- On September 4, 2015, the Supreme Court of Canada held that the Ontario court has jurisdiction to hear an action brought by Ecuadorian plaintiffs seeking the recognition and enforcement in Ontario of an Ecuadorian judgment against the U.S. multinational corporation Chevron (Chevron US) and its Canadian subsidiary (Chevron Canada) even where Chevron US had no connection to and no assets in Ontario and Chevron Canada was a stranger to the underlying judgment in Ecuador.
- The Supreme Court’s decision also opens the door for judgment creditors to argue that a subsidiary corporation’s assets should be available to satisfy a judgment against a parent corporation.
- The ruling, however, leaves in place the substantive defences available under Canadian law to rebut such claims.
On September 4, 2015, the Supreme Court of Canada unanimously held in Chevron Corp v. Yaiguaje that the Ontario court has jurisdiction to hear an action brought by Ecuadorian plaintiffs seeking the recognition and enforcement in Ontario of a US$9.51-billion Ecuadorian judgment for environmental damage against the U.S. multinational corporation Chevron (Chevron US) and its Canadian subsidiary (Chevron Canada). Remarkably, Chevron US had no connection to and no assets in Ontario and Chevron Canada was a stranger to the underlying judgment in Ecuador for which recognition and enforcement is being sought in the Ontario court.
The Supreme Court’s decision should be of interest both to Canadian multinational corporations with foreign operations and to foreign entities with operations or assets in Canada because it reduces the procedural obstacles to recognizing and enforcing foreign judgments in Canada. Significantly, however, the ruling leaves in place the substantive defences available under Canadian law to rebut such claims. The Supreme Court’s ruling means that the case will now return to an Ontario court to determine whether the Ecuadorian judgment can be properly recognized and enforced in Ontario.
In 2012, Ecuadorian plaintiffs commenced a recognition and enforcement action in Ontario against both Chevron US and Chevron Canada. Chevron US is a Delaware corporation with its head office in California. Chevron Canada is a wholly owned, seventh-level subsidiary of Chevron US, with its head office registered in Alberta. The plaintiffs served Chevron US in California and Chevron Canada in Mississauga, Ontario, where it maintains an office.
Chevron US and Chevron Canada moved before the Ontario court, seeking, inter alia, (i) a declaration that the Ontario court lacked the jurisdiction to hear the plaintiffs’ recognition and enforcement action, and (ii) an order dismissing, or permanently staying, that action.
The Ontario Superior Court of Justice held that the Ontario court has jurisdiction over both Chevron US and Chevron Canada. Nonetheless, the motion judge stayed the recognition and enforcement action on his own initiative because the judge held that Chevron US did not itself possess any assets in Ontario and that the plaintiffs had “no hope of success” in piercing the “corporate veil” in order to make the assets of Chevron Canada exigible to satisfy the judgment against its ultimate parent, Chevron US.
On appeal, the Ontario Court of Appeal agreed that the Ontario court has jurisdiction over both Chevron US and Chevron Canada, but held that the motion judge had erred in granting a discretionary stay of the action.
The Supreme Court unanimously upheld the decision of the Ontario Court of Appeal noting that different principles are engaged when considering actions in the first instance and actions for recognition and enforcement of foreign judgments. The purpose of the latter is to allow a pre-existing obligation to be fulfilled, which involves facilitating the collection of a debt already owed by a judgment debtor. The court’s role in enforcement proceedings is less invasive than an action in the first instance, militating in favour of generous and liberal enforcement rules for foreign judgments.
No Real and Substantial Connection to Ontario Is Required
The Supreme Court held that there is a low threshold for foreign judgment creditors to commence recognition and enforcement actions of foreign judgments in Ontario. The Court unambiguously held that there is no requirement to find a “real and substantial connection” between the enforcing Canadian court and the foreign action or judgment debtor.
The test for an Ontario court to recognize and enforce a foreign judgment is whether the foreign court validly assumed jurisdiction in the first instance; the foreign court must have had a real and substantial connection with the litigants or the subject matter of the dispute. This will be satisfied if the defendants submitted to the jurisdiction of the foreign court.
In addition, for the Ontario court to assume jurisdiction over the recognition and enforcement action, the defendant must have been properly served – either inside or outside Ontario – under the province’s Rules of Civil Procedure (Rules).
