Advisory Board

  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Peter Clarke
  • Barry Diller
  • IAC/InterActiveCorp
  • Fu Chengyu
  • China National Petrochemical Corporation (Sinopec Group)
  • Richard J. Gnodde
  • Goldman Sachs International
  • Lodewijk Hijmans van den Bergh
  • De Brauw Blackstone Westbroek N.V.
  • Jiang Jianqing
  • Industrial and Commercial Bank of China, Ltd. (ICBC)
  • Handel Lee
  • King & Wood Mallesons
  • Richard Li
  • PCCW Limited
  • Pacific Century Group
  • Liew Mun Leong
  • Changi Airport Group
  • Martin Lipton
  • New York University
  • Wachtell, Lipton, Rosen & Katz
  • Liu Mingkang
  • China Banking Regulatory Commission (CBRC)
  • Dinesh C. Paliwal
  • Harman International Industries
  • Leon Pasternak
  • BCC Partners
  • Tim Payne
  • Brunswick Group
  • Joseph R. Perella
  • Perella Weinberg Partners
  • Baron David de Rothschild
  • N M Rothschild & Sons Limited
  • Dilhan Pillay Sandrasegara
  • Temasek International Pte. Ltd.
  • Shao Ning
  • State-owned Assets Supervision and Administration Commission of the State Council of China (SASAC)
  • John W. Snow
  • Cerberus Capital Management, L.P.
  • Former U.S. Secretary of Treasury
  • Bharat Vasani
  • Tata Group
  • Wang Junfeng
  • King & Wood Mallesons
  • Wang Kejin
  • China Banking Regulatory Commission (CBRC)
  • Wei Jiafu
  • Kazakhstan Potash Corporation Limited
  • Yang Chao
  • China Life Insurance Co. Ltd.
  • Zhu Min
  • International Monetary Fund

