Capital Markets Review 2010 - Osler, Hoskin & Harcourt...Osler - 2010 Capital Markets Review 1 Each of the TSX and the TSX-V finished the year strongly closing up 13.47% and 49.36%

Osler - 2010 Capital Markets ReviewOsler, Hoskin & Harcourt llp

2010

Capital Markets Review

Osler - 2010 Capital Markets Review

Capital Markets Review 1 Introduction

4 Foreign Investment in the Natural Resource Sector in the Wake of Potash

7 Canada’s Mining Sector Still Thriving – And Gold Glitters More than Ever

9 The Mid-Market Remains the Main Driver of Canadian M&A Activity

12 New TSX Rule on Buy-Side Shareholder Votes – Initial Lessons

14 The Role of Litigation in M&A Tactics and Strategy – Greater than Ever

16 The IPO Environment in 2010 and Beyond

18 High Yield Debt – A New Form of Capital in Canada

20 Shareholder Activism: Important Considerations for Boards and Management

22 Increased Power – and Responsibility – of Boards and Special Committees 2010

1Osler - 2010 Capital Markets Review

Each of the TSX and the TSX-V finished the year strongly closing up 13.47% and 49.36% respectively over the beginning of the year. In addi-tion, through the addition of 76 new mining and energy listings in 2010, the TSX confirmed its status as the world’s leading mining and energy exchange while the TSX-V also enjoyed significant new listing activity across a number of sectors.

The IPO market rebounded in 2010 with approximately 73 new issues (compared to 28 new issues in 2009) despite having tailed off in the third quarter in the wake of general weakness in the overall world economy and a few high profile IPOs trading well below their issue price. In terms of follow-on offerings, mining, real estate and energy issuers raised sig-nificant amounts of equity in the Canadian public markets in 2010. The private placement market was also strong and many early stage issuers in the natural resource and technology sectors were able to complete succ-essful placements. The debt markets were active with approximately $67 billion of new corporate debt issues being completed in 2010, approximately $3.5 billion of which was high yield. The development of a

Canada shone brightly on the world stage at the start of 2010 as athletes from around the globe gathered in Vancouver to partici-pate in our highly successful Winter Olympic Games. The strength of our economy and its participants relative to other industrial-ized nations also garnered much attention in 2010 as Canadian companies raised money and acquired businesses both domestic-ally and abroad while our stock exchanges out-performed those of many other nations.

No.1 LAW FIRM CANADIAN M&A COMPLETED (BY VALUE)Thomson Reuters

No.1 LAW FIRM CANADIAN M&A ANNOUNCED (BY VALUE) Thomson Reuters

No.1 LAW FIRM CANADIAN M&A ANNOUNCED (BY VOLUME)Bloomberg

No.1 CANADIAN FIRM GLOBAL EQUITY OFFERINGS – ADVISING ISSUERSBloomberg

No.1 CANADIAN FIRM GLOBAL EQUITY (IPOs) – ADVISING ISSUERSBloomberg

Introduction


Canadian high yield market reflects a desire for yield by Canadian invest-ors and coincides with the year-end effectiveness of a new tax regime that has all but eliminated the income trust sector as many of the remain- ing income trusts were either converted into corporations, privatized or acquired in 2010.

BHP Billiton’s failed hostile bid for Potash Corporation filled the news for much of the year. However, beyond Potash, there was robust M&A activ-ity in 2010 across all segments: junior market, mid-market and mega-deals. As in other years, M&A transactions in the mid-market represented the substantial majority of announced deals, and mid-market deal volumes continued to be strong in 2010. There was also significant activity in the mega-deal segment of the market (deals valued in excess of $1 billion), much of which was in the energy and mining sectors which continue to be key drivers of Canadian M&A activity. Several significant mega-deals were announced in the last weeks of 2010, including two in the financial institutions sector as more certainty with respect to capital requirements and a Canadian dollar approaching par provided the opportunity for growth in the U.S. market for Canada’s banks.

Cross-border deals were a significant component of Canadian M&A activ-ity in 2010, and some commentators have suggested that more than 50% of announced transactions this year had a cross-border component. This was clearly in evidence in the resource sector where Asian investors, in-cluding both state-owned enterprises and sovereign wealth funds, were active buyers of Canadian natural resource assets. Canadian enterprises were equally active in making international acquisitions as outbound deals exceeded foreign acquisitions by a two-to-one margin, further evi-dencing the relative strength of our economy and capital markets.

Osler led the year-end Canadian M&A league tables for 2010 and ranked first among law firms for Canadian announced M&A deals by value (Thomson Reuters), first for Canadian completed M&A deals by value (Thomson Reuters) and first for Canadian announced M&A deals by volume (Bloomberg).

For the past five years, Osler hasconsistently placed at the top of transaction league tables with Thomson Reuters, Bloomberg and mergermarket frequently ranking Osler first among Canadian law firms.


