Recent Developments in Mergers & Acquisitions

1

Toby Allan

Anne Calverley, Q.C.

Brian Foster, Q.C.

Bill Gilliland

Recent Developments in Mergers & Acquisitions

FMC Breakfast Seminar

April 20, 2011

http://www.fmc-law.com/People/AllanThoburnToby.aspx

http://www.fmc-law.com/People/CalverleyAnne.aspx

http://www.fmc-law.com/People/FosterDBrian.aspx

http://www.fmc-law.com/People/GillilandWilliam.aspx

2

• Investment Canada Act – The Net Benefit Test

• Income Trusts – Back from the Crypt

• 2011 Budget Measures

• Supreme Court of Canada – National Securities Regulator

• TSX Minimum Listing Requirements – Large Resource Issuers

• Poison Pills – Update

Overview

3

Investment Canada Act – Net Benefit Test

Presented by: Toby Allan

4

Reviewable Transactions

• Acquisition of control of a Canadian business by a non‐Canadian

• Thresholds:

– WTO Investors ‐ $312 million

– Others ‐ $5 million

5

Net Benefit Test

• Acquisition likely to be of Net Benefit to Canada

• Determined by Minister of Industry

• Factors:– Effect of investment on level and nature of economic activity in Canada,

including employment, resource processing, utilization of parts, components and services produced in Canada and exports from Canada

– Degree and significance of participation by Canadians– Effect of investment on productivity, industrial efficiency, technological

development, product innovation and product variety in Canada– Effect of investment on competition– Compatibility of investment with national industrial, economic and cultural

policies– Contribution of investment to Canada’s ability to compete in world markets

6

BHP Billiton Takeover of PotashCorp

• Proposed acquisition not likely to be of “net benefit to Canada”

• Only second transaction to be rejected under Investment Canada Act

– First was the proposed acquisition by Alliant Techsystems of Macdonald Dettwiler and Associates rejected in 2008• National Security Concerns

• Political decision?

• Impact on future acquisitions – TMX/LSE

7

Income Trusts – Back from the Crypt

Presented by: C. Anne Calverley, Q.C.

8

Halloween 2006

9

I n c o m e T ru sts ar e B

aaak

Income Trusts

10

Recent Transactions

• The SIFT rules only apply to income earned by a publicly listed or traded partnership or trust from a business that is carried on in Canada.

• The SIFT rules do not apply to:(a) entities that are not publicly listed or publicly traded (i.e. most private entities

funded by private placement); or(b) publicly listed or traded trusts or partnerships that do not carry on business in

Canada.

11

U.S. Optimus Real Estate Fund Structure ‐ 2008

Investors

MFT OptimusUS Real Estate

Fund

Optimus Canadian GP

US – Optimus LP(US real estate)

Mutual Fund Trust UnitsDistributions from MFT

75% Debt 25% Equity

net rental incomecapital gain

25% Equity75% Debt

rental income (sheltered by interest expense) and capital gains (subject to 15% rate of tax).

Optimus Canadian LP

Unitholders

This transaction was undertaken by way of private placement.

12

Eagle Energy Trust ‐ 2010

DistributionsInvestment in Units

Investment inCommercial Trust Notes and Units

Investment in LP

Interest on CT Notesand income and return of capital on CT Units

Income and return of capital

Promoter

EEI Holdings Inc.(Alberta Co.)

Eagle Energy US GP LLC(Delaware LLC)

Eagle Energy Inc.(Alberta Co.)

CT Trustee

General Partner

Unitholders

publicly listed Mutual Fund Trust

Oil and Gas Assets

* Both trusts elected to be treated as corporations for US tax purposes. Interest expense and drilling costs provide significant tax shelter.

*Eagle Energy

Trust(Alberta Trust)

*Eagle Energy

Commercial Trust(Alberta Trust)

Eagle EnergyAcquisition LP(Delaware LP)

13

New Income Trusts

• Parallel Energy Trust (Final prospectus filed

• Exit Strategy for private owners of assets

• Management / Operations

• Additional acquisitions

• Non‐resident ownership rules

• U.S. ownership

14

PartnershipDeferral

2011 Budget Measures

15

The End of Partnership Deferral

• New rules do not apply to partners with less than a 10% partnership interest;

• All other corporate members of partnerships will have to accrue partnership income that is presently deferred;

Example:

A Co.Dec 31 YE

GP Co

PartnershipJan 31 YE

A Co’s share of partnership income for its fiscal year ending Jan 31, 2012 is $10 million.