Legal Roundtable

  • Dimitry Afanasiev
  • Egorov Puginsky Afanasiev and Partners (Moscow)
  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Johan Aalto
  • Hannes Snellman Attorneys Ltd (Finland)
  • Nigel P. G. Boardman
  • Slaughter and May (London)
  • Willem J.L. Calkoen
  • NautaDutilh N.V. (Rotterdam)
  • Peter Callens
  • Loyens & Loeff (Brussels)
  • Bertrand Cardi
  • Darrois Villey Maillot & Brochier (Paris)
  • Santiago Carregal
  • Marval, O’Farrell & Mairal (Buenos Aires)
  • Martín Carrizosa
  • Philippi Prietocarrizosa & Uría (Bogotá)
  • Carlos G. Cordero G.
  • Aleman, Cordero, Galindo & Lee (Panama)
  • Ewen Crouch
  • Allens (Sydney)
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Rachel Eng
  • WongPartnership (Singapore)
  • Sergio Erede
  • BonelliErede (Milan)
  • Kenichi Fujinawa
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Manuel Galicia Romero
  • Galicia Abogados (Mexico City)
  • Danny Gilbert
  • Gilbert + Tobin (Sydney)
  • Vladimíra Glatzová
  • Glatzová & Co. (Prague)
  • Juan Miguel Goenechea
  • Uría Menéndez (Madrid)
  • Andrey A. Goltsblat
  • Goltsblat BLP (Moscow)
  • Juan Francisco Gutiérrez I.
  • Philippi Prietocarrizosa & Uría (Santiago)
  • Fang He
  • Jun He Law Offices (Beijing)
  • Christian Herbst
  • Schönherr (Vienna)
  • Lodewijk Hijmans van den Bergh
  • De Brauw Blackstone Westbroek N.V. (Amsterdam)
  • Hein Hooghoudt
  • NautaDutilh N.V. (Amsterdam)
  • Sameer Huda
  • Hadef & Partners (Dubai)
  • Masakazu Iwakura
  • TMI Associates (Tokyo)
  • Christof Jäckle
  • Hengeler Mueller (Frankfurt)
  • Michael Mervyn Katz
  • Edward Nathan Sonnenbergs (Johannesburg)
  • Handel Lee
  • King & Wood Mallesons (Beijing)
  • Martin Lipton
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Alain Maillot
  • Darrois Villey Maillot Brochier (Paris)
  • Antônio Corrêa Meyer
  • Machado, Meyer, Sendacz e Opice (São Paulo)
  • Sergio Michelsen Jaramillo
  • Brigard & Urrutia (Bogotá)
  • Zia Mody
  • AZB & Partners (Mumbai)
  • Christopher Murray
  • Osler (Toronto)
  • Francisco Antunes Maciel Müssnich
  • Barbosa, Müssnich & Aragão (Rio de Janeiro)
  • I. Berl Nadler
  • Davies Ward Phillips & Vineberg LLP (Toronto)
  • Umberto Nicodano
  • BonelliErede (Milan)
  • Brian O'Gorman
  • Arthur Cox (Dublin)
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Sang-Yeol Park
  • Park & Partners (Seoul)
  • José Antonio Payet Puccio
  • Payet Rey Cauvi (Lima)
  • Kees Peijster
  • COFRA Holding AG (Zug)
  • Juan Martín Perrotto
  • Uría & Menéndez (Madrid/Beijing)
  • Philip Podzebenko
  • Herbert Smith Freehills (Sydney)
  • Geert Potjewijd
  • De Brauw Blackstone Westbroek (Amsterdam/Beijing)
  • Qi Adam Li
  • Jun He Law Offices (Shanghai)
  • Biörn Riese
  • Jurie Advokat AB (Sweden)
  • Mark Rigotti
  • Herbert Smith Freehills (Sydney)
  • Rafael Robles Miaja
  • Robles Miaja (Mexico City)
  • Alberto Saravalle
  • BonelliErede (Milan)
  • Maximilian Schiessl
  • Hengeler Mueller (Düsseldorf)
  • Cyril S. Shroff
  • Cyril Amarchand Mangaldas (Mumbai)
  • Shardul S. Shroff
  • Shardul Amarchand Mangaldas & Co.(New Delhi)
  • Klaus Søgaard
  • Gorrissen Federspiel (Denmark)
  • Ezekiel Solomon
  • Allens (Sydney)
  • Emanuel P. Strehle
  • Hengeler Mueller (Munich)
  • David E. Tadmor
  • Tadmor & Co. (Tel Aviv)
  • Kevin J. Thomson
  • Barrick Gold Corporation (Toronto)
  • Yu Wakae
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Wang Junfeng
  • King & Wood Mallesons (Beijing)
  • Tomasz Wardynski
  • Wardynski & Partners (Warsaw)
  • Rolf Watter
  • Bär & Karrer AG (Zürich)
  • Xiao Wei
  • Jun He Law Offices (Beijing)
  • Xu Ping
  • King & Wood Mallesons (Beijing)
  • Shuji Yanase
  • OK Corporation (Tokyo)
  • Alvin Yeo
  • WongPartnership LLP (Singapore)

Founding Directors

  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz
  • Nigel P.G. Boardman
  • Slaughter and May
  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz
  • Peter Williamson
  • Cambridge Judge Business School
  • Franny Yao
  • Ernst & Young

Monthly Archives: August 2013

SPANISH UPDATE – Information Exchange in the Framework of a Merger

Editors’ Note:  This paper was contributed by Juan Miguel Goenechea, a partner at Uría Menéndez in Madrid and a member of XBMA’s Legal Roundtable.  As one of Spain’s leading M&A experts, Mr. Goenechea has broad expertise in corporate, banking, finance and securities transactions at the top end of the market.  Edurne Navarro, the partner in charge of Uría Menéndez’s Brussels office, authored this article.  Ms. Navarro’s practice focuses on EU and Spanish competition law, as well as trade law.