Osler was fortunate to have represented our clients in a number of lead-ing transactions in 2010 as evidenced by our strong performance in the capital markets league tables. We are most grateful to our clients for the opportunity to work with them on these transactions and we are pleased to share some of our observations and experiences in 2010 and to provide our thoughts on what 2011 might bring. Should you wish to discuss any of the articles contained in our 2010 capital markets review, please do not hesitate to contact any of our legal professionals.

We wish you all the best for 2011.

frank turner doug marshall Co-Chair, Corporate Co-Chair, Corporate Calgary, Alberta Toronto, Ontario [email protected] [email protected] 403.260.7017 416.862.4218

Osler's Corporate Finance team performed very strongly in 2010. Osler was ranked first by Bloomberg among Canadian law firms in advising issuers on global equity offerings and first among Canadian law firms for advising issuers on global equity IPOs. Bloomberg also ranked Osler as the top Canadian law firm for advising issuers on U.S. equity and equity-linked offerings.

Osler was ranked by Bloomberg as being the third most active law firm in Canada advising issuers on corporate debt issues (by deal count) and the second most active law firm in Canada advising underwriters on corporate debt issues (by deal count).


2010 was a year that saw significant amounts of foreign invest-ment in the Canadian natural resource sector. Many of these investments were made by state-owned enterprises (SOEs) such as sovereign wealth funds (SWFs). These types of investors carefully weigh the benefits of the investment against perceived regulatory risk when deciding whether or not to pursue a specific opportunity. In this regard, Canada scores well on both counts, and has generally enjoyed a reputation as a jurisdiction that both welcomes foreign investment and has an abundance of attractive investment opportunities.

Some commentators have suggested that the decision of the federal government not to allow BHP Billiton’s proposed acquisition of Potash Corporation of Saskatchewan will have a chilling effect on foreign invest-ment in the resource sector. We do not agree. Properly understood, we believe that Potash should be interpreted narrowly. Further, we believe that there will continue to be significant amounts of foreign investment in the Canadian natural resource sector, but more typically at levels where investors acquire smaller businesses, or minority interests in larger enterprises as opposed to outright control.

We do not believe that the federal government's decision in the

proposed acquisition of Potash Corporation will have a significant

chilling effect on the level of foreign investment in the Canadian

natural resource sector, although foreign investors may be inclined

to pursue minority interests, as opposed to outright control, pending

clarification of the scope of that decision.

Foreign Investment in the Natural Resource Sector in the Wake of Potash


With its abundance of natural resources and its repu-tation in the international community as a jurisdic-tion that welcomes investment, Canada has historically been quite successful in attracting significant amounts of foreign capital, which has been instru-mental in building our natural resource sector. This was certainly true in 2010, which saw a large number of significant investments by foreign entities in Canadian natural resource companies and projects. Also of significance was the extent to which SOEs and SWFs were active investors in the Canadian natural resource sector in 2010, examples of which include:

• China Investment Corporation’s investment in Penn West Petroleum Ltd.

• Korea Investment Corporation’s investments in both Laricina Energy Ltd. and Osum Oil Sands Corp.

• Sinopec’s investment in Syncrude Canada Ltd.

• China National Petroleum Corporation’s arrangements with EnCana regarding the development of shale gas

• Korea Gas Corp.’s investment in a British Columbia shale gas joint venture with EnCana

The heightened levels of SOE investment in the Can-adian natural resource sector are due in part to the desire of growing Asian economies to secure owner-ship of, or access to, vital natural resources. In addi-tion, SOEs and SWFs have access to state financial resources and typically do not require external fund-ing in order to transact, which is a significant com-petitive advantage in a choppy credit environment. Lastly, we believe that SOEs and SWFs have a prefer-ence for investing in Canada as compared to other jurisdictions such as the United States (which has

rejected high profile deals by SOEs) and Australia (where all foreign-government related investments are subject to regulatory review). This is an important consideration for SOEs and SWFs, which are often quite focussed on regulatory risk when considering whether or not to pursue a specific opportunity. As such, some commentators have suggested that the Potash decision will have a chilling effect on the level of foreign investment in the Canadian natural re-source sector. We do not think this will be the case.

In our view, it is important to put the Potash decision into context:

• It is only the second disapproval (outside of the cult-ural sector) in over 1600 cases reviewed under the Investment Canada Act (ICA) over the last 25 years;

• The deal was hostile and the offer price was viewed as being low;

• There was intense opposition by the Saskatchewan provincial government because of a large negative impact on provincial tax revenues if the BHP deal had gone ahead;

• The minority federal government was concerned about an approval potentially undermining its political sup-port at the federal level in the Western provinces;

• It involved an acquisition of control of a very large, high profile Canadian company (which had previous-ly been government-owned); and

• The target was one of the world’s largest producers of potash, a strategic resource vital to the global agricul-ture industry.


