western canadian public m&a - deal study

Western Canadian Public M&A Deal Study

December 2014 By: Bill Gilliland, Partner Dan Shea, Associate

Dentons Canada LLP

Overview of survey and methodology

December 2014 Dentons Canada LLP

• Our survey focuses on M&A deals announced between 2011 and 2014 involving western Canadian-based public company targets.

• The majority of transactions covered by the survey were structured as plans of arrangement (with a few takeover bids), involved companies engaged in the energy sector, and had an enterprise transaction value at the time of announcement of at least $250 million.

• Throughout the survey we provide samples of many of the provisions that are tracked in the survey. The samples are taken from agreements we reviewed and are provided as examples only and are not model provisions.

• The bolded percentages throughout the survey indicate the occurrence-rate of various provisions in the transaction agreements we reviewed. Please note that our characterization of provisions into categories involves professional judgment, as our survey categories do not lend themselves to simple or perfect characterizations.

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Table of contents

Dentons Canada LLP 3

I. Material Adverse Change …………………………………………………………….. 4

II. Deal Protection Provisions …………………………………………………………… 11

A. Non-Solicitation Provisions …………………………………………………….. 12

B. Matching Rights …………………………………………………………………. 17

C. Break Fees……………………………………………………………………….. 20

D. Expense Reimbursement ………………………………………………………. 26

III. Regulatory Approvals …………………………………………………………………. 29

December 2014

Material adverse change

Dentons Canada LLP

• Use of Concept: • Qualifies certain representations, warranties and covenants • Condition of closing that no material adverse change occurs during the interim period

• Three components to material adverse change: • Defining material adverse change • Exceptions to the definition of material adverse change • Exceptions to the exceptions

4 December 2014

Defining material adverse change

Dentons Canada LLP

Means any change, effect, event, circumstance, fact or occurrence that individually or in the aggregate with other such changes, effects, events, circumstances, facts or occurrences, is or would/could reasonably be expected to be [68%/32%] material and adverse to the business, condition (including financial condition), assets, liabilities (contingent or otherwise), results of operations, prospects [47%], or operations of the Company and its subsidiaries, taken as a whole, or prevent, frustrate, materially delay or impair the ability to consummate the Contemplated Transactions. [35%]

5 December 2014

Exceptions to the definition of material adverse change

Dentons Canada LLP

• Material adverse change provisions provide exceptions for matters that are not to be considered when evaluating whether a material adverse change has occurred. The exceptions represent a negotiated allocation of risk between the parties, as well as market practice.

• The usual exceptions: • Any adoption, proposal, implementation or change in applicable Law or accounting standards

(including GAAP and IFRS) or interpretations thereof by any Governmental Authority [94%] • Any change in global, national or regional political conditions (including the outbreak of war or acts of

terrorism) or in general economic, business, regulatory, currency exchange or credit market conditions or in national or global financial, commodity (including oil and natural gas or related hydrocarbons) or capital markets [97%]

• Any change generally affecting the industries in which the Company operates, including the oilfield services, facility infrastructure services, midstream production services or oil sands and refinery asset management and maintenance services industries in North America, as a whole [97%]

6 December 2014


Dentons Canada LLP

• The usual exceptions (con’t): • The announcement or performance of this Agreement or consummation of the transactions

contemplated hereby [97%] • Any change in the market price or trading volume of the securities of the Company (it being

understood that the causes underlying such change in market price or trading volume may be taken into account in determining whether a Material Adverse Change has occurred) [91%]

• Any action taken (or omitted to be taken) at the written request of the Purchaser [97%]

7 December 2014



• Other common exceptions: • The failure, in and of itself, of the Company to meet any internal or public projections, forecasts or

estimates of revenues or earnings (it being understood that the causes underlying such failure may be taken into account in determining whether a Material Adverse Change has occurred) [59%]

• Any event, occurrence, circumstance or state of facts which has, prior to the date hereof, been publicly disclosed in the Company Public Documents or which is set out in the Disclosure Letter [68%]

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• In addition to the customary exceptions that are largely derived from market practice, it is common to include exceptions tailored to specific transactions and circumstances.

