What’s Market in Canadian Public Target M&A: Key Trends and Insights From the ABA Deal Points Study

Navigating the intricate landscape of public mergers and acquisitions (“M&A”) to know “what’s market” requires a keen understanding of developing trends and supporting studies. The American Bar Association (“ABA”) recently released an updated Canadian Public Target M&A Deal Points Study (the “Study”) which offers valuable insights into the realm of Canadian public target M&A transactions based on data pulled from definitive agreements underlying transactions announced in 2020 and 2021. The Study surveyed 92 M&A deals and two takeover bids, the majority of which had transaction values ranging from $25 million to $500 million.

From buyer profiles and industry trends to key commercial terms, this article examines critical deal points that shaped the public Canadian M&A deal landscape during the period covered by the Study. By staying informed about these key points, prospective buyers/sellers and their advisers can better navigate the complexities of Canadian public market M&A transactions and make informed decisions in this dynamic and evolving landscape.

Buyer Profiles, Industry Trends, Governing Laws and Timelines

Shift in Buyer Profiles: One notable finding from the Study is the changing nature of buyers in Canadian M&A deals. Strategic buyers accounted for an overwhelming majority of acquisitions, representing 92% of the total number of buyers examined in the Study, compared to 87% in the ABA’s 2017 Canadian Public Target M&A Deal Points Study (the “2017 Study”).^[1] Conversely, the involvement of private equity buyers decreased to 8% as compared to 13% in the 2017 Study. The geographical distribution of these buyers has been consistent between the Study and the 2017 Study, as well as in prior research. Notably, the percentages of buyers from different jurisdictions remained within a 5% margin of variation, indicating a stable trend over time, with 62% of buyers being from Canada, 20% of buyers from the United States, 3% from both China and Australia and 2% from both the United Kingdom and the Cayman Islands.

Industry Trends: While deal flow in the majority of target industries remained consistent, there were notable shifts in certain sectors that saw a significant increase or decrease in M&A deal activity since prior ABA Canadian public M&A studies. The mining and natural resources sectors have steadily increased their share of target companies included in ABA studies over recent years, as those industries represented 29%, 34% and 36% of target companies examined in the ABA’s 2015 Canadian Public Target M&A Deal Points Study (the “2015 Study”), the 2017 Study and the Study, respectively. Conversely, the real estate sector has witnessed a decline as the focus of Canadian public M&A activity as companies in that sector accounted for 9%, 6% and 3% of target companies over the same timeframes.

There are several notable reasons we believe have resulted in the decline in real estate-focused M&A activity over the years, with interest rate hikes, higher numbers of employees working from home and general economic uncertainty having a significant impact on Canadian real estate investments. Another notable M&A activity decline appeared in the oil and gas industry, which represented 9% of target companies examined in the Study, down from 29% in the 2017 Study, likely a result of those commodity prices falling in the wake of the COVID-19 pandemic. The Study added new analysis of M&A activity in the cannabis industry, which accounted for 14% of target companies in the four years after Canada legalized cannabis on October 17, 2018, indicating its emergence over this time as a significant player in Canadian public M&A activity. However, given the recent decline in investor interest and investment in the cannabis industry generally, it will be interesting to see whether this industry accounts for a lower percentage of M&A activity in the next ABA study.

Timeline From Signing to Closing: The duration between the signing of an acquisition agreement and closing the particular deal varied across different types of transaction structures. The Study identified the following average timeframes across certain typical structures:

1. Takeover bids: 57 days (a significant decrease from 143.5 days in the 2017 Study);
2. Cash consideration transactions: 85.4 days (a decrease from 100.2 days in the 2017 Study);
3. Equity or mixed consideration transactions: 87.5 days (a small increase from 85.1 days in the 2017 Study); and
4. Transactions requiring specific regulatory approvals: 97.2 days (a small increase from 95.3 days in the 2017 Study).

Of the deals examined in the Study, 46% were all cash, 38% were all shares and 16% were mixed consideration (i.e., mix of cash and share) transactions. This highlights the mix of transaction consideration buyers can expect to deliver and sellers may need to accept in order to effect their proposed M&A transaction, potentially adding further time, fees and nuances to the deal.

Exchanges: The Study also highlights new data with respect to the Canadian public company targets in the study: (i) 60% were listed on the Toronto Stock Exchange, (ii) 31% were listed on the TSX Venture Exchange and (iii) 9% were listed on the Canadian Securities Exchange. This is the first time this statistic has been published in an ABA public Canadian M&A study.

Governing Law: The Study also explored the governing laws of acquisition agreements. Ontario, British Columbia and Alberta were the dominant jurisdictions in Canada, comprising 30%, 39% and 23% of the total sample overview, respectively. There are several factors that parties consider when choosing appropriate governing laws, including but not limited to convenience, the applicable industry, the outcome of the governing law on a dispute, or the home jurisdiction of the parties. We recommend speaking to a legal adviser when deciding which jurisdiction’s laws will govern your agreement.

