction as fair and reasonable. In reaching this conclusion, the court relied principally on the shareholder vote and on what the court described as the “principle of corporate democracy,” according to which “a vote of affected shareholders is a recognized means of addressing controversial transactions.”

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This endorsement of shareholder primacy is hard to reconcile with the stakeholder view of the corporation promulgated in BCE according to which the interests of the corporation are not to be equated with shareholder interests.

The Magna transaction was also the subject of an Ontario Securities Commission hearing. The OSC, like the court, determined that whether the transaction should proceed “is a business and financial decision that shareholders are entitled to make.” The OSC’s affirmation of shareholder primacy, despite BCE, was no surprise in light of the OSC’s decision the previous year in the HudBay Minerals/Lundin Mining matter. In that decision, the OSC gave HudBay shareholders a veto that they do not have under the corporate statutes over a “merger of equals” transaction that the HudBay board determined was in HudBay’s best interests. The OSC’s decision was based on its concern for the fair treatment of shareholders in order to foster confidence in the capital markets.

When in doubt, let the shareholders decideThese decisions leave Canadian corporate and securities regulatory laws in a state of incoherence on the relative roles of the board and shareholders in transformative transactions. The logic of BCE suggests that it would be wrong for the board simply to defer to shareholders or to give shareholders a veto over decisions for which the corporate statutes assign responsibility to the board. However, what BCE suggests would be wrong is what the courts and securities regulators endorsed in Magna and HudBay. Neither the courts nor the securities regulators have faced up to this contradiction. Until they do, Canadian law will be unpredictable. However, the lesson in the meantime for Canadian boards struggling with controversial transactions would appear to be: when in doubt, let the shareholders decide.

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Target boards will consider more aggressive defensive tactics when facing a hostile bid By Thomas Yeo, Sharon Geraghty and Joris Hogan

4Two well-known Canadian companies dominated the M&A headlines last summer and fall, one as the hunter and one as the hunted. Although the outcomes in both situations were similar – hostile bidders turned away – the cases highlight an important question: whether directors of Canadian companies facing a hostile bid find themselves with a relatively empty toolbox compared with directors in other jurisdictions.

As the battle for Potash Corporation of Saskatchewan was waged, only three possible outcomes appeared evident:

i. BHP Billiton would be successful in its bid;

ii. Potash Corporation would find some alternative transaction led by a “white knight”; or

iii. The Canadian industry minister would refuse to grant Investment Canada Act approval for the BHP transaction.

We all know now that it was a failure to win Investment Canada approval that ended BHP’s deal (see Trend 1, above). However, at no time during the Potash saga did observers really expect that, unless the federal government intervened, Potash Corporation would ever manage to simply turn away BHP without an alternative transaction in hand. In other words, without unusual government intervention, Potash Corporation was “in play” and therefore a transformational outcome was imminent one way or another.

Meanwhile, Quebec-based convenience store operator Alimentation Couche-Tard Inc. embarked on a hostile bid for Iowa-based Casey’s General Stores Inc. The range of possible outcomes in that case was far from certain,

and both sides employed many different tactics during the fight. Those tactics included

• the issuance by Casey’s of a substantial amount of debt on a private placement basis, with terms that included a “poison put” in the event of a change of control;

• a buyback of approximately 26% of Casey’s outstanding shares using the proceeds of the debt issuance; and

• a proxy battle launched by Couche-Tard for control of Casey’s board.

At the end of the day, after losing its proxy battle by a wide margin and with Casey’s board dangling the prospect of a higher offer from 7-Eleven, Couche-Tard refused to raise its bid and walked away. Ultimately Casey’s board received a higher offer from 7-Eleven, but still declined to take the offer to shareholders – deeming it inadequate.

The Casey’s board was able to use the protection of a shareholder rights plan, but also benefited from a corporate statute in Iowa that prevented Couche-Tard from acquiring 100% of Casey’s unless Couche-Tard received the support of Casey’s board or was able to obtain 85% of the outstanding shares under its tender offer.