Highlights:

  • Prior to the authorization of a merger by the relevant authorities, the exchange of information between them, while a crucial part of the deal, might be considered in certain circumstances a violation against proceeding with a merger without authorization.  Outlined below are some of the precautions to be taken in order to avoid a violation of Article 101 of the Treaty on the Functioning of the European Union (“TFEU”) or the corresponding legal provision in national law.
  • Agreements on the exchange of information are incompatible with the rules on competition if they reduce or remove the degree of uncertainty as to the operation of the market in question, rendering it artificially transparent, resulting in a restriction of competition between undertakings.  Competition law does not impede the exchange of information if it is (i) non confidential or (ii) even if confidential, not commercially sensitive.
  • Prior to the approval of the merger, access to information must be limited to what is needed to know to ensure future operations once the merger has been authorized.  Access also must be limited to a specific group of people within each organization (usually known as the “Clean Team”) who are not be part of the commercial or marketing teams and who will not share competitively sensitive information beyond what is required for legitimate purposes such as negotiation, due diligence, and integration planning.

MAIN ARTICLE

INTRODUCTION

Information exchange in the framework of a merger constitutes an important issue where the demands of the course of trade need to be balanced with the limitations imposed by competition law. Companies aim at completing the merger as soon as possible. However, competition law in most European jurisdictions requires the merger to be suspended until authorization is granted. Prior to the authorization, the parties to the merger remain competitors, and exchanging information between them is a walk on very thin ice.

Competition law considers that the exchange of information renders a market artificially transparent and may restrict competition. In that sense, the exchange of information during the negotiation of a merger may fall under the scope of Article 101 of the Treaty on the Functioning of the European Union (“TFEU”) or the corresponding legal provision in national law.

On the other hand, the exchange of information between merging companies is a crucial part of the merger itself. It is thus logical that, after an agreement to merge has been reached and before the authorization to execute the merger has been granted, the exchange of information might be considered in certain circumstances as a violation of the suspension obligation.

Therefore, legal concerns may arise both (I) prior to the merger agreement, when the exchange of information may be considered part of an anticompetitive practice and, (II) after a merger agreement has been reached, when the exchange of information may constitute an indication of the execution of the merger prior to its authorization, also known as gun-jumping.

II.  EXCHANGE OF INFORMATION DURING THE NEGOTIATION OF A MERGER

Agreements on the exchange of information are incompatible with the rules on competition if they reduce or remove the degree of uncertainty as to the operation of the market in question, rendering it artificially transparent, resulting in a restriction of competition between undertakings.

Competition law does not impede the exchange of information if it is (i) non confidential or (ii) even if confidential, not commercially sensitive. Specifically,

  • Information accessible through public sources or that companies may obtain by their own means is considered as non-confidential.
  • As to non-commercially sensitive information, this is information that, even if not generally accessible to third parties, is not directly related to the commercial strategy of the companies.

Areas where the exchange of information is particularly sensitive include non-aggregated turnover and financial data, information on costs, relationships with suppliers and customers, and confidential market information (such as the company’s position in the markets where it operates, statements as to the strengths or weaknesses of competition in these markets, or indications as to the position of third parties as close or distant competitors). However the type of information that should be considered sensitive for a certain company depends on the type of business and the market in which it operates.

In some cases, the parties may need to evaluate the economic efficiencies resulting from the merger, which can be relevant when defending the transaction before the competition authorities. Doing so will, in most cases, require not only information publicly available on the market, but also specific data that only the target can provide to the acquirer. Therefore, to satisfy an order to include in the notification to the authorities reliable data on possible efficiencies derived from the merger, the parties may need to exchange sensitive information. The limits which are imposed on the information that can be exchanged may, however, hinder the efficiencies claims. Nevertheless some mechanisms can be put in place to deal with this issue:

  • The creation of a “clean team”, as explained below.
  • Involvement of a third party: hiring, for instance, an economic consultant, not belonging to any of the parties in the transaction, with the ability to access and treat the sensitive information needed to assess post-merger efficiencies, without the threat of infringing competition law provisions.

III.  EXCHANGE OF INFORMATION AFTER THE MERGER AGREEMENT BUT BEFORE THE AUTHORIZATION TO MERGE HAS BEEN GRANTED

As mentioned, in most jurisdictions competition law establishes a suspension obligation when a merger must be reported to the relevant competition authorities. The parties must suspend the implementation of the transaction until the antitrust authorities grant an authorization. The infringement of this obligation is considered in most jurisdictions a serious offense and may entail significant fines.