We expect that we will continue to see foreign enti-ties, including SOEs/SWFs, actively investing in the Canadian resource sector in 2011. However, particu-larly for SOEs/SWFs, we anticipate that deal size will tend to be within the parameters noted above, and that foreign buyers will pause prior to attempting acquisition of outright control of significant resource companies or projects until there is greater clarity as to the full impact of the Potash decision on foreign investment. contributors:

frank [email protected]

peter [email protected]

janice buckinghamHead, Oil & Gas Group [email protected]

The ICA requires that certain types of investments be reviewed and cleared by Industry Canada prior to their completion. In addition, acquisitions of control by SOEs and SWFs are subject to additional guide-lines, but to date these have not posed significant obstacles. However, investment review problems can be avoided almost entirely if the investor does not acquire control of a Canadian business under the ICA or if the value of the acquired business is less than the prescribed threshold. Accordingly, many of the SOE/SWF investments in the natural resource sector in 2010 were structured so as to be non-reviewable in order to avoid regulatory disruption. Typical acquisi-tion structures of this nature include the following:

• an acquisition of under 20% of the outstanding equity of a target with modest governance rights, and often accompanied by a direct investment in underlying assets of the target

• an acquisition of a target with an asset value below the review threshold (currently $299 million but expected to grow eventually to $1 billion)

• an acquisition of a target which has its operating business exclusively outside of Canada

While investments of the nature described above can still be selected for review by the Minister of Industry on a national security basis, to our knowledge this has not occurred.


The Canadian metals and mining sector has consistently been a rare bright spot in an otherwise challenging transactional envi-ronment over the past several years, maintaining a high volume of both public offering and private placement financing activity and M&A activity. This trend continued in 2010, with completed M&A volume for the sector by value measured at approximately $23.5 billion for the nine months ended September 30, 2010, a close second to the oil and gas sector (at $25.7 billion for the period) among all Canadian industry segments.

Activity in the sector has been buoyed by continuing high commodity prices, which have largely recovered from their relatively brief dip in the wake of the 2008 financial crisis, and are in many cases at or near all-time highs. This is most obviously true in the case of gold, whose price per ounce continued to set all-time highs throughout 2010. Indeed, the prominence of the gold subsector in Canada is now particularly pronounced, with the value of gold sector M&A activity for the nine months ended September 30, 2010, outpacing the rest of the metals and mining sector by a wide margin ($16.2 billion to $7.3 billion). The gold subsector also accounted for two of the country’s largest transactions by value, Kinross Gold Corporation’s $7.7 billion acquisition of Red Back Mining Inc. and Goldcorp Inc.’s $3.2 billion acquisition of Andean Resources Limited, as well as a large number of transactions in the mid-cap and junior portions of the market.

We expect that Canada's mining sector will continue to see robust

levels of both financing and M&A activity in 2011 as well as a

continuing regulatory focus on the sector by government

authorities.

Canada’s Mining Sector Still Thriving – And Gold Glitters More than Ever


The relative health of the M&A market in the mining sector is particularly impressive in the wake of the introduction in December 2009 of a buy-side shareholder approval requirement by the TSX for materially dilutive transactions. Fears were expressed that the TSX rule would serve as a considerable impediment to transactional activity in the mining sector, which has historically relied heavily on the use of share consideration relative to cash. Based on activity levels during the first year following the implementation of the TSX rule, it appears that those fears may have been somewhat misplaced – though of course it is impossible to estimate the number of potential transactions that would have taken place in the absence of the rule.

In the regulatory sphere, the most noteworthy development in 2010 was the long-awaited release in draft form of a revised version of National Instru-ment 43-101 Standards of Disclosure for Mineral Pro-jects, the primary regulatory instrument governing mining-related disclosure in Canada. The proposed revisions would broadly assist in streamlining trans-actional practice by mining issuers, and while no an-nouncement has yet been made on timing, it is hoped that the new instrument will come into force in final form at some point in 2011. More generally, 2010 saw continued international regulatory focus on corporate social responsibility issues in the mining sector, including the narrow defeat in Canada of legislation aimed at regulating the activities of Canadian mining companies outside of Canada (Bill C-300 “The Responsible Mining Act”), and the inclusion in the

Dodd-Frank Wall Street Reform and Consumer Protec-tion Act in the United States of disclosure provisions relating to mine safety, payments to governmental entities, and the use of so-called “conflict minerals.”

We expect to see many of these trends continue in 2011, including in particular a relatively robust deal environment driven by strong commodity prices, and a continuing regulatory focus on the sector from governments. contributors:

doug bryce [email protected] 212.991.2528

jeremy fraiberg Co-Head, Mining Group [email protected] 416.862.6505

david hanick Co-Head, Mining Group [email protected] 416.862.5979


The Mid-Market Remains the Main Driver of Canadian M&A Activity

Available data suggests that in 2010, almost 90% of announced

Canadian M&A transactions were in the mid-market.

Much of the news regarding Canadian M&A transactions in 2010 was dominated by BHP Billiton’s failed bid for Potash Corporation of Saskatchewan, and it is typically the mega-M&A deals (those north of $1 billion) that garner most of the media attention. However, again this year, it was the mid-market (deals of up to $250 million) that was the principal driver of M&A activity in Canada, especially in the natural resource, technology and real estate sectors.