Target Representations and Warranties

Fair Presentation Representation: The Study looked at the “Fair Presentation” representation, which is typical in share and asset sale agreements and requires vendors or target companies to confirm that the target’s financial statements regarding the financial position, results of operations and cash flows of a target present fairly in accordance with Generally Accepted Accounting Principles (“GAAP”). Specifically, the Study noted that the Fair Presentation representation, which typically includes a materiality qualifier of some fashion, had two distinct formulations:

1. GAAP Qualified "Fairly Presents" Representations: This category constituted 22% of deals examined in the Study. Among these representations, 50% included a materiality qualification (an increase from 26% in the 2017 Study), while the remaining 50% did not (a decrease from 74% in the 2017 Study).
2. "Fairly Presents" Representations Not Qualified by GAAP: This category accounted for 78% of the of deals examined in the Study. Within this group, 93% of the representations included a materiality qualification (up from 84% in the 2017 Study) and the remaining 7% did not (down from 16% in the 2017 Study).

The use of a GAAP-qualified Fair Presentation representation provides some predictability as to the standard by which financial statements of a target are prepared and may be assessed by a proposed buyer. Forgoing the GAAP-qualified standard creates greater room for interpretation and the ability for a buyer to contest the preparation of a target’s financials. This provides additional context as to the increased prevalence of materiality qualifiers in non-GAAP-qualified representations, as such qualifiers add an extra layer of protection for sellers.

Full Disclosure Representation: The Study noted that the “Full Disclosure” representation was only present in a relatively small subset of analyzed deals, with such representation absent in 89% of deals examined in the Study (a small increase from 80% in the 2017 Study). Among the deals that did contain the Full Disclosure representation, 30% included a knowledge qualifier (a significant increase from 6% in the 2017 Study, though more consistent with 31% in the 2015 Study), while 70% did not include a knowledge qualifier (a decrease from 94% in the 2017 Study, though more consistent with 69% in the 2015 Study).

Of the 30% of deals which included the use of a knowledge qualifier, 96% used constructive knowledge as opposed to actual knowledge. While actual knowledge typically has a narrow interpretation, constructive knowledge is broader and typically includes knowledge that could be inferred through the reasonable inquiry of the person or entity making the applicable representation (regardless of whether the person making the applicable representation conducted such inquiry). This increase in the use of constructive knowledge qualifiers may indicate a trade-off against the overall increase in the use of knowledge qualifiers generally, as parties look to balance the interests of buyers and sellers in the overall Canadian public M&A market.

Additional Representations: A new data point in the Study is the emergence of the "Weinstein" representation. This representation pertains to the Canadian public company target asserting that it is "not subject to any allegations of sexual or other unlawful harassment." The Study revealed that this representation appeared in 14% of deals examined in the Study. This data underscores that potential significance of the consequences of these claims from an economic (and reputational) standpoint and that Canadian public companies are mindful of costs associated with defending sexual misconduct allegations. In addition, the data further affirms the market trends and responses to society’s heightened awareness of this type of behaviour, which directly increases the risk of reputational harm that accompanies these claims for both buyers and sellers.

Deal Protection and Related Provisions

Pre-Signing Exclusivity Period: The Study highlighted an increase in pre-signing exclusivity periods in comparison to the 2017 Study. A total of 63% of deals examined in the Study disclosed a pre-signing exclusivity period, of which the largest category (28%) had a duration of greater than seven weeks. In comparison, only 6% of deals in the 2017 study had a pre-signing exclusivity period of seven or more weeks. Additionally, 15% of deals in the 2017 study had an exclusivity period of five weeks or more, compared to the Study in which 45% fell into the same timeframe. Longer exclusivity periods provide buyers with more time to assess the benefits and viability of the transaction, and decrease potential competition from other interested parties.

Fiduciary Outs: The Study reviewed the circumstances in which explicit “fiduciary out” provisions were included in purchase agreements, which provisions effectively act as exceptions to the typical “no shop” clause and allow a target board to consider unsolicited proposals once a purchase agreement has been signed (or letter of intent entered into containing a pre-signing exclusivity period). The largest percentage of fiduciary out provisions referred to superior proposals and fiduciary duties, making up 44% of deals examined in the Study (down from 84% in the 2017 Study). Where a company receives a superior proposal, the rejection of which would contradict the fiduciary duties of the board, a fiduciary out allows the board to accept the new bid. The second-largest percentage category of exceptions is the “back door fiduciary exception” which was included in 33% of deals surveyed in the Study. The back-door exception limits the target board’s ability to change its recommendation regarding a superior proposal but allows the board to provide materials or take action to disclose information to the target shareholders as is required by its fiduciary duty.

Go-Shop Period: The Study indicated that the use of a “go-shop” provision continues to be fairly uncommon in Canadian public M&A transactions. A total of 97% of deals examined in the Study did not include a go-shop period (defined in the study as 30 days or more from signing), which is relatively consistent with the last three ABA studies on Canadian public M&A activity. The use of a go-shop provision provides particular benefit to the seller, who is afforded the ability to use the buyer’s offer as a floor to find a more favourable deal without the risk of having to pay a break-up fee.