Therefore, before the approval of the merger has been granted, the affected companies will be considered competitors and any joint commercial actions, such as price setting, joint contract negotiation, or the exchange of sensitive information, will be considered contrary to Article 101 TFEU or the equivalent national provisions.

However, parties are allowed to undertake preparatory actions regarding the implementation of the merger. The main objective of information exchanges prior to the authorization of the merger by competition authorities may be: (a) to comply with contractual obligations (e.g. information necessary for valuation purposes); (b) to prepare and ensure the integration of the businesses; and (c) to define actions or adopt decisions concerning the company resulting from the merger which will have effects after the authorization but need to be taken previously to avoid undermining the value of the company. In that framework, exchanges of confidential and commercially sensitive information are licit under certain conditions:

  • Access to information must be limited to what is needed to know to ensure future operations once the merger has been authorized. For example, commercial information for renegotiating suppliers’ contracts in order for them to enter into force once the merger is authorized.
  • Access must be limited to a specific group of people within each organization (usually known as the “Clean Team”) with the following characteristics:

i.      The employees in the Clean Team must not be part of the commercial or marketing teams.

ii.     They must sign a confidentiality agreement stating that the parties shall not share competitively sensitive information beyond what is required for legitimate purposes such as negotiation, due diligence, and integration planning. Such information should be shared only in accordance with the confidentiality agreement, limit its use to consideration of the transaction, and be disclosed only to persons who need access thereto for such purpose.

iii.    It is advisable to record the minutes of the meetings and to maintain a record of the shared information.

The members of the team will disclose the information to the relevant persons in the company, having previously removed the confidential or more sensitive information.

Such groups cannot be created with the objective or effect of coordinating the current commercial strategy of the companies, nor give an opportunity for an exchange of confidential information relating to said commercial strategy. The information exchanged should also be destroyed in case the merger does not ultimately proceed.

IV.  CONCLUSION

The exchange of information in the framework of a merger is an extremely delicate matter that, if not carried out properly, can infringe competition law and result in the imposition of very high fines on the companies involved. It is important to remember that the scope of the limits imposed by competition law to exchanges of information extend beyond the agreement to merge and are not lifted until the authorization to merge is granted. Prior to that moment, safeguard measures have to be put in place.

We have outlined here some of the precautions to be taken, but a case-by-case analysis has to be carried out in order to define the type of information that can be exchanged in each case and to put in place the necessary measures to prevent any antitrust concerns. It is thus important to seek legal advice to ensure that the behavior undertaken complies with the limits imposed by the law.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

SOUTH AFRICAN UPDATE – The Private Equity Review (2013 Edition)

Editors’ Note: This article was contributed by Michael Katz, chairman and senior partner of Edward Nathan Sonnenbergs and a member of XBMA’s Legal Roundtable. It was authored by Edward Nathan Sonnenbergs directors Johan Loubser, Jan Viviers and Andrea Minnaar.

Executive Summary:

This article provides an update on the legal framework and regulatory developments for fundraising by fund managers from third parties who invest into closed-ended funds domiciled in South Africa.  While private equity fundraising activity and the success rate thereof has not returned to 2006–2007 levels, the relatively expensive level of equities on the Johannesburg Stock Exchange, regulatory acceptance of investment by South African pension funds in private equity funds, the South African government’s renewable energy programme and the remarkable economic growth enjoyed by some sub-Saharan African countries are fuelling renewed interest in private equity investment.  Although South African private equity funds are likely to have increased exposure to sub-Saharan African countries other than South Africa, the current trend is for most South African private equity funds to maintain a primary focus on investment in South Africa.  The full review is posted here

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

GERMAN UPDATE – Private Equity Reacting Flexibly

Editors’ Note: Dr. Christof Jäckle and Dr. Emanuel Strehle are members of XBMA’s Legal Roundtable and Partners at Hengeler Mueller—a leading German firm in the M&A and corporate arena. This article is co-authored by Hengeler Mueller partners Dr. Emanuel P. Strehle and Dr. Hans-Jörg Ziegenhain.