Currently available data suggests that in 2010, almost 90% of announced Canadian M&A transactions were in the mid-market segment. This is due in part to the fact that credit is typically more readily available for deals in this price range. Further, many mid-market deals are “all cash” and involve targets that are closely held companies; these deals can generally be completed more easily than transactions involving the acqu-isition of widely held public companies.

Mid-market M&A activity has significant implications for the larger economy. Many mid-market M&A deals involve both a mid-market acquirer and a mid-market target and result in combinations that are positioned to achieve greater success, once combined (and integrated), than the sum of the parts. These types of deals are important drivers of economic growth and sometimes result in enterprises moving from the mid-market to the big cap segment, which in turn replenishes Canada’s base of large corporates. Further, many founders who sell their mid-market businesses redeploy both their expertise and capital and go on to start successful new businesses. It is also the case that transactions in


this band are often driven by strategic as opposed to financial considerations – and strategic transactions are an important indicator of broader trends in part-icular sectors and in our economy as a whole.

Because mid-market transactions are often driven by strategic commercial considerations and involve the acquisition of an operating business, or part thereof, by an acquirer looking to tuck the acquisition into its existing business, transition and integration issues are very important. Accordingly, advisers need to ensure a stable and steady transition that sees as little disrup-tion to the relevant business (and its employees) as possible. In addition, advisors engaged on mid-market deals need to be mindful that many mid-market com-panies were founded and continue to be influenced by one or more entrepreneurs and an exit transaction or combination will often be the most significant trans-action any of them have undertaken. This in turn can present material diligence and process issues that advisors need to address at an early stage.

There was significant M&A activity in the Canadian technology sector in 2010 with high profile compan-ies such as Google, RIM and Microsoft each acquiring mid-market targets in order to access complementary technologies (that often have an existing commercial base) as well as human talent. For example, in 2010,

Microsoft completed its acquisition of Opalis while Google’s acquisitions included two Ontario-based bus-inesses (BumpTop and SocialDeck) as it continued to build out social functionality. Google and Microsoft have historically been active in Canada - each has made multiple technology acquisitions in the Can-adian mid-market in prior years, which reflects well on the Canadian technology sector, its capacity for innovation and the talented people that drive it.

The energy sector continues to be an area of robust mid-market activity. The continued downward pres-sure in 2010 on natural gas prices increased interest in combining companies with complementary or sim-ilar asset bases, which can provide a lower operating cost structure for the combined entity. Further, many large integrated oil and gas companies rationalized their portfolio of properties in 2010 in order to focus on larger projects or on those properties that were perceived to have more upside potential. Mid-market companies were often the purchasers of these proper-ties, playing the role once filled by income trusts. Lastly, the oil sands remain an area of significant in-terest to investors, and there were a number of stra-tegic investments in oil sands companies and projects in 2010 at less than $250 million as offshore and insti-tutional investors sought exposure to the Canadian oil sands, but at levels providing only for a minority interest.


Both the real estate sector (where buyers are looking to lock up increasingly scarce assets) and the indus-trial products sector continued to feature significant numbers of mid-market transactions in 2010. In the commercial real estate sector, what began as a rela-tively quiet year finished as one of the hottest mar-kets in years with multiple bids and lower cap rates for prime real estate properties across the country. In particular, investors’ continuing desire for yield and the demise of the Canadian income trust sector com-bined to provide Canadian REITs with access to sig-nificant amounts of capital, permitting them to be aggressive with their acquisitions throughout the year. The combination of these large pools of capital, historically low interest rates and lenders wishing to lend to strong borrowers with stable and secure real estate, made 2010 one of the busiest years on record for those in the real estate business.

We expect that the mid-market will drive Canadian M&A activity in 2011 and that many of the trends observed in 2010 will continue. In this regard, we ex-pect that there will be a significant number of mid- market acquisitions in both the natural resource and technology sectors and that cross-border deals will continue to be prevalent. Provided that the U.S. and Europe do not pull the Canadian economy into an-other recession, the availability of significant capital to REITs should continue and result in another strong year for mid-market participants in the Canadian

commercial real estate sector. We also expect to see foreign acquisitions by Canadian mid-market com-panies to continue as domestic enterprises take advantage of the strength of the Canadian economy relative to other countries to grow their businesses. contributors:

geoff taberCo-Head, Mid-Market Group [email protected] 416.862.6614

andrea whyteCo-Head, Mid-Market Group [email protected]

frank [email protected]


The rule imposing a buy-side shareholder vote in connection

with materially dilutive transactions by a listed acquirer was

implemented by the Toronto Stock Exchange in December 2009

and while the data sample remains relatively limited, some initial

lessons are starting to emerge from the buy-side shareholder

vote requirement.