The Canadian approach: “There comes a time when the pill must go”Securities regulators in Canada have long held the view that the best approach in a hostile bid is to have an unrestricted auction for control. They regard this approach as consistent with their mandate to protect the interests of investors – shareholders should not be

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deprived of the ability to sell their shares as they see fit. The securities regulators make clear in their national policy on defensive tactics that these tactics may be used only “in a genuine attempt to obtain a better bid.” Historically, there has been no room in the regulators’ minds for any tactics that would “deny or limit severely” the ability of shareholders to respond to a bid.

In the takeover bid context, the securities regulators have wielded enormous power to implement this philosophy. Through their authority to issue cease trade orders, the regulators have the power to pull the plug on rights plans, the most commonly used Canadian defensive tactic. The regulators’ approach, however, is hard to reconcile with the Supreme Court of Canada’s interpretation of the duties of directors in a change-of-control situation. In the BCE decision in 2009, the Supreme Court expressly rejected the notion that the directors’ only role in a change-of-control transaction is to maximize value for shareholders; the Court instead reiterated the principle that directors’ duties are owed to the corporation and that directors must consider the impact of a transaction on all stakeholders. Although the BCE decision certainly suggests that there may be appropriate circumstances for a board to “just say no” and employ defensive tactics to turn away a hostile bidder, rather than simply to buy time to find a white knight, the securities regulators are likely to reject that board decision and turn the decision regarding the company’s future over to the shareholders.

Recent rights plan decisions of the Ontario and Alberta securities regulators (in Neo Material Technologies and Pulse Data, respectively) suggested that perhaps the old way of thinking about defensive tactics may be changing in light of BCE. In both those cases, securities regulators refused to cease trade a

rights plan in the face of a hostile bid. However, in both cases, shareholders, with full knowledge of the hostile bid proposed to them, voted to ratify the rights plan. The OSC’s most recent decision in the Baffinland Iron Mines case, however, makes clear that its previous Neo decision turned on shareholder approval of the plan in the face of the bid and should not be viewed as recognizing any right of the board to use a poison pill to deny shareholders access to a bid. The decision of the British Columbia Securities Commission in Lionsgate is also unequivocal in its conclusion that the position of securities regulators in Canada should not change as a result of Neo and Pulse Data and that there will always come “a time when the pill must go.”

The “just say no” defence in the United States and a shifting international moodForeign takeovers of domestic companies are a rising concern in all jurisdictions, particularly as the global financial crisis has made targets vulnerable to opportunis- tic buyers. Part of the concern in Canada has related to a track record of broken promises by foreign acquirors, but Canadian companies have also not fared that well recently in attempting hostile transactions in other jurisdictions (in addition to Couche-Tard’s abandoned

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bid for Casey’s, Agrium Inc. was forced after a year to abandon its bid for CF Industries in early 2010). The concern expressed during the Potash debate about Canada being a “boy scout” when it comes to foreign takeovers may be driven less by the federal government’s position on foreign investment and more by Canadian directors’ inability to do much more than initiate an auction for control of the company once a company is in play.

In the United States, directors have the well-known “Revlon duty” to maximize shareholder value, but that duty arises only after a board has made a decision to sell control of the company. Until that decision is made, the board is free to implement defences against a takeover bid, including adopting a rights plan or a panoply of other “shark repellents.” However, in Delaware and most states, the Unocal “enhanced scrutiny” standard applies to a board’s action to implement or amend a rights plan after the company is put in play by a third-party bidder or by a board decision to sell a controlling interest in the company. Under this enhanced scrutiny standard, in order to receive the protection afforded by the business judgment rule, the directors must show that they had reasonable grounds to believe that a danger to corporate policy and effectiveness existed and that the defensive response was reasonable and proportionate to the perceived threat.

Unlike the Canadian securities regulators, the U.S. Securities and Exchange Commission has stayed out of the regulation of defensive tactics, leaving them to the courts to police as a matter of fiduciary duties under applicable state laws governing the fiduciary obligations of directors. The SEC has instead focused on ensuring that shareholders have adequate information with which to make a decision. For example, while Casey’s was able to maintain its rights plan in place throughout its contest with Couche-Tard without regulatory interference, in

Canada the rights plan would almost certainly have been nullified by the regulators after 45 to 60 days.