Break Fee as a Percentage of Deal Size and Buyer Termination Fee (Reverse Break Fee) as a Percentage of Deal Size: The Study analyzed average break-up fees for deals within three categories, with the analysis confirming that the fees are relatively consistent across the different break fee categories:

• Acquisition proposal with no target shareholder vote: 3.42% average break fee (determined based on 84 deals in the Study);
• Acquisition proposal with outside date: 3.48% average break fee (determined based on 57 deals in the Study); and
• Change of board recommendation: 3.41% average break fee (determined based on 57 deals in the Study).

Regarding reverse break fees, 20 deals analyzed in the Study contained reverse break fees, which had an average of 3.66%.

Treatment of Options: The Study reviewed the treatment of options in multiple deal types. In the case of all cash deals, 100% of the deals examined in the Study included accelerated option vesting at close (i.e., each unvested option automatically became vested at closing). For deals which were all shares or mixed consideration, 62% included accelerated option vesting, 34% did not include accelerated option vesting (i.e., unvested options become an option to purchase buyer common shares subject to vesting under the same time period) and 5% of deals were silent. The Study also included new data regarding the option holders’ right to vote. In 76% of the deals examined in the Study, target option holders were not given voting rights, while 24% of deals gave target option holders voting rights. Further, the Study analyzed whether option holders participated in a single combined vote with shareholders (19%), whether option holders and shareholders participated in separate votes (0%) or whether shareholders participated in both a vote with option holders and a separate vote (81%).

Lock-Up Agreements: Lock-up agreements restrict the ability of certain shareholders, typically company insiders, directors, officers or significant shareholders, from selling their securities for a specified period after the completion of a transaction. A lock-up agreement can also serve other functions, including but not limited to committing certain shareholders to tender their securities to the acquirer’s offer. In a “hard” lock-up, the shareholders are fully committed to sell their securities to the acquirer. In a “soft” lock-up, the shareholders may sell their securities to a competing superior offer in certain circumstances. The majority of lock-up agreements in Canada are “soft.” A total of 97% of the agreements reviewed in the Study contained a lock-up agreement, an amount which remained consistent since the 2017 Study (96%).

Conditions to Closing

Accuracy of Representations: The Study provides insights into the accuracy of representations and warranties as a condition to closing. All deals that included this condition required the representations to be brought down to closing. However, the Study distinguishes between different approaches:

1. Representations Confirmed (Brought Down) Only at Closing: Approximately 41% of deals examined in the Study only required that all representations and warranties had to be accurate solely at closing.
   
2. Representations Confirmed at Signing and Brought Down Closing: Approximately 38% of deals examined in the Study required all representations and warranties had to be accurate at both signing and closing.
   
3. Some Representations Brought Down at Signing, All at Closing: In 21% of the transactions examined in the Study, only some representations and warranties needed to be accurate at signing, with all representations and warranties required to be accurate at closing. Interestingly, this category increased markedly from just 5% in the 2017 study.

Buyer’s Material Adverse Effect (“MAE”) “Walk Right”: The Study also examined the inclusion of an MAE "walk right" for the buyer. A "walk right" entails an express closing condition, a specific termination right in the termination section, or an MAE closing condition through the bring-down of the MAE representation. Notably, all of the transactions analyzed in the Study incorporated this right.

Material Adverse Change in "Future Prospects" of the Target: The Study reveals a decrease in the utilization of a buyer option to terminate the transaction in connection with a proposed material adverse change in the “future prospects” of the target. Only 11% of the deals examined in the Study included "prospects" or “future prospects” as an element of the material adverse change termination or walk away right in favour of the buyer, compared to 27% in the 2017 Study. The decrease in the ability of buyers to terminate for what may be considered more subjective “future prospects” of a target may be a reflection of the uncertainties that impacted a variety of industries as a result of the COVID-19 pandemic. We will monitor whether this trend continues at the time of the next ABA public Canadian M&A study.

Conclusion

The results of the Study offer valuable insights into the evolving landscape of public Canadian M&A transactions and provide strong evidence of parties adapting to the changing dynamics and evolving trends in a competitive marketplace. With that said, readers should be cautioned that the transactions and agreements referenced in the Study were sourced from the System for Electronic Documents and Analysis and Retrieval (SEDAR) maintained by Canadian securities regulatory authorities. As a result, the Study only reviewed a specific and focused number of transactions completed during the applicable time period and was limited to Canadian publicly traded target companies. 

The Capital Markets Group at Aird & Berlis will continue to monitor developments in the Canadian public M&A space. Please contact one of the authors if you have questions about or require assistance in executing Canadian public M&A transactions.

[1] The 2017 Study was the most recent study conducted by the ABA on Canadian public target M&A, prior to the current version.