A Co’s “Stub period accrual”(i.e. income inclusion as at Dec 31, 2011) is $10 million x 11/12.

16

The End of Partnership Deferral

• The “Stub Period Accrual” will be included in a corporate partner’s income over a 5 year period, commencing 2012;

• The new rules will come into effect for corporate partners with fiscal periods ending after March 22, 2011;

• Separate new rules will be introduced for multi‐tier partnerships, the biggest of which will be to force them to elect a common partnership year‐end.

• All Partnerships will have a one time opportunity to elect to change their fiscal period to any selected date.

• If no election filed, partnership fiscal year‐end becomes December 31st.

17

Continuing Benefits of Partnership Structures

1. Tax Consolidation

Income and losses are consolidated in Parent Co. Resource deductions are also deducted by Parent Co.

GP Co

P1Startup losses

P2Profitable Business

Parent Co.CEE/CDE/COGPE

18

Continuing Benefits of Partnership Structures2. Tax “Bump” for “after‐acquired Property”

• On the wind‐up of Partnership A the $100M ACB of its partnership units can be used to increase the tax basis in shares of Subco and/or units of Partnership B regardless of when either subsidiary entity was formed and regardless of when either entity acquired assets.

• Where a corporation is wound‐up, such an increase is only available in respect of assets owned at the time that Parent acquired control of the corporation.

Parent

GP Co GP Co

Sub Co

Partnership A

Tax free rollover of disposition assets Partnership B

$100M ACB

increase in tax basisincrease in tax basis

19

Continuing Benefits of Partnership Structures

• A Co may be allocated deductions relating to contributed resource property (i.e. COGPE (oil and gas property) or CDE (mining property)).

• B Co may be allocated resource deductions relating to its cash contribution (i.e. CDE (development drilling) or CEE (exploration drilling)).

Partnership

A Co.

contributes resource property contributes cash

B Co.

20

OilsandsTax Advantages

21

2011 Budget Measures affecting OilsandsMines and Oil Shale Mines• Oilsands activities will now be treated in the same way as conventional oil and gas activities.

• The cost of acquiring oilsands properties will qualify as COGPE (10%) rather than CDE (30%).

• Taxpayers disposing of oilsands properties must reduce CDE if the original cost of the property was CDE.

22

2011 Budget Measures affecting OilsandsMines and Oil Shale Mines• Subject to transitional rules, costs incurred to bring oilsands and oil shale

mines into commercial production will be CDE (30%) rather than CEE (100%)

Transitional Rules for Oilsands and Oil Shale Mines

• Costs incurred to bring oilsands and oil shale mines into commercial production will continue to qualify as CEE for:(i) Expenses incurred before March 22, 2011; and(ii) Expenses incurred before 2015 in respect of new mines on which major

construction began before March 22, 2011.

23

2011 Budget Measures affecting OilsandsMines and Oil Shale Mines

Transitional Rules for Oilsands and Oil Shale Mines

• For all other expenses the transition of the treatment of these expenses from CEE to CDE will be phased in, during which time the amount of such expenses will be required to be allocated between CEE and CDE on the following basis:

100%70%40%20%______CDE proportion

___30%60%80%100%100%CEE proportion

201620152014201320122011Year

5742200

24

Supreme Court of CanadaNational Securities Regulator

Presented by: Brian Foster, Q.C.

25

TSX Minimum Listing Requirements – Large Resource Issuers

Presented by: Toby Allan

26

Current TSX Minimum Listing Requirements

Oil & Gas Companies:

Non‐Exempt Companies – Proved Developed Reserves of $3 Million

Exempt Companies – Proved Developed Reserves of $7.5 Million

27

Proposed TSX Minimum Listing Requirements

Proposed New Subcategory for Oil & Gas Development Stage Issuers:

• Contingent Resources of $500 million• Market Value of Securities to be Listed of ≥ $200 million• Clearly defined development plan which will advance the property• Sufficient funds for an 18 month period to bring property into commercial production

• Appropriate capital structure

28

Contingent Resources Requirement

• Contingent resources requirement consistent with exemptions granted to date

• Intended to set high standard

• Certain resources may be excluded based on the nature of the contingency

– e.g. where the technology under development is not sufficiently advanced to extract the resource

• Calculated as net present value of future cash flows before income taxes, prepared on a forecast basis, and discounted at 10%

29

Market Capitalization Requirement

• Intended to ensure that market value is sufficient to support resource valuation and the significant capital expenditures required for such projects

• Not expected to be a barrier to entry, provided the contingent resource requirement is met

30

Poison Pills

Presented by: Bill Gilliland

31

NATIONAL POLICY 62‐202TAKE‐OVER BIDS – DEFENSIVE TACTICS

• The take‐over bid provisions should favour neither the offeror nor the management of the target company, and should leave the shareholders of the target company free to make a fully informed decision.