Even the United Kingdom is rethinking its approach to takeover bids after Kraft’s acquisition of the iconic British candy maker Cadbury. That deal and the surrounding publicity have prompted the U.K. regulator to propose new rules intended to reduce the tactical advantage of bidders in takeover situations.

Continued debate in CanadaDespite the debate over the sufficiency of the tools available to directors of Canadian companies facing a hostile takeover, it is doubtful that we will see any significant movement on the issue from securities regulators in the near future, particularly given the lack of a national securities regulator.

In light of Lionsgate and Baffinland, it now seems clear that Neo and Pulse Data do not herald a real shift in policy by securities regulators and do not open the door to a “just say no” defence. However, we expect that directors facing a hostile bid will continue to try to test the “old” thinking of securities regulators by attempting to keep rights plans in place longer or by obtaining shareholder approval of plans in the face of a hostile bid.

We also anticipate that boards and their advisers will look to develop innovative defensive tactics that, unlike rights plans, are not susceptible to the cease trade powers of securities regulators and that would require intervention by the courts. The courts are a preferable venue for targets to defend defensive tactics since courts are more likely than securities regulators to be deferential in their review of target board actions, particularly in light of the new fiduciary duty framework established in the BCE decision.

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In 2009, we predicted that shareholder activism would increase in 2010. We saw this borne out. Shareholders are increasingly exercising their voices, in some cases after pushing for the right to do so, in corporate decisions ranging from matters such as “say on pay” to endorsing or rejecting M&A transactions and the continuance of shareholder rights plans, to replacing directors who are not to their liking. We see this activism continuing in 2011, accompanied with a new focus on the mechanics of the proxy system in Canada and the United States. Interestingly, what we also began to see in 2010 was the corporate world pushing back against what it considered to be the growing and inappropriate influence of proxy advisory firms on the way shareholders exercise their votes. We believe this movement will gain more momentum in 2011.

Shareholders remain keenly interested in getting their voices heardTo see how shareholder activism thrived in Canada and the United States in 2010, you only have to look at Carl Icahn and his list of recent proxy fights. Even institutional investors such as pension funds are becoming increasingly active owners in both governance and financial matters. Shareholders are willing to exert their influence to get what they want.

A number of factors are behind this activism: Shareholders are being given more opportunities to vote as a result of stock exchange or securities laws that give them more legal tools and require their approval for an increasing scope of matters (for example, the TSX now requires its listed companies to obtain shareholder approval when acquiring another public company if the transaction involves issuing shares in excess of 25% of the acquiring company’s outstanding shares). The evolution of corporate governance best practices is also

leading more companies to seek their shareholders’ views on matters that had previously been outside shareholders’ sphere of influence – in Canada, for example, “say on pay” and corporate social responsibility agenda items (see Trend 3, above, on the role of directors versus shareholders). Shareholders are also seeking more influence through negotiations with companies and, failing that, through requisitioning shareholder meetings to force consideration of matters of concern to them. West Face Capital’s launch of a proxy battle to replace certain directors of Maple Leaf Foods is a recent example of this in Canada. Activists are feeling more confident, with the assistance of experienced advisers who are gaining new-found prominence in launching proxy battles to force boards to listen to shareholders’ views. This trend shows no sign of abating.

The spotlight will shine more brightly on shareholder voting processes in M&A By Patrice Walch-Watson and Andrew Beck

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Proxy voting system flawed?Shareholder voting in public companies relies on proxy voting. Significant attention has been paid to the U.S. and Canadian proxy systems of late. This has resulted, in part, from the SEC and then the Canadian Securities Administrators inviting general comment on their respective proxy regimes in response to industry and investor interest in updating the rules to promote greater efficiency and transparency in the systems and to enhance the accuracy and integrity of the shareholder vote.

Market participants in the United States and Canada have spoken loudly and clearly, questioning whether the proxy voting system itself is broken. Their concern goes beyond policy issues (although there remains continued interest in the policy issues, including the ongoing debate about reimbursement of proxy solicitation expenses).