The rule imposing a buy-side shareholder vote in connection with materially dilutive transactions by a listed acquirer was imple-mented by the Toronto Stock Exchange (TSX) in December 2009, bringing the Canadian practice largely into line with the equiva-lent rules on U.S. stock exchanges. Since that time, there have been approximately a dozen Canadian transactions requiring such votes, including Kinross Gold’s acquisition of Red Back Min-ing, Quadra Mining’s acquisition of FNX Mining and Canaccord Financial’s acquisition of Genuity Capital Markets. While the data sample remains relatively limited, some initial lessons are starting to emerge from the buy-side shareholder vote requirement.

Shareholder buy-in. In contrast to the HudBay Minerals-Lundin contro-versy that preceded the new TSX rule, it appears that all of the anno-unced transactions to date since the rule's implementation have been ap-proved by the acquiring company’s shareholders by varying margins, the majority with high levels of shareholder support (i.e., 95%-plus of those voting). To date, shareholders have proven willing to endorse the strategic M&A proposals made by their directors and management teams, and we have yet to see a high profile public rejection similar to HudBay.

New TSX Rule on Buy-Side Shareholder Votes – Initial Lessons


Deal terms. The existence of the buy-side shareholder vote will likely have implications for certain of the traditional elements of public company transaction structuring and deal terms, including, in particular, the deal protection portions of transaction agreements. Going forward, we expect market practice to clarify as more deals navigate the buy-side shareholder vote requirement.

Role of Institutional Shareholder Services (ISS). Unlike the analysis on the sell side of a transaction, where proxy advisors appear to rarely recommend against an arm’s length transaction involving a meaningful premium for target shareholders, the approach and analytical framework that will be applied by ISS and its proxy advisory firm peers on the buy-side remains to be settled. Given the enormous numbers of shares of most public companies that are held by the institu-tional investors that are subject to the recommenda-tions of the proxy advisory firms (and the lack of

direct premium being offered to the buy-side share-holders), issuers subject to shareholder votes would be well advised not to underestimate the importance of the ISS recommendation (and the recommendations of the other proxy advisory firms) to the outcome of their transactions, and to think through carefully when and how to engage with the advisory firms following announcement of the transaction. contributor:

doug bryce [email protected] 212.991.2528


Aspects of the law governing M&A were changed by legal and regulatory decisions in 2010, although these developments were not always free from ambiguity. Magna changed some of the rules of the road for votes on plans of arrangement – in some situations. Lions Gate reinstated the classic approach to analysing the role of poison pills in contested take-over bids – in some situations. In addition, litigation was used tactically and in new ways in some deals, such as the proposed takeover of Potash Corporation by BHP Billiton, which ended up in an Illinois court.

In its Magna International Inc. decision, the Ontario Securities Commis-sion (OSC) ruled that where a board or special committee does not make a recommendation to shareholders in a matter that requires a shareholder vote, the company is required to disclose much more information to its shareholders – essentially, what the board may have used in its delibera-tions. The OSC required substantial additional disclosure and thereby reiterated its view that shareholders should make the ultimate decision about a change of control. While the ruling was quite specific to the Magna situation, it created investor interest because it is an important precedent for situations in which a board does not provide a recommen-dation to shareholders. In addition the Magna decision could well affect

New situations as well as differences in viewpoints among

provincial securities commissions, and between the commissions

and the courts, will continue to shape the framework in which

M&A transactions take place.

The Role of Litigation in M&A Tactics and Strategy – Greater than Ever


sale or conversion transactions by other Canadian family-controlled – or dual-class share – companies, and there are still several of them. The Magna story came to a close with court approval of the plan of arrangement, despite concerted opposition at the fair-ness hearing by a group of institutional shareholders and their subsequent unsuccessful appeal.

In Lions Gate Entertainment Corp., the British Colum-bia Securities Commission took exception to the dir-ection in which many thought the Ontario and Alberta regulators were headed with respect to the use of poison pills. It restored the interpretation that was in place prior to the OSC’s decision in Neo Ma-terials to the effect that pills cannot remain in place indefinitely. The B.C. regulator also established that even a shareholder vote cannot keep a pill in place in-definitely, since this would mean that a majority of shareholders can determine whether individual share-holders can exercise their right to tender to an offer if they so choose. In Neo Materials, the OSC had held that a pill that had received shareholder approval in the face of a bid could stay in place, unless the board had failed to meet its fiduciary duties in adopting the pill. In Lions Gate, the decision was that the public in-terest takes precedence and a pill must go once it has provided the target company’s board with a reason-able amount of additional time to seek a competing bid or an alternative transaction. As the year came to a close, the Ontario regulator made a point in its deci-sion in Baffinland of circumscribing the scope of its decision in Neo Materials and returning to a more classic approach to poison pill analysis.

While the hostile take-over bid for Potash Corporation of Saskatchewan by BHP Billiton was ultimately killed by a political decision, there were developments that may become more common in future transactions. One was the use of litigation in other jurisdictions – in that case, Illinois. Another was the indication by BHP that it would defer to an independent oversight body to monitor its undertakings to the government. Normally Ottawa would have to sue in Federal Court for breaches of undertakings, as it has done in U.S. Steel – a process that may take years to resolve. The BHP approach may now become a more common way of providing the government comfort that an acquirer will honour its undertakings.