• For example: • Unfavourable results in respect of wells currently being drilled or in respect of which drilling

commences prior to closing • Any action taken in connection with obtaining regulatory approvals • Certain actions or proceedings relating to concurrent transactions • Ability of Purchaser to consummate the transaction

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Exceptions to the exceptions

Dentons Canada LLP

• Notwithstanding the exceptions to the definition of material adverse change, items that are external to the target are typically considered in the material adverse change analysis to the extent their impact on the target is disproportionate to similar companies in the same industry [97%]

• For example: Except such change, effect, event, circumstance, fact or occurrence referred to in clauses (i) [changes in laws/accounting standards], (ii) [general political/economic conditions], and (iii) [impacts on target's industry generally] to the extent that such change, effect, event, circumstance, fact or occurrence has a disproportionate effect on the business, condition (including financial condition), assets, liabilities (contingent or otherwise), results of operations, prospects, or operations of the Company and its subsidiaries, taken as a whole, compared to other companies of similar size in the industry in which the Company carries on business.

10 December 2014

Deal protection provisions


• Non-solicitation provisions

• Matching rights

• Break fees

• Expense reimbursement

December 2014

Non-solicitation provisions


• Canadian public company merger agreements almost universally contain a non-solicitation covenant that circumscribes the target's ability to ‘shop’ itself or solicit or consider competing bids after agreeing to be acquired. Every agreement reviewed for our survey contained a non-solicitation covenant.

• The covenant provides an exception to permit the target to provide confidential information to certain competing bidders and to consider and accept “Superior Proposals” (which is necessary to facilitate the target board's exercise of its fiduciary duties)

• Non-solicitation provisions are a critical deal-protection mechanism and significantly impact a target's ability to control its sale process.

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What is a “Superior Proposal”?


“Superior Proposal” means a bona fide unsolicited Acquisition Proposal made by a third party to the Target or its shareholders in writing after the date hereof:

• To acquire all of the Target Shares or all or substantially all of the assets of Target on a consolidated basis; • 62% require the Acquisition Proposal to be for all (or at least 90%) of the target's shares or

all/substantially all of the target's assets. These thresholds are influenced by numerous factors including the structure of the purchaser's offer, market practice, and availability of topping bids.

• That is reasonably capable of being completed without undue delay, taking into account all legal, financial, regulatory and other aspects of such Acquisition Proposal and the party making such Acquisition Proposal; [85%]

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Dentons Canada LLP

Definition of “Superior Proposal” (con’t): • That is not subject to any financing condition and/or in respect of which any required financing to

complete such Acquisition Proposal has been obtained or demonstrated to the satisfaction of the board of directors, acting in good faith (after receipt of advice from its financial advisors and outside legal counsel) to be reasonably likely to be obtained without undue delay; [100%]

• Which is not subject to a due diligence and/or access condition; [56% with 26% permitting a limited due diligence condition]

• That is made available to all Target Shareholders on the same terms and conditions; and [15%]

14 December 2014



Definition of “Superior Proposal” (con’t): • In respect of which the board of directors determines in good faith (after receipt of advice from its

outside legal counsel with respect to (x) below and financial advisors with respect to (y) below), (x) that failure to recommend such Acquisition Proposal to its securityholders would be inconsistent with its fiduciary duties and (y) would, taking into account all of the terms and conditions of such Acquisition Proposal, if consummated in accordance with its terms (but not assuming away any risk of non-completion), result in a transaction more favourable to its securityholders from a financial point of view than the Arrangement (including any adjustment to the terms and conditions of the Arrangement proposed by Purchaser)

• 100% require Superior Proposal determination to be based upon advice from outside financial advisors and legal counsel

• 97% require Superior Proposal to be financially superior or more favourable from a financial point of view. An alternative approach is to simply require the Superior Proposal to be more favourable to shareholders.

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When can confidential information be provided to competing bidders?

Dentons Canada LLP

• Acquisition Proposal is or could/would reasonably be expected to lead to a Superior Proposal [68%]

• Acquisition Proposal is a Superior Proposal [32%]

16 December 2014

Matching rights


• Matching rights are almost universal in Canadian public company merger agreements, and every agreement reviewed for our survey provided the purchaser with matching rights.

• Matching rights are an important deal protection mechanism as they provide a strong deterrent to “deal jumping”. The deterrent arises since competing bidders have to undertake significant transactional expense (including opportunity costs), while the incumbent purchaser can simply choose to top any competing bid.

• The deterrent effect can be most effective for financial buyers who have a common value perspective (such as cash flows), since toping bids will often be based on similar valuation parameters. The deterrent effect may be less significant for strategic buyers that have a different valuation perspective from the incumbent purchaser.