Defendant Is Not Required to Have Assets in Ontario
The Supreme Court held that it is not necessary for foreign debtors to possess assets in Ontario in order for the Ontario court to take jurisdiction in a recognition and enforcement action. The Court noted that in today’s globalized world and electronic age, to require that a judgment creditor wait until the foreign debtor is present or has assets in the province before a court can find that it has jurisdiction in recognition and enforcement proceedings would be to turn a blind eye to current economic reality. The Court stated that there is nothing improper with allowing foreign judgment creditors to choose where they wish to enforce their judgments and to assess where their debtor’s assets could be found or may end up being located one day.
Veil Piercing of a Subsidiary to Satisfy a Parent Corporation’s Debt
The Supreme Court explicitly stated that the Ontario court’s jurisdiction over Chevron US and Chevron Canada did not prejudice future arguments regarding their distinct corporate personalities; nor did it settle the question whether Chevron Canada’s assets should be available to satisfy Chevron US’s debt.
Nonetheless, the Supreme Court’s decision opens the door for judgment creditors to argue that a subsidiary corporation’s assets should be available to satisfy a judgment against a parent corporation.
Existence Versus Exercise of Jurisdiction
The Supreme Court draws a clear distinction between the existence of jurisdiction and the court’s exercise of jurisdiction. Once parties move past the jurisdictional phase, it may still be open to a judgment debtor/defendant to argue the following:
- The proper use of Ontario judicial resources justifies a stay under the circumstances.
- The Ontario courts should decline to exercise jurisdiction on the basis of forum non conveniens.
- One of the available defences to the recognition and enforcement of a foreign judgment (i.e., fraud, denial of natural justice in the foreign proceeding or public policy in Canada) should be accepted in the circumstances.
- A motion should be brought for summary judgment or for determination of an issue before trial under the Rules.
The plaintiffs in Chevron Corp. v. Yaiguaje may ultimately not succeed on the merits of their recognition and enforcement action in Ontario. And they may be unsuccessful in collecting damages in Ontario from either Chevron US or Chevron Canada. Nonetheless, the Supreme Court’s decision has implications for the transnational litigation strategies pursued by Canadian multinational corporations and by non-Canadian entities with operations or assets in Canada. Subsequent developments in this litigation may also provide valuable lessons in parent-subsidiary governance.
- The Takeovers Panel recently issued a draft guidance note on when shareholder intention statements to accept a bid may be unacceptable.
- Statements of intention from major shareholders to accept a takeover bid or vote in favour of a scheme should be qualified as being subject to no superior proposal emerging.
- Shareholders should allow a reasonable period to elapse (the guidance suggests 2 or 3 weeks, dependent on circumstances) before accepting a takeover bid.
- Details should be provided including name of shareholder and, where it is material, their shareholding.
- The draft guidance does not give guidance on when an intention statement might give rise to relevant interests or associations in breach of the Corporations Act. It is hoped the final guidance note will do so.
Public submissions recently closed on the Takeovers Panel’s consultation draft of a new guidance note on shareholder intention statements in the context of public company takeovers. The proposed guidance follows recent Panel decisions concerning Ambassador Oil and Gas Limited and Bullabulling Limited. In these cases statements either made by, or attributed to, target shareholders were found to either be misleading or to give rise to an association resulting in breach of the Corporations Act. Anecdotally ASIC has also recently increased its scrutiny of such shareholder statements. We expect that the Panel will have received a range of submissions from interested parties. This article provides a summary of the key points, along with some of our submissions on the proposed guidance.
Shareholder intention statements – the context
In Australian public company takeovers it has become commonplace for major shareholders of a target company to publicly state whether or not they intend to accept a takeover bid or vote in favour of a scheme of arrangement proposal. On the Takeovers Panel’s own statistics, 45% of takeover bids and 86% of schemes in 2014 were announced along with a statement attributed to a major shareholder concerning their intentions. To date in 2015 they remain a common feature of public company transactions, with notable recent examples such as the proposed $1.4 billion acquisition by DUET Group of Energy Developments and Independence Group’s $1.8 billion acquisition of Sirius Resources featuring public statements of support from major shareholders holding over 20% of the target company.