Canadian securities regulators and the SEC are being strongly urged to consider changing, indeed strengthening, regulation of proxy voting to deal with identified cases of over-voting, empty voting and the overall lack of transparency in the way voting is processed to ensure that votes are counted properly. Corporations and their shareholders want a clearer view of the way voting instructions are being dealt with, particularly by the proxy voting services that most intermediaries use, such as Broadridge Financial Solutions. These issues have been highlighted in a number of recent proxy battles, including, in Canada, in VenGrowth Asset Management’s sale of funds to Covington Capital, in which a dissident share holder voiced dissatisfaction about problems with the ability to physically submit votes to the proxy voting service, the availability of shareholder lists, the ability to view proxies, and how and when votes are tabulated. In contested M&A transactions, with millions or billions of dollars resting on the outcome of these votes, capturing

and accurately recording every vote are critical to all parties involved.

We expect that shareholder voting issues will continue to be under the microscope in the United States and Canada in 2011.

Proxy advisory firms facing scrutiny Proxy advisory firms such as Institutional Shareholder Services, Glass Lewis and Proxy Governance Inc. are hired by institutional investors to provide recommendations on how they, as shareholders, should vote on certain corporate decisions. The reports are based on the proxy advisory firm’s research and views of corporate governance best practices. These reports shape – and some say determine – voting outcomes because many institutional shareholders either automatically vote in line with the proxy advisory firm’s views or give the reports significant weight in deciding how to vote. The role of proxy advisory firms is being increasingly scrutinized and openly criticized by many in corporate Canada and the United States; Kinross Gold Corporation and IBM are just two public companies that have been vocal about their serious concerns in this regard.

The questions that are being asked on both sides of the Canadian–U.S. border about proxy advisory firms include these:

• Is too much power concentrated in the hands of too few?

• Are the proxy advisory firms qualified to advise on all the types of decisions that shareholders are now voting on, particularly in change-of-control transactions in which experience beyond corporate governance is critical?

• Is regulation required to ensure (i) disclosure of apparent voting control and (ii) more oversight and transparency of possible conflicts of interests when the same firm, through different departments, provides both consulting services to issuers regarding management proposals and corporate governance ratings and voter recommendation services to institutions?

• Should the firms be exempt from the proxy solicitation regime and reporting of control rules?

This is one largely unregulated area of the securities world that may not stay that way for much longer since regulators are being strongly urged to step in.

Changes will comeIn 2011, equity holders will continue to have increased opportunities to formally exercise their democratic rights to have a say in corporate decisions. We expect that further changes to the proxy voting system will make their way into the regulatory reform agenda in Canada and the United States as regulators heed the call to protect investor confidence by ensuring fairness, accuracy and transparency in all aspects of shareholder voting.

Torys’ M&A Practice GroupTorys’ M&A Practice Group is highly regarded for its experience in sophisticated, complex and innovative mergers and acquisitions. We are involved in high-profile transactions, both public and private, as well as those for small and mid-sized companies. On cross-border and global M&A transactions, we provide seamless service to clients in the United States, Canada and internationally.

The members of the M&A Practice Group have the expertise to advise on all of the areas of law that pertain to M&A transactions, including corporate; securities; litigation and dispute resolution; competition and antitrust; taxation; foreign investment issues; regulatory matters, including stock exchange requirements; and employment, pension and benefits issues.

For further information about our M&A Practice, please contact

Philip Brown Matthew Cockburn Sharon Geraghty212.880.6238 416.865.7662 [email protected] [email protected] [email protected]

For further discussion and videos on M&A trends, please visit our microsite at www.torys.com/matrends2011.

About Torys LLPTorys LLP is an international business law firm with offices in Toronto and New York. Our reputation for quality, creativity and teamwork has made us trusted legal advisers in complex transactions and major disputes on both sides of the border and internationally.

The firm offers services in mergers and acquisitions; corporate and capital markets; litigation and dispute resolution; restructuring and insolvency; taxation; competition and antitrust; environmental, health and safety; debt finance and lending; project development and finance; managed assets; private equity and venture capital; financial institutions; pension and employment; intellectual property; technology, media and telecom; life sciences; real estate; infrastructure and energy; climate change and emissions trading; and personal client services.

Copies of this and other Torys publications are available at www.torys.com.

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