Highlights:

  • The private equity business it has recovered to a constant level.  In 2012, private equity transactions related to Germany reached a total volume of approx. EUR 5.8B. Other than in the United States, volumes and conditions have not returned to their levels of before 2007, but there is development in this direction.
  • Following 2007, leverage decreased significantly and most recently settled between 50% and a maximum of 70%. At present, a return to pre-2007 leverage ratios is not to be expected in the short term, also in view of the increasing capital requirements for banks. Leveraging transactions by a combination of bank financing and (in some cases, structurally junior) bond financing via the capital market is clearly on the rise.
  • The current uncertainties in the debt and [capital/equity] markets and the resulting requirement of being able to react to changes on short notice are often reflected in flexible sales schemes or exit strategies
  • Multiple-track processes are currently standard practice, especially in larger transactions, and are also used outside the private equity business by industrial companies in carving-out  or selling sub-groups.
  • Deals are increasingly structured to include management participation in the profit or losses

Main Article:

Multi-track transactions, club deals and direct investments by pension funds: currently wide-spread development in transactions.

Börsen-Zeitung, 15 June 2013

Although the private equity business in Germany has yet to reach pre-Lehman Brothers volumes again, it has recovered to a constant level. In 2012, private equity transactions related to Germany reached a total volume of approx. EUR 5.8 billion according to the industry association BVK. Other than in the United States, volumes and conditions have not returned to their levels of before 2007, but there is development in this direction. The trend has been confirmed within the first five months of the current year, when CVC funds bought Ista in the first billion-volume deal.

It’s all about the right mix

If one takes a closer look at the M&A transactions with a private equity component, however, it becomes evident that there are major differences as compared to the years until 2007.

Leverage. Until 2007, the share of non-equity financing (leverage) was as high as 90%. In the years that followed, this share decreased significantly and most recently settled between 50% and a maximum of 70%. The decline is not surprising, given the consequences that the financial crisis had also for the banking system. At present, a return to pre-2007 ratios is not to be expected in the short term, also in view of the increasing capital requirements for banks. Against this background – and also in view of the trend towards corporate bonds – leveraging transactions by a combination of bank financing and (in some cases, structurally junior) bond financing via the capital market is clearly on the rise. A current example is the bond financing in connection with the Ista transaction.

Multiple-track transactions. The current uncertainties in the debt and [capital/equity] markets and the resulting requirement of being able to react to changes on short notice are often reflected in flexible sales schemes or exit strategies. This is especially the case where the sell side also involves a private equity firm (secondary or tertiary transactions).

Including recapitalisation

The sale of Kabel BW by EQT to Liberty in 2011, which served as a role model for other transactions, is a prominent example. In parallel to the auction process, the former owners – funds advised by EQT –prepared for an IPO as well as for a refinancing through the placement of a bond on the capital market. By simultaneously preparing multiple alternatives for a partial or complete exit from the investment, they intended to achieve the highest degree of transaction security that was possible in those uncertain times. In the end, the deal comprised a sale to a strategic bidder (Liberty) and the placement of a bond in the period between signing and closing of the transaction, allowing for part of the proceeds to be distributed prior to the closing date by way of recapitalisation.

Multiple-track processes are currently standard practice, especially in larger transactions, and are also used outside the private equity business by industrial companies in carving-out  or selling sub-groups (such as the spin-off of Osram from Siemens or ThyssenKrupp’s sale of its stainless steel business in 2012). Due to their high complexity, multiple-track transactions make very high demands.

Management rollover. One of the material success factors of private equity is the participation of the management and of key employees in the company with the aim of synchronizing their interests and the Company’s interests to the highest degree possible. In most cases, the participation is structured in such a way that if the company’s development is normal or negative, management participates less, and if the targets are overachieved, management participates more.