Used appropriately, these statements are a legitimate and important part of public company takeovers. They provide transparency for all shareholders and, at times, can give bidders the confidence to proceed with a transaction.
In the above context, the proposed guidance from the Takeovers Panel, which will give some more certainty to the validity of the use of shareholder intention statements, is very welcome. It could be said that the draft guidance is light-on in some respects in relation to association and relevant interest matters (see further below). To ensure the guidance is most helpful, it is hoped that the final guidance note fills in the gaps.
The legal framework: the 20% rule and truth in takeovers
The Corporations Act restricts a bidder obtaining a relevant interest, or reaching any agreement, arrangement or understanding as to voting or disposal in respect of more than 20% of the target company prior to commencing a takeover or scheme transaction. Therefore, to the extent a major shareholder is willing to sell into or accept an offer, the bidder can only reach an agreement for the shareholder to accept a bid or vote in favour of a scheme up to 19.9% of the target company.
However the ‘20% rule’ does not inhibit a shareholder (or shareholders collectively) holding more than 20% from publicly stating that it intends (or they intend) to accept a bid or vote in favour of a scheme. ASIC’s Regulatory Guide 25 Takeovers: False and Misleading Statements classifies these statements as a ‘last and final statement’ which then needs to be followed through. The policy, often referred to as the ‘truth in takeovers’ policy, could be said to effectively bind shareholders to act consistently with public intention statements without the bidder necessarily having any agreement with the shareholder that it do so.
Accordingly, it is not unusual to see:
- a bidder and major shareholder enter into pre-bid acceptance or voting agreements up to, in aggregate, 19.9%; and
- major target shareholders publicly indicate their intention to accept or vote in favour of the transaction for their remaining holding beyond 19.9%, in the absence of a superior proposal.
The proposed draft guidance
The Takeovers Panel’s proposed draft guidance note sets out the Panel’s view on when a statement by a major shareholder may be misleading. The key points include:
Is it misleading?
The draft guidance in effect provides that a shareholder statement could be misleading (or at least confusing) if:
- expressed in unclear terms (eg a reference to a ‘present’ intention);
- qualified in an ambiguous way (eg if an intention to accept is said to be within a certain period and the shareholder accepts early); or
- published without sufficient details (eg the size of the shareholder’s holding in the target company, where material).
These are all sensible guidance points. Shareholder intention statements are only effective if the market can clearly understand the effect and implications of the statement – it should be clear how many shares are affected, the timing by which acceptance will be made and the circumstances in which the shareholder does not need to accept.
When will an intention statement give rise to unacceptable circumstances?
The Panel’s draft guidance follows its key decision on these matters in MYOB Limited in 2008. Statements should feature the following key components:
- Superior proposal qualification: Where a statement may take the bidder’s relevant interest in the target beyond 20%, the shareholder’s intention should be expressed to be in the absence of a superior proposal. In MYOB, shareholders holding 34% of the target stated an intention to accept as soon as the offer opened without any such qualification, effectively binding themselves to accept regardless of whether a superior offer arose. The Panel found this unacceptable.
- Time to accept: Following the MYOB decision, shareholder intention statements are typically qualified to allow 2 or 3 weeks for a competing proposal to emerge before acceptance. Under the Panel’s draft guidance, if the shareholder does not wait for “a reasonable period” to elapse before accepting, unacceptable circumstances can arise. The Panel appears to be considering whether 2 or 3 weeks after the offer opens is a reasonable period. The Panel recently made a declaration of unacceptable circumstances in Ambassador Oil & Gas where a shareholder acted inconsistently with their statement by accepting early.
We agree that these two key components are important to ensure that a competitive market can continue. One of the Panel’s consultation questions is whether the guidance should specify an appropriate waiting period before a shareholder can accept. The Takeovers Panel has in the past indicated that 3 weeks is an appropriate period. We generally agree that a 3 week period should give a serious potential counter bidder sufficient time to put together a proposal. We also agree with the Panel where it flagged that the appropriate time period will depend on the circumstances. In our view, circumstances where a shorter period may be appropriate include where the target has already tested the market via a sale process or where there is a significant period between announcement of an offer and dispatch of bidder’s statements (which commences the offer period in a takeover bid).
