Negotiating Competition Act and Investment Canada Act Terms in M&A Agreements

Introduction Overview Competition Act notification and review Investment Canada Act notification and review Regulatory Terms Representations Conditions Covenants Essentials of Commercial Contracts 1

Competition Act Notification and Review Pre-merger notification may be required where: Parties assets or revenues >$400 MM; and Target s assets or revenues >$80 MM Parties must submit pre-merger notification or request an exemption (Advance Ruling Certificate) Parties may close after expiry of waiting periods, receipt of no action letter or receipt of ARC Parties are legally entitled to close after the expiry of waiting periods, but reviews can last longer Essentials of Commercial Contracts 2

ICA Notification and Review The acquisition of control of a Canadian business by a non-canadian may require foreign investment approval under the ICA Whether approval is required depends upon: Value of the assets of Canadian business Structure of transaction (direct or indirect) Nationalities of vendor and buyer (whether or not they are WTO investors ) Whether the Canadian business is cultural National security reviews are also possible Essentials of Commercial Contracts 3

Overview of Regulatory Objectives Regulatory provisions in M&A agreements: Identify approval requirements (representations and conditions) Set out what the parties will do to obtain approval (covenants) Allocate risks (conditions and covenants) Essentials of Commercial Contracts 4

Regulatory Uncertainty has Focussed Attention on Risk Allocation Vigorous competition enforcement in Canada and abroad Agencies have both blocked large mergers and challenged small, non-reportable transactions Agencies in developing jurisdictions can require long reviews and impose unusual remedies Governments have shown an unprecedented willingness to block transactions on other grounds Investment Canada and CRTC in Canada CFIUS in the US 5

Key Regulatory Terms Representations and Warranties Conditions Covenants Essentials of Commercial Contracts 6

Representations Assurances about the factual/legal characteristics of the buyer or seller Typical regulatory representations confirm whether regulatory approvals are needed to close Confirmation of approval requirements; or Confirmation that assets/revenues are below notification thresholds ICA representations may also confirm that the buyer is not a non-canadian the buyer or seller is a WTO Investor the target is not a cultural business Essentials of Commercial Contracts 7

Conditions - Overview State of affairs that must exist in order for the buyer or seller to close Identification of regulatory approvals that are needed to close Substance may be set out in the conditions section or in the definitions section Essentials of Commercial Contracts 8

Conditions Competition Act conditions typically range from: no legal impediment to closing (e.g., expiry of waiting periods), to positive approval (e.g., ARC or no action letter) Investment Canada Act conditions require: Net benefit approval Essentials of Commercial Contracts 9

Conditions cont d Other issues Foreign filings Material vs. non-material filings Non-notifiable transactions No injunction or investigation Essentials of Commercial Contracts 10

Conditions Negotiating Perspectives Buyer s perspective: Avoid post-closing investigation or remedy Divestiture/extensive investigation could reduce the value of acquired business Seller s perspective: Take the money and run ; or Secure approval because Risk of unwinding the transaction Seller may take shares for consideration and have a continuing interest in buyer Essentials of Commercial Contracts 11

Covenants - Overview Obligations of parties in respect of their conduct between signing and closing Identification of actions to be taken to satisfy regulatory closing conditions Normally relate to timing of submission of filings and cooperating to complete reviews Can also specify other actions to be taken to secure approval, such as asset sales Essentials of Commercial Contracts 12

Covenants Filing deadlines and ongoing responsiveness Timing of initial filing and responding to agencies information requests Regulatory co-operation Exchange of information needed to complete submissions Treatment of external counsel material Review and approval of agency submissions Participation in conference calls and meetings Essentials of Commercial Contracts 13

Covenants cont d Obligations to address regulator s concerns Unlimited Hell or High Water clauses Buyer must agree to any remedy Best efforts likely imposes similar obligations May result in unexpected outcomes: e.g., unusual remedy demands from non-mainstream regulators Limited covenants that define actions to be taken Side letters are sometimes used to avoid giving agencies roadmaps to potential problems Commercially reasonable efforts Likely do not impose a divestiture requirement Essentials of Commercial Contracts 14

Covenants cont d Other issues Obligations to contest or appeal opposition by regulators This interacts with the HOHW/efforts provisions as well as outside date deadlines long outside date = greater ability to challenge regulators short outside date = greater pressure to offer remedies Obligations to pay filing fees legal and third party costs (e.g., for responding to Supplemental Information Requests) Essentials of Commercial Contracts 15

Covenants Negotiating Perspectives Buyer s perspective: Avoid inconsistent communication to regulators Avoid or quantify maximum scope of remedies Access information for regulatory processes and integration planning Assure seller of ability to obtain approval Essentials of Commercial Contracts 16

Covenants Perspectives cont d Seller s perspective: Ensure expeditious regulatory review/closing Ensure that buyer is committed to the transaction Both: Clarify who is to pay regulatory costs Avoid deterioration in seller s business Essentials of Commercial Contracts 17

Non-competition covenants Are non-compete provisions: Compliant with the Competition Act? Enforceable at Common Law? Under the Competition Act An agreement between competitors to not compete may breach the criminal conspiracy offence However, reasonable non-compete provisions in M&A agreements are unlikely to be a concern Consideration should be given to whether a non-compete may substantially lessen competition Essentials of Commercial Contracts 18

Non-competition covenants At Common Law Restrictive covenants must be reasonable with regard to the interests of the parties and public Scope (business and geography) and duration Otherwise compliance with the Competition Act Essentials of Commercial Contracts 19

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