New challenges arise due to the increase in transactions in which private equity funds are involved both on the seller’s and on the purchaser’s side. Upon initial participation in the target company, management is often in an inferior economic position due to the limited funds it can invest and frequently needs financial support (such as a loan) to fund the participation. Accordingly, their position when it came to negotiating the conditions of the management participation programme has been weak.

The past years, however, have shown that the balance of power can shift quickly, at the latest after the first successful exit in which management participated to a large degree in the resulting profit. If the sold company is again acquired by a private equity company, the latter is then dealing with a party that is considerably more self-confident when negotiating th next management participation in the target company. Management then – at least partly – sees itself more as a co-investor. From a legal perspective, the transfer of the existing participation to the transferee is a particular challenge, if the parties seek to avoid unnecessary back and forth payments.

Club deals. In particular in transactions involving infrastructure entities (airports, power grids, gas grids etc.), the number of club deals, i.e., transactions involving a consortium of bidders, has lately increased. Current examples are the acquisition of Open Grid Europe by a consortium consisting of Macquarie, Adia, Meag and BCIMC as well as the acquisition of Net4Gas by Allianz Capital Partners and Borealis Infrastructure (a subsidiary of the Canadian Omers pension fund).

But also in traditional private equity transactions, bidders have teamed up on numerous occasions, for example the mid cap funds Bregal and Quadriga for the acquisition of LR Health, or Aea Investors and the Teachers Private Capital pension fund for the acquisition of Dematic.

Besides risk sharing considerations and the increase of the potential transaction volume, regulatory requirements play a role. The acquisition of a majority holding, for example, would regularly not be permitted for pension funds, or would not be desirable, for example for insurance companies or banks, for consolidation or capitalisation aspects.

Club deals do not show any special characteristics on the sell side, as the parties involved normally pool their assets to form an acquisition vehicle; at most, the procedure for obtaining the necessary antitrust clearance may become more complicated due to the larger number of parties involved. On the bidder side, however, the transaction will definitely be more complex, as, in addition to the acquisition documentation, a consortium agreement is needed. In such agreement, in addition to provisions governing capitalisation, the rules on corporate governance and a later exit must be stipulated. In this context, problems may arise in particular where different investment horizons are involved.

Direct investments. The trend towards mega funds and the significant management fees associated therewith have led some investors to consider engaging in the private equity business themselves. This is especially true for the major Canadian pension funds, which play a trendsetting role in this regard (e.g. Ontario Teachers, Canada Pension Plan or Omers) and which have established their own private equity departments or subsidiaries. These pension funds usually refrain from taking the lead in the acquisition of companies, mainly due to regulatory constraints, but direct investments are on the upswing.

A firm position

These are direct participations in the (topmost) holding company through which the target company is acquired. In the past, the typical clients of private equity funds were pension funds that invested in them and thus participated in the fund’s total return only. Direct investments allow for a more targeted risk allocation when investing, and also give the private equity company greater flexibility in structuring its fees.

It becomes clear that private equity continues to hold a firm position in the German M&A market. In the long-run, only those equity investors will remain successful that are able to react flexibly and quickly to changes in the markets will remain successful. And, the market leaves room for dynamics.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

CANADIAN UPDATE – 2013 Canadian Capital Markets Report: Looking Back, Looking Forward

Editors’ Note:  This article was submitted by I. Berl Nadler, a partner at Davies Ward Phillips & Vineberg LLP and a leading Canadian corporate lawyer who has been involved in numerous high-profile financing transactions and acquisitions worldwide on behalf of multinational corporate clients.

Executive Summary:  Capital markets in Canada have followed the trend experienced in global capital markets recently, showing mixed results. A measured level of optimism for economic rebound in some parts of the World in the last year or so was tempered by the continued European debt crises and the fears regarding the U.S. fiscal cliff. With only part of the U.S. fiscal cliff having been addressed and the continued concerns about Europe and Asia, Canadian capital markets may continue to experience a degree of uncertainty.

Developments on the legal front in Canada and the U.S. followed economic trends with legislative and governance efforts focusing on areas that figured prominently in capital markets activity.

