Canada: Corporate and M&A
Bennett Jones LLP - Brent W. Kraus and Kristopher R. Hanc
Corporate and M&A trends in Canada in 2020 were significantly impacted by the reality of the COVID-19 pandemic. For some, the pandemic gave rise to strategic M&A opportunities that could be executed by those companies that were weathering the storm relatively better than their competitors, some of whose acquisition transactions were needed to survive. In contrast, shareholder activism was reduced, as it was anticipated that securityholders would consider aggressive activism to be particularly opportunistic in the context of the struggles of the pandemic. Nevertheless, activism in respect of board control and M&A remained consistent with 2019 activity in the mining sector and with small cap issuers (<CAD250 million). Shareholder proposals were roughly half of the level in 2019. Those proposals which did proceed tended to focus on compensation, gender diversity, and environmental, social and governance (ESG).
The pandemic also gave rise to the reconsideration of contractual arrangements. Initially, the onset of the pandemic gave rise to significant analysis of the interpretation of force majeure clauses by both clients and the legal profession. As clients transitioned to the new reality of continuing to transact in the context of the ongoing pandemic, focus shifted to the allocation of ongoing risk through a reconsideration of the use of material adverse change clauses and other conditions to closing.
Throughout the pandemic, Canadian regulators and stock exchanges acted quickly to provide legislative or policy accommodations to assist issuers and the capital markets in managing virtual processes. Securities regulators provided pragmatic relief from filing deadlines and both securities and corporate law regulators issued blanket exemptions and accommodations to facilitate virtual securityholder meetings, permitting companies to continue to attend to routine business and to access securityholder meetings in order to transact where desired.
Transactions in the basic materials and energy sectors generated over 40% of overall Canadian public M&A deal activity in 2020. One of the largest Canadian basic materials transactions in 2020 was the CAD4 billion all-stock combination of West Fraser Timber and Norbord, creating a global leader in the wood products sector.
After a slow start in the first half of the year, Canada’s technology sector saw a significant increase in M&A activity in the latter half of 2020. The COVID-19 pandemic has accelerated trends that we expected to occur in the future. The pandemic's impact on our daily lives has increased the attractiveness for buyers looking to do rollup transactions to consolidate their respective industries. The focus of activity in the sector has been on biotech, health tech, e‑commerce, software-as-a-service (SaaS), artificial intelligence and technologies that enable remote workforces.
In Canada's energy industry, other macro-economic and political factors also had significant impact in addition to the COVID-19 pandemic. The OPEC+ supply shock that occurred in early 2020, together with ongoing political challenges impacting oil egress to foreign markets, caused commodity prices to fall precipitously. These realities exacerbated an ongoing trend of consolidation within the oil and gas industry and related services industries, most prominently Cenovus Energy's acquisition of Husky Energy. Although the rationale for such acquisitions were diverse, a common thread was the goal of achieving economy of scale and diversification to survive a prolonged and challenged commodity price environment. In large part, acquisitions within this space were funded through share consideration, with cash components secured through the debt capital markets, which remained robust in the context of a low interest environment and constrained equity markets.
Throughout all Canadian industries, 2020 witnessed an increasing focus on ESG matters. Investor expectations demanded that companies place increased focus on ESG matters, and demonstrate greater accountability on ESG through enhanced disclosure and reporting. Workplace safety, diversity, social equity are all matters of significant focus.
In particular, board diversity remained a prime concern both from a legislative and investor perspective. For example, federal corporate legislation introduced mandatory diversity disclosure for public companies in 2020. In addition, proxy advisory firms introduced more stringent gender diversity policies, effective in 2021 and 2022, which will impose negative voting recommendations based on failing to meet specific board composition targets. More than ever Canadian companies are noting that ESG plays an increasing role in accessing capital, as well as constituting matters for discussion in the context of M&A. Frequently, the execution of an M&A transaction is viewed as an opportunity to address overdue governance matters, including greater gender diversity in board composition.
Looking forward, while it appears the COVID-19 pandemic will impact a significant portion of 2021, it is anticipated that Canadian M&A will remain robust. The impact of the pandemic will continue to give rise to M&A opportunities for some, and the necessity to transact for others. The Biden administration's cancellation of the Keystone XL pipeline had immediate impacts for some Canadian industries, but the impact, if any, of the administration's "Buy American" policy is not yet known and may not have any perceptible effect on cross-border transactional activity. Continued Canada-China political tensions, unless resolved in 2021, are likely to have a continued chilling effect on inbound M&A from China. This was most recently evidenced by Industry Canada's rejection of the sale of TMAC Resources Inc. to Shandong Gold Mining Co., Ltd. on national security grounds. In the current environment, investors from China and certain other countries should expect longer and more difficult reviews, and should engage advisors early in the transaction planning process to appropriately assess the risks and seek to manage them effectively.