December 2014

Matching rights

Dentons Canada LLP

• The following is a sample matching rights provision: In the event that Target is in receipt of a Superior Proposal, it shall give Purchaser, orally and in writing, at least five Business Days [56%] advance notice of any decision by the Target Board to accept, recommend, approve or enter into an agreement to implement a Superior Proposal, which notice shall (i) confirm that the Target Board has determined that such Acquisition Proposal constitutes a Superior Proposal; (ii) identify the third party making the Superior Proposal; and (iii) include a true and complete copy thereof and any amendments thereto. During such five Business Day period, Target agrees not to accept, recommend, approve or enter into any agreement to implement such Superior Proposal and not to release the party making the Superior Proposal from any standstill provisions and shall not withdraw, redefine, modify or change its recommendation in respect of the Arrangement. In addition, during such five Business Day period, Target shall, and shall cause its financial and legal advisors to, negotiate in good faith [82%] with Purchaser and its financial and legal advisors to make such adjustments in the terms and conditions of this Agreement and the Arrangement as would enable Target to proceed with the Arrangement as amended rather than the Superior Proposal.

18 December 2014

Matching rights

Dentons Canada LLP

• Five business day match period is most common [56%], but match periods often range from three business days to seven business days

• 82% of agreements require the target to negotiate in good faith with purchaser during match period

• Other approaches (i.e. “weaker” match rights) only require target to consider amendments in good faith or to simply provide information to purchaser about superior proposals

19 December 2014

Break fees

Dentons Canada LLP

• Break fees payable by the target

• Break fees payable by the purchaser

20 December 2014

Break fees payable by the target

Dentons Canada LLP

• General situations where break fees are payable by the target: • Target board changes recommendation [100%] • Acceptance of superior proposal [100%] • Vote down in the face of a competing acquisition proposal [94%]

• Less common break fee triggers include: • Breach of non-solicitation covenant [44%] • Material breaches of representations or covenants, or breaches that result in non-fulfillment of

conditions [56%]

• Two-tiered break fees are less common. When used, the break fees tend to be tiered based on strategic triggers (such as board recommendation changes or accepting a superior proposal) and breaches of the agreement. Less than 10% of agreements reviewed included two-tier break fees and when used the second tier fee can often be more accurately classified as an expense fee.

21 December 2014



Vote down in the face of a competing acquisition proposal (i) after the date hereof and prior to the Target Shareholder Meeting, a bona fide Acquisition Proposal shall have been made or proposed to Target or otherwise made or publicly announced; (ii) the requisite Target Shareholder approvals for the arrangement are not obtained at the Target Shareholder Meeting; and (iii) within X months after the date of the termination of this Agreement, such/any Acquisition Proposal is consummated/entered into.

• 31% required Acquisition Proposal to be made public, with 69% allowing Acquisition Proposal to be made public or to the company

• 13% had a six month period; 16% had a nine month period; and 71% had a twelve month period • 16% were triggered by such Acquisition Proposal and 84% were triggered by any Acquisition

Proposal • 38% required Acquisition Proposal to be consummated within the applicable period and 62%

required Acquisition Proposal to be entered into within the applicable period (but, in the case of the latter, the Acquisition Proposal almost always had to be subsequently consummated)

• Also, the threshold for the percentage of shares/assets that must be subject to the Acquisition Proposal is sometimes increased from 20% to 50% for purposes of this break fee trigger

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Vote down in the face of a competing acquisition proposal (con’t)

• Modified versions of this break fee trigger have appeared in recent transactions.

• Whereas historically this break fee trigger has always required a vote down of the incumbent deal, modified versions trigger the break fee if the agreement is terminated as a result of (i) a willful/fraudulent breach of the target’s representations or covenants or (ii) as a result of the occurrence of the outside date, along with satisfaction of the other conditions to the trigger (set forth on the previous slide).

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Break fees payable by the purchaser

Dentons Canada LLP

• Same circumstances as for target (i.e. reciprocal break fees – common for merger of equal transactions)

• Financing conditionality • Specific regulatory conditionality • Purchaser shareholder approval

• Break fees payable by the purchaser are influenced by numerous factors (for example,

whether the transaction raises substantive regulatory concerns, requires purchaser financing, or involves the issuance of the purchaser’s stock) and, accordingly, is not susceptible to meaningful quantitative tracking for purposes of our survey

24 December 2014

Break fees payable by the purchaser

Dentons Canada LLP

Specific regulatory conditionality • The following are sample break fee triggers relating to regulatory approvals:

The Purchaser shall pay, or cause to be paid, to the Company by wire transfer of immediately available funds an amount equal to $100,000,000 (the "Purchaser Termination Fee") if this Agreement is terminated by the Company on the basis that the PRC Approvals are not obtained by January 15, 2012, provided, however, if following the Company's termination of the Agreement, the Parties ultimately consummate the transactions contemplated herein, such Purchaser Termination Fee shall be refunded to the Purchaser Parties within two business days of the closing date of the transaction. "PRC Approvals" means the approvals required to be obtained from the National Development and Reform Commission of China, the Ministry of Commerce of China and the State Administration of Foreign Exchange of China, and any other required approvals to be obtained from Governmental Entities of China, in order for the Purchaser to complete the transactions contemplated by this Agreement. The Reverse Break Fee shall be payable if this Agreement is terminated pursuant to Section 7.2(1)(b)(ii) (Illegality) if an Award with respect to either or both of the CRTC Approval or Competition Act matters precludes the consummation of the Arrangement. The Reverse Break Fee shall be payable if this Agreement is terminated pursuant to Section 7.2(1)(b)(iii) (Occurrence of Outside Date) if either or both of the conditions set forth in Section 6.1(3) (CRTC Approval) and Section 6.2(4) (Competition Act Clearance) is not satisfied by the Outside Date.

25 December 2014

Expense reimbursement

Dentons Canada LLP

• General triggers for expense reimbursement: • Certain breaches of representations and warranties • Certain breaches of covenants • Failure to obtain shareholder approval (i.e. “naked vote down”)

• Approximately 32% of agreements reviewed included an expense reimbursement provision, with most triggered solely by certain breaches of representations or covenants.

• An important issue is whether the expense fee will be reciprocal or only payable by the target.

26 December 2014


Dentons Canada LLP

• The following are sample expense reimbursement provisions: If this Agreement is terminated pursuant to [Target Shareholders do not approve] or [breach of Target representations, warranties and covenants], the Target shall pay, or cause to be paid, to the Purchaser by wire transfer of immediate available funds, an amount equal to the Purchaser's reasonably incurred out-of-pocket fees and expenses in connection with the transactions contemplated by this Agreement, up to a maximum of $5,000,000 million, within two Business Days of such termination. Any payment due under [Break Fee Provision] shall be reduced dollar for dollar by any payment made as Expense Reimbursement. If this Agreement is terminated pursuant to [Purchaser Shareholders do not approve] or [breach of Purchaser representations, warranties and covenants], the Purchaser shall pay, or cause to be paid, to Target by wire transfer of immediate available funds, an amount equal to Target's reasonably incurred out-of-pocket expenses in connection with the transactions contemplated by this Agreement, up to a maximum of $5,000,000 million, within two Business Days of such termination. Any payment due under [Break Fee Provision] shall be reduced dollar for dollar by any payment made as Expense Reimbursement.

27 December 2014


Dentons Canada LLP

• The amount of the expense reimbursement is generally based either on a specified amount or the party being reimbursed is entitled to its actual expenses up to a specified cap (such as the example on the previous slide).

28 December 2014

Regulatory approvals

Dentons Canada LLP

• Parties generally required to apply some degree of "effort" to obtain regulatory approvals

• Regulatory approvals generally required to be obtained on terms either reasonably satisfactory to the parties or in accordance with pre-specified conditions

• Some transactions include a “hell or high water” clause that commits the purchaser to undertake any obligations or divestitures that the government requires to consummate the transaction, regardless of cost (rare for the energy sector)

29 December 2014


Dentons Canada LLP

• "Commercially reasonable efforts" most common standard for obtaining regulatory approvals

• "Best efforts” less common

• Recent retail transactions (Loblaw/Shoppers, Sobey’s/Safeway) involving significant substantive competition concerns include “hell or high water” standard

30 December 2014



• Choice of “effort” standard is important

• Canadian courts consistently hold that "best efforts" imposes more onerous obligation than "commercially reasonable efforts" (Atmospheric Diving Systems Inc. v. International Hard Suits Inc., 1994 CarswellBC 158; Strategy Summit Ltd. v. Remington Development Corp., 2011 CarswellAlta 1616). Commercially reasonable efforts permits parties to consider their economic position when determining where their performance obligation ends. Best efforts involves taking, in good faith, all reasonable steps to achieve the objective, carrying the process to its logical conclusion, leaving no-stone-unturned, and doing everything known to be usual, necessary and proper to ensure the success of the undertaking.