32

NATIONAL POLICY 62‐202TAKE‐OVER BIDS – DEFENSIVE TACTICS

• Canadian securities regulatory authorities appreciate that defensive tactics, including those that may consist of some of the actions listed in subsection (4), may be taken by a board ofdirectors of a target company in a genuine attempt to obtain a better bid.

• Tactics that are likely to deny or limit severely the ability of the shareholders to respond to a take‐over bid or a competing bid may result in action by Canadian securities regulatory authorities.

33

Canadian Jorex Limited and Mannville Oil & Gas Ltd. (1992), 15 OSCB 257

• "There comes a time when the pill has got to go."

• "When does the pill go?"

34

MDC Corporation and Regal Greetings & Gifts Inc. (1994 LNONOSC 211)

• Bid for all shares.

• Plan adopted in advance of bid, and shareholders approval of plan prior to bid.

• Shareholders informed of what plan intended to do.

• Allow Board sufficient time to pursue alternatives to maximize value.

• No evidence of use of Plan for improper purpose.

35

MDC Corporation and Regal Greetings & Gifts Inc. (1994 LNONOSC 211)In our view, our determination of where the public interest lies required us, in this case, to consider two principal questions.

– If the Plan is permitted to remain in effect for a reasonable further period, is there, on the evidence, a reasonable possibility that a better offer will come along during the period so that, whether or not this results in MDC raising its bid, the shareholders of Regal will be advantaged?

– If the Plan is not terminated prior to the end of the current period for the acceptance of the bid, is it likely that RGG will not extend the period for acceptance for such "reasonable further period", and thus deprive the Regal shareholders of the opportunity to decide whether they wish to accept the RGG bid?

36


• If the Plan was permitted to remain in effect for a further three weeks from September 9, 1994, there was a reasonable possibility that a better offer would come along during the period.

• MDC was likely to extend the period for acceptance of the bid for some reasonable period if the likelihood was that an order would be granted terminating the operation of the Plan after the end of that period, if the Regal board had not itself done so before then.

• What do shareholders want?

37


• Given large institutional shareholder base would have been relatively easy to get shareholder to say time has come – in fact some indicated time had not come.

• In fact the plan was doing what shareholders were informed it would do.

• An auction was developing.

• Plan allowed to stand for 3 more weeks, subject to developments.

38

Royal Host Real Estate Investment Trust (1999 LNONOSC 594)

• Pill adopted after announcement of bid, and no unitholder approval.

• Little evidence of unitholder support for plan – 22.6%.

• Sense that management had decided not to put plan to unitholders earlier because they thought it might not approve it.

• Hearing concluded that a reasonable possibility that superior alternative would be found if more time.

• An auction was developing.

39


• Likely that bid would be extended if plan extended for another short period – advisor indicated he wouldn’t advise withdrawing bid.

• 35 day period calculated from the date target released from non‐solicit provisions of another agreement – unique facts justifying extension (recent expiry of non‐solicitation clause) ‐ commission focused on 35 day period under law.

• Therefore bid allowed to stay in place for 13 more days.

40


In applying these principles [NP 62‐202] to the determination of the public interest in a particular case, the challenge we face is finding the appropriate balance between permitting the directors to fulfill their duty to maximize shareholder value in the manner they see fit and protecting the right of the shareholders to decide whether to tender their shares to the bid.

We can make this determination only after considering all of the relevant factors in that particular case. While it would be impossible to set out a list of all of the factors that might be relevant in cases of this kind, they frequently include:

– whether shareholder approval of the rights plan was obtained;

– when the plan was adopted;

41


– whether there is broad shareholder support for the continued operation of the plan;

– the size and complexity of the target company;

– the other defensive tactics. if any, implemented by the target company;

– the number of potential, viable offerors;

– the steps taken by the target company to find an alternative bid or transaction that would be better for the shareholders;

42


– the likelihood that, if given further time, the target company will be able to find a better bid or transaction;

– the nature of the bid, including whether it is coercive or unfair to the shareholders of the target company;

– the length of time since the bid was announced and made;

– the likelihood that the bid will not be extended if the rights plan is not terminated.