Osler was directly involved in some of the litigation that changed M&A law in the past year (including Magna and Lions Gate), and new law in the M&A sphere will continue to evolve. New situations, as well as differences in the views among provincial secur-ities commissions, and between the commissions and the courts, will continue to shape the framework in which transactions take place. contributors:

mark [email protected]

rob [email protected]


For Corporate Finance, 2010 was a year of ups and downs. While there were more successful IPOs than in the previous two years, there were also a large number of withdrawn transactions, not to mention challenges in pricing some IPOs that did get completed. Caution will continue to be the theme in 2011.

While 2010 was an improvement in many ways over previous years in Corporate Finance, the IPO market in Canada still fell short of expecta-tions. On the positive side, market conditions finally improved to the point where a number of IPOs were successfully launched and complet-ed, including by technology companies and other issuers outside of the natural resource sector. However, looking at the most successful IPOs in 2010, three industries clearly stood out as attracting the most interest from investors: mining (particularly gold and precious metals), oil and gas and real estate. The market was much more challenging for IPO candidates outside of these industries. Follow-on offering activity was a similar story in terms of the types of issuers accessing the markets, al-though pricing of new equity offerings returned to more normal ranges in 2010 (with “normal” being single-digit discounts to market price for public offerings).

On the debt side, 2010 was another strong year for new issues. While debt offerings tend to attract less media attention, the continued

Looking at the most successful IPOs in 2010, three industries

clearly stood out as attracting the most interest from investors –

mining, oil & gas and real estate – and we expect this trend to

continue in 2011 with continued strength in the commodity sector

and significant investor interest in higher-yielding securities.

The IPO Environment in 2010 and Beyond


development of a Canadian high yield debt market was one of the most covered corporate finance stories in 2010.

With this background, we offer some thoughts for 2011:

• We expect that the mining, oil & gas and real estatesectors will continue to attract significant investorinterest in light of continued strength in commod-ity prices and a desire by investors for yield. Issuersoutside of these sectors will need to be realisticabout valuations.

• Issuers will need to be flexible with their financingplans. For companies seeking an exchange listingor equity financing for the first time, managing ex-pectations – of shareholders, board and manage-ment – will be key. Prior to 2010, it was relativelyunusual for an IPO to proceed to the marketingstage and not be priced. This was not the case in2010, which will be remembered for the large num-ber of withdrawn IPOs, not to mention challengesin pricing some transactions that did get completed.

• Earlier stage businesses should be prepared to con-sider a range of transactions, including fallback list-ing methods such as a reverse take-over, oralternatives to listing such as an outright sale of thebusiness through an M&A transaction. All issuersshould be cautious about relying exclusively on aconventional marketed IPO for a financing or li-quidity transaction, since a conventional IPO is themost susceptible to changes in market conditions.

• Issuers should expect greater scrutiny and less pre-dictability from regulators and will need to be real-

istic about timelines. There are potentially many rea-sons for this, including a heightened focus on regula-tion following the financial crisis and, in Canada, what perhaps can be described as some distraction caused by efforts to create a national securities regulator. Issuers should build in more time to allow regulators to consider requests for exemptive relief, particularly for applications involving non-routine matters. For public offerings, we have seen regulators in the past year focus on use of proceeds and promot-er issues. While the financial crisis gave rise to a flur-ry of issuers raising funds for general corporate purposes, in general, issuers today can expect more scrutiny of disclosure regarding how offering pro-ceeds will be spent as well as the adequacy of pro-ceeds for achieving their intended purpose. For issuers seeking a TSX or TSX-V listing for the first time, greater focus on meeting the exchange’s minimum listing requirements (particularly financial tests) will be required and issuers seeking an initial listing should plan on speaking with the exchange early in the process. Lastly, build in longer review times for a new listing application – at least two months from the time of submitting application materials to be safe.

contributor:

desmond leeCo-Head, Corporate Finance [email protected]


Much like the income trust wave of years past, some Canadian issuers are now finding they have access to capital in ways that did not previously exist. This has taken the form of high yield debt. Prior to 2010, the United States market was virtually the only alternative for Canadian high yield debt issuers. Due to various factors, it appears a nascent high yield market has taken hold in Canada. According to one source, 2010 saw $3.5 billion of supply across 14 transactions, a significant increase compared to the $800 million of supply across four transactions in 2009.

High yield debt is essentially non-bank debt that does not carry an in-vestment grade rating and that typically bears interest at a higher rate as compared to investment grade issues (i.e., it is “high yield”). The min-imum rating for long term debt to be considered “investment grade” is BBB - for debt rated by S&P, Baa3 for debt rated by Moody’s and BBB (low) for debt rated by DBRS.