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Dentons Canada LLP

The following is a sample provision from the Daylight Energy / Sinopec (October 2011) transaction pertaining to regulatory approvals:

Covenant The Purchaser Parties shall use all commercially reasonably efforts to obtain all Regulatory Approvals and to effect all necessary registrations, filings and submissions of information requested or required by Governmental Entities from the Purchaser Parties, or any of its affiliates relating to the Arrangement. Condition All Regulatory Approvals in form and substance satisfactory to the Parties, acting reasonably, shall have been obtained.

32 December 2014


Dentons Canada LLP

• Trend moving away from pure efforts standards (such as the sample provision from the Daylight/Sinopec transaction) to more sophisticated obligations in light of increased risk and sensitivity regarding divestitures and undertakings under the Competition Act and Investment Canada Act

• But may want to avoid detailed provisions regarding divestitures, undertakings and other remedies if the transaction does not raise substantive issues as this may cause the reviewing agency to believe there are issues when there are none

• From the purchasers perspective, inclusion of a “hell or high water” clause may reduce the purchaser’s bargaining power with the reviewing agency since the reviewing agency will know the purchaser is required to take all necessary steps to implement the transaction

33 December 2014


Dentons Canada LLP

The following provision from the Celtic Exploration / ExxonMobil (October 2012) transaction provides an example of a more sophisticated approach to prescribing the obligations associated with obtaining regulatory approvals, and is an example of the trend away from pure “efforts” standards:

Notwithstanding any other provision of this Agreement, nothing in this Agreement shall require, or be construed to require, ExxonMobil or the Purchaser to: (i) disclose to any Person (including Celtic) ExxonMobil's or the Purchaser's plans and undertakings submitted for the purposes of the review under the Investment Canada Act or any drafts thereof or correspondence or discussions with respect thereto; (ii) provide the Commissioner, the Minister of Industry or the Governor in Council any undertakings or meet any requirements in relation to the Competition Act Approval and Investment Canada Approval that are not as to commercial matters and, in any case, are not commercially reasonable to ExxonMobil and the Purchaser; (iii) sell, lease, license, transfer, dispose of, divest or otherwise encumber, or to hold separate pending any such action or proffer, propose, negotiate, offer to effect or consent, commit or agree to any sale, divestiture, lease, licensing, transfer, disposal, divestment or other encumbrance of, or to hold separate any assets, licenses, operations, rights, product lines, businesses or interest of ExxonMobil, the Purchaser, Celtic or any of their respective Subsidiaries or Affiliates; or (iv) take or agree to take any other action, or agree or consent to any limitations or restrictions on freedom of actions with respect to, or its ability to own, retain or make changes in, any assets, licenses, operations, rights, product lines, businesses or interests of ExxonMobil, the Purchaser or Celtic or any of their respective Subsidiaries or Affiliates.

34 December 2014



The following provision from the Loblaw / Shoppers Drug Mart (July 2013) transaction provides an example of a “hell or high water” regulatory approval clause:

Loblaw shall use its best efforts to obtain Competition Act Approval as soon as reasonably practicable but, in any event, no later than the Outside Date. For purposes of the foregoing, “best efforts” shall include, without limitation, proposing, negotiating, agreeing to and effecting, by undertaking, consent agreement, hold separate agreement or otherwise: (i) the sale, divestiture, licensing or disposition of all or any part of the businesses or assets of Loblaw or Shoppers Drug Mart; (ii) the termination of any existing contractual rights, relationships and obligations, or entry into or amendment of any licensing arrangements; (iii) the taking of any action that, after consummation of the Arrangement, would limit the freedom of action of, or impose any other requirement on, Loblaw with respect to the operation of one or more of the businesses, or the assets, of Loblaw or Shoppers Drug Mart; and (iv) any other remedial action whatsoever that may be necessary in order to obtain Competition Act Approval prior to the Outside Date, provided that any such action is conditioned upon the completion of the Arrangement.

December 2014


Dentons Canada LLP

• Scope and sophistication of regulatory approval provisions is also related to many deal factors including transaction size, industry (e.g. oil sands or telecommunications), size of parties, whether a party is foreign or controlled by a government, and the substantive nature of competition concerns.

36 December 2014

western canadian public m&a - deal study

Law

survey categories

various provisions

usual exceptions

characterization of

model provisions

deal protection provisions

nonsolicitation provisions

financial condition