43

Pulse Data Inc. (2007 ABASC 895)• Bid for all.

• Plan put in place in face of offer.

• Permitted bid definition included 50% tender by independent shareholders.

• Overwhelming recent informed shareholder approval of plan ‐ in face of the offer –shareholders new the offer would be lost.

• No auction.

• Pulse shortened time period under the plan that a bid needed to remain open to the day before the hearing – takes time out of the picture – only issue is compliance with the terms of the plan.

• Plan not in the way of the bid so long as in fact shares taken up so as to comply with the terms of the bid.

• No evidence of coercion or undue pressure on shareholders to approve the plan.

44

Pulse Data Inc. (2007 ABASC 895)

• In our view, this very recent and informed Pulse Shareholder approval (less than one week before hearing), given in the absence of anyimminent alternatives to the Offer, demonstrated that the continuation of the Rights Plan as at 27 September 2007 was in the bona fide interests of Pulse Shareholders.

• We further clarified that this decision does not preclude any party from making further applications to the Commission should circumstances change.

45

Neo Material Technologies Inc. and Pala Investments Holdings Limited

• Partial Bid.

• Purpose of the plan was to stop "creeping takeovers".

• Shareholder approval obtained – overwhelming support –institutional investors voted for the plan even though their general policy was to vote against plans that precluded partial bids.

• Shareholder Approval needs to be informed – terms of the plan and implications of vote.

46


• Approval of the plan seen as a rejection of the bid.

• Decision to implement the plan was carried out in the best interests of the corporation.

• No evidence of coercion or undue pressure on shareholders to approve the plan.

• So long as the plan continues to allow the target’s board the opportunity to fulfill their fiduciary duties the plan continues to serve its purpose. No requirement to seek alternative bids.

47


• "At the time the application came before us, little time had passed since the shareholders' ratification of the Neo Board's decision to maintain the Second Shareholder Rights Plan."

• "To paraphrase the words of this Commission in Jorex, the time for the pill to go is not yet upon us."

48

TransAlta Corporation and Canadian Hydro Developers, Inc. (2009 ABASC 448)

• Issue is the time an offer must be open under plan – 60 days, and bid was open for only 35 days.

• Plan approved well before the bid was announced or even known.

• 60 day requirement in the plan still of value – a real and substantial probability that an alternative proposal could materialize.

49


• TransAlta – made clear that should not assume that its bid would be extended if pill allowed to stay – a risk that the target board should be taken to have understood.

• Auction had been undertaken. Board of target still of the view that the TransAlta bid not in the best interests of the company.

• Informed shareholder approval re the terms of a permitted bid.

• No other compelling reason to bring the pill to an end.

50


• "We would expect that the Plan should come to an end before the expiry of such a hypothetical extension of the Bid."

• "Moreover, we considered that there could be circumstances warranting an even earlier end to the Plan. One such circumstance might be a crystallization, into an actual proposal, of the New York Prospect. Another such circumstance might be a concrete indication that no alternative to the Bid should be expected in the coming few weeks."

51

Nations Energy Company Ltd. Take‐over Bid for Tartan Energy Inc. (2005 ABASC 725)

• Bid for all.

• Plan put in place at last minute before expiry of bid.

• No shareholder approval.

• ASC view that auction process needs to be undertaken promptly, and with a view to timeline of the takeover bid in place.

• Was an insider bid, and so long run up to expiry – i.e. had to get a valuation – 6 weeks between announcement of bid and launch.

52

Nations Energy Company Ltd. Take‐over Bid for Tartan Energy Inc. (2005 ABASC 725)

• No finding of an auction if time for bid submission is after the expiry of the bid – can only conclude there might be a bid.

• Informal support indicated from shareholders, but this was from management – not disinterested and informed.

• No evidence of significant informed shareholder support.

53

Lions Gate Entertainment Corp. (2010 BCSECCOM 432)

• Bid for all.

• Plan put in place in face of offer.

• Shareholder meeting called to approve plan for a few days after expiry of offer.