In addition to the rating, there are also many features of high yield debt that are typically not associated with investment grade issues. The most significant difference is in the nature of the covenant pattern. Depending on the particular industry of the issuer and the issuer's individual cir-cumstances, investment grade debt typically carries with it very few covenants beyond the covenant to pay back the money borrowed with interest. High yield debt is much different in this regard.

Prior to 2010, the United States market was virtually the only

alternative for Canadian high yield debt issuers, but due to

various factors, it appears a nascent high yield market has taken

hold in Canada.

High Yield Debt – A New Form of Capital In Canada


Thus far in the emerging Canadian high yield market, covenant patterns for some issuers have resembled those used in the U.S. high yield market. Typical cov-enants of this nature include limitations on restricted payments (i.e., dividends and distributions to share-holders, investments and redemptions of junior and, in some cases, pari passu debt), limitations on the incurrence of debt, limitations on liens, mergers or amalgamations, limitations on asset sales, repurchases upon a change of control, limitations on business activities and limitations on transactions with affili-ates. While these covenants tend to be heavily negoti-ated and contain numerous permitted exceptions to the restrictions, the essence of these covenants is the preservation of cash flow so that there is sufficient cash to repay the debt. Notwithstanding the use by some Canadian high yield issuers of U.S. style coven-ant patterns, Canadian high yield market practice is still developing and what is considered to be “market” in terms of covenant patterns and other material terms has not been settled.

Another complexity with high yield debt not often found with comparable investment grade issues is the interplay with other debt existing in an issuer’s cap-ital structure. Inter-creditor and priority issues are common, which often require multiple negotiations to occur simultaneously with different parties.

An issue of importance to Canadian high yield issuers will be the impact on covenant packages and the ne-gotiation of covenants upon the adoption of Inter-national Financial Reporting Standards by Canadian public companies effective January 1, 2011 or, in the

case of private Canadian companies, the use of Acc-ounting Standards for Private Enterprises as issued and adopted by the Canadian Institute of Chartered Accountants. No clear approach to these changes in accounting principles has emerged, though some potential trends can be discerned from recent transactions.

What is clear with high yield debt, however, is the requirement for competent counsel to navigate the myriad of issues and covenant negotiations that arise. Osler has been active in the emerging Canadian high yield market, most recently representing Cara Oper-ations Limited in its issuance of $200 million of 9.125% Senior Secured Second Lien Guaranteed Notes due 2015 and Livingston International Inc. in its issu-ance of $135 million of 10.125% Senior Unsecured Notes due 2015. Attorneys in Osler’s New York office have significant experience in representing both issu-ers and underwriters in the U.S. high yield market and we are leveraging that experience for the benefit of our Canadian clients. contributors:

michael innes [email protected] 416.862.4284

james [email protected] 212.991.2565


The past year saw a significant resurgence in shareholder activ-ism aimed at instigating changes in corporate strategy, including: institutional investor opposition to Magna International’s dual class share reclassification; Carl Icahn’s unsolicited takeover bid for Lions Gate Entertainment; West Face Capital’s proxy contest to replace the directors of Maple Leaf Foods; and litigation by Greenlight Capital and Farallon Capital that sought to prevent related party transactions between Magna Entertainment and its controlling shareholder, MI Developments.

In this current and continuing climate of hedge fund and institutional shareholder activism, advance takeover planning and preparedness is es-sential to improve a company’s ability to deter inadequate bids – particu-larly in the wake of the recent economic crisis – or secure a superior deal in the event of sale of control. Moreover, management and boards need to be prepared to engage with institutional investors, financial analysts and proxy advisory firms if a transaction that is determined to be in a company’s best interests is ultimately to succeed.

Shareholder activism shows no sign of abatement in 2011. In this regard, we expect to see increased activity aimed at instigating change in corpor-ate strategy and direction by means such as forcing a sale of a target company, reconstituting a board of directors by way of a proxy contest, and promoting corporate policy that is designed to maximize short-term

Management should carefully design a process that can with-

stand investor – and potentially judicial – scrutiny. It should also

be prepared to engage with its constituencies, namely institutional

investors, financial analysts and proxy advisory firms.

Shareholder Activism: Important Considerations for Boards and Management


share value (for example, through asset sales, share buy-backs and recapitalization transactions). In addi-tion, as illustrated by the recent Magna International experience, institutional shareholders can be expected to be organized in the context of a contested trans-action. In the Magna case, several institutional share-holders, including the Ontario Teachers’ Pension Plan Board and the Canada Pension Plan Investment Board, mobilized themselves to launch a vigorous campaign against the share capital reorganization that resulted in the elimination of Magna’s dual class share struc-ture. That case, among others, sends a signal to boards that change of control and other transforma-tional transactions will continue to receive careful scrutiny by affected parties and potential opposition.

Accordingly, in arriving at and implementing corpor-ate decisions, management should carefully design a process that can withstand investor – and potential-ly judicial – scrutiny. Moreover, management should be prepared to defend corporate decisions and, in this regard, should be ready, willing and able to engage with their most outspoken constituencies, namely, institutional investors, financial analysts and proxy advisory firms, and understand their concerns and objections to a proposed transaction if it is to ultim-ately be successful.