As a separate matter, parties need to take care that any shareholder intention statement does not give rise to an unacceptable arrangement or understanding that could give the bidder a relevant interest in the shareholder’s shares, or render the bidder and the shareholder ‘associates’ in breach of the 20% or substantial holding rules in the Corporations Act.
The draft guidance touches very briefly on the need to avoid these issues and to circumstances where an association may arise. ASIC provides some guidance on when a relevant interest and association might arise, but that guidance does not refer to shareholder intention statements in the context of a takeover bid or scheme. Given its power to declare unacceptable circumstances, this is guidance the Takeovers Panel is best placed to give.
There is currently a range of views amongst advisers, market participants and regulators in respect of the circumstances in which a relevant interest or association may arise, and when a relevant interest or association may be found unacceptable. We think the final form of the guidance note should make clear that the making of an intention statement from a shareholder, including after discussion with the bidder, will not, without more, be considered to give rise to an association or to the bidder having acquired a relevant interest in the relevant shareholder’s shares, provided certain safeguards are included. In our view, where a statement of support for a transaction is made by a shareholder (including in circumstances where the shareholder and bidder’s aggregate voting power exceeds 20%) that:
- is made with the shareholder’s consent;
- is expressed to be subject to a superior proposal; and
- allows sufficient time for a superior proposal to arise,
such a statement should generally not give rise to an association or a relevant interest. In our view, these circumstances do not lend themselves to inhibiting an efficient, competitive and informed market for the shares in the target company.
We think it would be very helpful for the Takeovers Panel to give clear guidance on these matters in the final guidance note.
Consent to be named
The draft guidance indicates that any shareholder intention statement should only be published by a bidder or target if the shareholder(s) has consented to the statement being made. Other than where a shareholder is already on the public record as to its intentions, this seems a sensible approach to ensure that other target shareholders and the market generally are not misled by inaccurate/unverified statements.
It would be helpful if the final guidance note clarifies that obtaining consent alone does not give rise to an agreement or understanding between the bidder and the shareholder which constitutes an ‘association’.
Guidance on shareholder intention statements is certainly welcome: the current market practice would be assisted by greater certainty in this area and, in our view, the draft guidance generally strikes the right balance between a competitive market and allowing shareholders to make their positions clear at the time a bid is announced (or shortly thereafter). Having said that, we would welcome the Takeovers Panel’s final guidance note extending to clear guidance on the association and relevant interest issues.
- Global M&A volume in Q3 exceeded US$1 trillion, a quarterly figure second only to 2015’s Q2 in recent years. M&A volume through the first three quarters was US$3.2 trillion (an increase of 30% over the same period in 2014), and year-to-date volume through the date of publication is the strongest on record. These USD figures were recorded despite the strength of the dollar when measuring values for deals struck in other currencies.
- Global M&A activity in 2015 is on pace to reach US$4.2 trillion, a nearly 30% jump compared to 2014 (itself the strongest year since 2007).
- Despite the recent stock market volatility, concerns about a slowing Chinese economy, falling commodity prices, and the prospect of near-term interest rate increases in the United States, M&A activity has carried its momentum through 2015. This trend is largely being driven by large corporate cash balances (carried at virtually zero return) and still relatively high stock prices that together provide strong acquisition currency; attractive financing for most corporate borrowers; continued industry consolidation and competitive pressure; and the search for global scale and synergies.
- North American targets accounted for more than US$600 billion of the US$1 trillion of global M&A volume in Q3, with a significant portion of that activity attributable to a series of transformative strategic deals involving U.S. companies, albeit often highly globalized competitors.
- At its current pace, pure cross-border M&A activity will account for 35% of global deal volume in 2015, which is consistent with recent levels. Three of the 10 largest deals in Q3 were cross-border transactions, with the balance involving U.S. companies.
- Megadeals continued in Q3, with deals in excess of US$10 billion accounting for approximately 37% of global M&A volume. Six deals in Q3 exceeded US$20 billion in value.
- Healthcare and Energy & Power were the strongest M&A sectors in Q3, with Healthcare and Financials leading cross-border M&A activity.