• No shareholder approval.

• No auction.

• No evidence that board of Lions Gate failed to discharge fiduciary duties.

• No evidence of coercion.

54


Commissions reluctant to interfere with a board’s discharge of its fiduciary

duty:

• Practice of boards to maximize shareholder value.

• Need a reasonable period of time to seek an improved or alternative transaction.

• Shareholders ultimately have the opportunity to decide whether or not to tender to an offer.

55


• Having made the choice to not seek an improved or alternative transaction, there is no basis for a poison pill to continue.

• The only reason a Canadian securities regulator will tolerate a poison pill is to give a target company board time to discharge its fiduciary duty.

• The focus of that duty is to improve the existing bid or to find a better one.

56

Baffinland Iron Mines Corporation (2010 OSC)

• Unsolicited bid for all shares by Nunavut Iron Ore.

• Outstanding for 57 days.

• Baffinland rights plan already approved by shareholders.

• Baffinland subsequently entered into support agreement with ArcelorMittal re: a higher bid.

• Support agreement includes covenant not to solicit competing offers.

• Nunavut says only obstacle to increasing offer price is rights plan.

57


• In our view, it is generally time for a shareholder rights plan "to go" when the rights plan has served its purpose by facilitating an auction, encouraging competing bids or otherwise maximizing shareholder value.

• A rights plan will be cease traded where it is unlikely to achieve any further benefits for shareholders.

• Notwithstanding the principles referred to above, at the end of the day, there is no one test or consideration that constitutes the "holy grail" when deciding whether a rights plan should remain in place or be cease traded.

• Royal Host Factors.

58


• The auction is not yet over although, as a practical matter, it is unlikely that a third bidder will be prepared to make an offer.

• Clearly, Nunavut is considering its response to the ArcelorMittal Offer and may increase that offer.

• Accordingly, in our view, it is not necessary for the Rights Plan to remain in place in order to facilitate an auction; there are now two competing bids on the table.

• Based on the evidence before us, we have concluded that there is no real and substantial possibility that Baffinland will be able to increase shareholder choice by keeping the Rights Plan in place (see Re MDC Corp., 1994 LNONOSC 211).

• Accordingly, there is an obvious potential benefit to Baffinland shareholders if the Commission immediately issues an order cease trading the Rights Plan: Baffinlandshareholders may potentially receive a higher offer from Nunavut. In our view, the fact that Nunavut has not disclosed whether and on what terms it would be prepared to increase its offer does not change that analysis.

59


• Baffinland has also submitted that we should consider the factors discussed in Royal Host (see paragraph 30 of these reasons) "through the lens of deference to the reasonable business judgment of the target company's directors" as contemplated in Re Neo Material Technologies.We do not agree.

• In Neo, the Commission concluded that it would defer to the wishes of shareholders who had overwhelmingly voted to keep the relevant rights plan in place in the face of the specific bid that was before shareholders at the time of the vote.

• The vote was held only two weeks before the hearing.

60


• Having concluded that it should do so, the Commission then asked whether there were any circumstances that would lead it to a different conclusion.

• One such consideration was whether or not the board of directors of Neo was acting in accordance with its fiduciary duties in having decided not to solicit competing bids.

• If the board was not complying with its fiduciary duties that might have led the Commission to cease trade the Neo rights plan regardless of the shareholder vote (although whether the Commission would have done so is an open question).

61


• Accordingly, in our view, Neo does not stand for the proposition that the Commission will defer to the business judgment of a board of directors in considering whether to cease trade a rights plan, or that a board of directors in the exercise of its fiduciary duties may "just say no" to a take‐over bid.

• Such a conclusion would have been inconsistent with the provisions of NP 62‐202 and the relatively long line of regulatory decisions that began with Canadian Jorex. To the contrary, the Commission in Neo deferred to the wishes of shareholders as contemplated by NP 62‐202.

• Neo suggests only that whether or not the board of directors of a target issuer is acting in the best interests of that issuer and its shareholders, and is complying with its fiduciary duties, is a relevant, although secondary, consideration for the Commission in deciding whether to cease trade a rights plan.

• Whether a board of directors is complying with its fiduciary duties does not determine the outcome of a poison pill hearing.

Questions?

The preceding presentation contains examples of the kinds of issues companies looking at mergers and acquisitions could face.If you are faced with one of these issues, please retain professional assistance as each situation is unique.