With the increased amount of shareholder activity, it is important for boards to monitor the share owner-ship of their company and to consider whether to dev-elop and implement a proactive dialogue with the company’s shareholders. A proactive approach revo- lving around good corporate governance and effective communication may reduce the likelihood of time- consuming, costly and publicized disputes. At the same time, the interests and motivations of particular shareholders vary. Accordingly, an important chal-lenge for boards is to balance the interests of share-holders while at the same time having the fortitude to comply with their fiduciary duty to act in the best interests of the corporation and not of any particular stakeholder group. Courts in Canada have recently provided strong support for directors to exercise their business judgment in responding to shareholder over-tures and activism. contributor:

emmanuel pressman Co-Head, M&A Group [email protected] 416.862.4903


It is becoming more difficult to be a director of a public company in Canada. In recent years, Canadian courts have increasingly deferred to the business judgment of boards of directors. This gives boards more power. With increased power, however, comes increased public and investor scrutiny – as well as potential pres-sure from activist shareholders, especially during critical periods such as during a merger, acquisition or capital restructuring.

In these situations, often it is the special committee of the board of direc-tors, and the independent directors who comprise it, who bear increased responsibility and end up on the front line, since in many cases the special committee actually runs the process at a target company which is facing an offer or is in a potentially contentious situation. Recent examples where the recommendation of the independent committee has been chal-lenged through litigation and has ended up before the courts include Lions Gate Entertainment Corp. and Magna International Inc.

The very creation of a special committee can be a challenge for a board. Are the committee’s members clearly and demonstrably “independent,” as that term is more stringently applied today? Do they have the right combination of talents? Can the committee members make the commit-ment to move from the part-time role of director to the often full-time position of special committee member?

Today, boards of directors and special committees must act in the

best interests of the company and in compliance with legal and

regulatory requirements and increasingly, they must also be able to

demonstrate they have done so scrupulously every step of the way.

Increased Power – and Responsibility – of Boards and Special Committees


By their nature, the members of special committees are not members of management and often have less intimate knowledge of the company. They may also have limited experience in M&A, since they may have been named as directors because of their achievements in government, philanthropy or aca-demia. However, as soon as the special committee is created, this smaller group of directors bears exten-sive responsibility for protecting shareholders’ inter-ests – and the full brunt of scrutiny, as well as possible regulatory intervention and litigation. Litigation can often be time-consuming and expensive, and will subject every detail and nuance of a special commit-tee’s activities to microscopic review.

With this heavy responsibility now distilled and borne by the special committee, its members must tread carefully while, at the same time, often having to move quickly. It will be expected to engage finan-cial advisors, and increasingly that engagement may need to be based on a flat project fee, not a success fee basis. This development is in part a consequence of shareholder complaints about the HudBay/Lundin process where advisors were paid a fee based on the success of the transaction, causing the Ontario Securities Commission to express concern as to the independence of the advisors and their advice in circumstances where a success-based fee is paid.

The special committee will generally need to engage independent, unconflicted legal counsel. Then the special committee must manage this group and other advisors to develop and implement a strategy and supporting tactics that meet the test of serving the best interests of the company.

In a hostile takeover bid, the special committee must make the fundamental decision whether it is possible to “just say no” (which is more difficult to do in Canada than in the U.S.) or whether to initiate an auc-tion for the company to seek a superior offer. There are also related decisions to be made concerning the tactical use of shareholders rights plans, the terms of a negotiated deal, and the size and conditions of break fees or reverse break fees.

In making critical decisions the special committee must contend with the complex Canadian legal land-scape. According to the Supreme Court of Canada in BCE, directors must act in the best interest of the company in very broad terms, which comprehends “a duty to treat individual stakeholders affected by corporate actions fairly and equitably”. At the same time, the special committee members must take into account Canadian securities laws, including National Policy 62-202 – Defensive Tactics, which provides specific deference to the interests of shareholders alone, and the ability of Canadian securities regula-tors to act in what they consider to be in the public


contributors:

ward sellersCo-Head, M&A [email protected]

clay horner Chair, Osler, Hoskin & Harcourt llp [email protected] 416.862.6590

interest in relation to any specific transaction. Even when a special committee does come to a well con-sidered recommendation in this complex environ-ment, that does not guarantee that its recommended course of action will be supported by all shareholders or will not be subject to attack by a hostile bidder.

Today, boards of directors and special committees not only can, but must, do more. They must act in the best interests of the company and in compliance with legal and regulatory requirements. Increasingly, they must also be able to demonstrate they have done so scrupulously every step of the way.

25Osler - 2010 Capital Markets ReviewOsler, Hoskin & Harcourt llp

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Documents

Capital Markets Review 2010 - Osler, Hoskin & Harcourt...Osler - 2010 Capital Markets Review 1 Each of the TSX and the TSX-V finished the year strongly closing up 13.47% and 49.36%