Main Article:

Developments in 2012 and What to Watch for in 2013

IPOs – In 2012, $1.8 billion of new equity was raised in Canada. Companies and their management must be well prepared to take advantage of the opportunity this apparent growth trend suggests.

Mining Company Disclosure – Several Canadian and U.S. developments on disclosure requirements will impact both junior and senior mining companies. Regulators in Canada increased their focus on the technical disclosure of mining issuers and challenged the appropriateness of many preliminary economic assessments. In the U.S., the SEC issued final rules for mining and other resource extraction issuers to disclose payments made to governments and rules relating to conflict mineral disclosure.

Exempt Market – Last year, Ontario issuers raised $142.9 billion in reliance on exemptions from the prospectus requirements. The Ontario Securities Commission has issued a concept paper discussing new capital raising exemptions in an effort to foster even greater access to the exempt markets. The section includes a discussion of an offering memorandum exemption, crowdfunding exemption and exemptions based on the sophistication of the investor or the receipt of advice from a registrant.

Shareholder Democracy – Corporate governance continued to be a rapidly evolving area in 2012 with a number of new developments introduced, including new TSX rules regarding the election of directors, the emergence of advance notice by-laws and lessons learned about “empty-voting”.

Proposed Changes to early Warning Reporting System – The Canadian Securities Administrators have published for comment significant changes to the rules requiring public disclosure of shareholdings in a public company. The proposal would, among other things, reduce the reporting threshold from 10% to 5% and require reporting of “hidden ownership” and certain “empty voting” positions.

Update on National Regulator Initiative – The initiative to establish a single, Canadian securities regulator suffered a major setback in its efforts when the Supreme Court of Canada ruled in December 2011 that legislation proposed by the federal government creating a single national securities regulator is unconstitutional. Efforts towards a negotiated, cooperative approach towards a single regulator have not had any success.

The Canadian Federal budget for 2013 provides clues to what the Federal government may attempt to do in light of the current status of their initiative.

Proxy Advisory Firms – Canadian regulators began to focus on proxy advisory firms in 2012, in light of the important role they play in the shareholder voting process which becomes more acute as shareholder activism continues to be on the rise. Regulators are seeking views on a range of potential concerns, including a lack of transparency on how proxy advisors arrive at their vote, the potential inaccuracies and the limited opportunity for issuer engagement.

Emerging Market Issuers – During 2012, Canadian and U.S. regulators expanded their review of the risks associated with emerging market issuers increasing their focus on the “gatekeepers” involved in bringing these issuers to the North American markets.

Impact of Trading OTC – Recently adopted Multilateral Instrument 51-105 – Issuers Quoted in the U.S. Over-the-Counter Markets deems certain issuers that trade over-the-counter in the U.S. to be reporting issuers for purposes of Canadian securities laws. The objective of the instrument is to discourage the manufacture and sale of “shell companies” traded in the U.S. This overly broad instrument may have unintended consequences for foreign issuers that are not engaged in abusive practices.

Wrapper Relief – The Ontario Securities Commission granted exemptive relief to several dealers allowing them to offer foreign securities to certain institutional investors in Canada using a prospectus or other offering document prepared in compliance with U.S. securities laws. The U.S. offering document will no longer have to be “wrapped” to include certain mandated Canadian disclosure. The order significantly lowers the technical barriers to entry for private placements by foreign issuers into Canada. It will improve access to foreign securities for the benefit of Canadian institutional investors and, indirectly, the many Canadian retail investors whose money they manage.

Regulation of Non-Resident Investment Fund Managers – New registration requirements were introduced in the provinces of Ontario, Québec and Newfoundland and Labrador, requiring non-resident investment fund managers to register in those provinces, but not in the other provinces of Canada.

U.S. Law Developments – The “JOBS” Act was signed into law in April 2012 in the U.S. and includes a number of initiatives to promote job creation and further economic growth in the U.S. by facilitating capital market raising activities and aiming to reduce regulatory burdens on smaller issuers.

Download the full report here.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

 

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