ISRAELI UPDATE – A Proposed Reform in Israeli Merger Control and Supervision of Authorized Distributors
Executive Summary: Memorandum published by the General Director of the Israel Antitrust Authority earlier this year proposed reform that reflects a considerable expansion in the application of Israeli antitrust law to mergers between foreign corporations, as well as mergers involving Israeli and foreign corporations (including the acquisition of an Israeli corporation by a foreign corporation with no previous ties to Israel). Current guidelines of the IAA mandate the General Director to supervise mergers involving foreign corporations that are not registered in Israel in cases where a nexus could be determined to exist between the foreign corporation and Israel. The new proposal foregoes the nexus requirement, by defining “Corporation” as any foreign corporation. This article discusses such proposal as well as additional proposed changes included in the memoranda.
At the beginning of April 2015, the General Director of the Israel Antitrust Authority (the “General Director”) published memoranda of legislation calling for an amendment of the Israeli Restrictive Trade Practices Law, 5748-1988: memorandum of the Restrictive Trade Practices Law (amendment to mergers section and various provisions), 5775-2015 (the “Memorandum”), proposing a significant reform in the merger control regime; and memorandum of the Restrictive Trade Practices Law (removal of import barriers), 5775-2015, calling for the impositions of the special duties that are currently applicable only to monopolies, to authorized distributors that do not hold monopoly positions, where their behavior impairs or impedes parallel import.
The main changes proposed in the memorandum are detailed below.
Mergers involving foreign companies
Currently, the literal definition of a “Merger” in the Israeli Restrictive Trade Practices Law applies to mergers between corporations incorporated in Israel and to foreign corporations that are registered in Israel. Until now, the General Director applied his authority to regulate mergers involving foreign corporations that are not registered in Israel by interpretive means, in cases where nexus could be determined to exist between the foreign corporation and Israel. Guidelines published by the General Director state that a merger involving an unregistered foreign corporation would fall within the definition of “Merger” if such foreign corporation has substantial holdings in Israeli corporations or if it conducts business in Israel, including through local representatives that are subject to the foreign corporation’s influence.
The current proposal wishes to cancel the need to prove nexus to Israel by defining “Corporation” as any foreign corporation. In this respect, the proposed reform reflects a considerable expansion in the application of Israeli antitrust law to mergers between foreign corporations, as well as mergers involving Israeli and foreign corporations (including the acquisition of an Israeli corporation by a foreign corporation with no previous ties to Israel). Due to the potential consequences of this change on foreign investments in Israel, it would be advisable to have a thorough discussion and consider amendments to the Memorandum.
Regulating mergers involving individuals and other forms of corporations
The General Director proposes to amend the definition of “Company” so that Israeli merger control would not be affected by the form of incorporation, and would include mergers where one of the parties is an individual, an unregistered partnership (including a foreign partnership) or an association. Presently, the definition of merger applies only to some of the abovementioned forms of incorporation and to some transactions involving individuals (by way of interpretation).
Prohibition on mergers that fail to meet the thresholds for pre-merger notification
Presently, a merger that fails to meet the minimum threshold for pre-merger notification is immune from intervention, and the parties to such a merger may consummate the transaction even if it entails significant competitive harm.
The General Director proposes to effect a substantive prohibition on any merger that raises reasonable concerns of significant competitive harm or harm to the public. If accepted, this amendment could subject parties to a merger to criminal liability and administrative sanctions, and enable the General Director to order the dissolution of the merger, even if the parties thereto did not have a duty to notify the General Director of the merger, if it is determined that such merger raised reasonable concerns of significant competitive harm. Naturally, this provision creates a great deal of uncertainty, especially due to the fact that in many cases the information required for a full competitive analysis of the merger is not available to the parties prior to the entering into the merger agreement or the consummation of the transaction (for example, information acquired by the General Director from third parties). The costs of such analysis in themselves may deter parties from executing merger transactions.
Mergers that give rise to competitive concerns are sometimes approved subject to certain conditions; however, where there is no requirement to file a merger notification, the merging parties are in fact denied the opportunity to receive a conditional merger approval. To resolve this issue, under the proposed regime, parties could voluntarily file a merger notification, and the General Director would have 15 days to notify them whether or not he intends to review the merger. A negative response or no response will be deemed as an unconditional approval of the merger.
Changing the minimum threshold for pre-merger notification
The General Director proposes to update the minimum thresholds requiring pre-merger notifications. The current minimal joint turnover threshold in Israel of both parties is ILS 150 million (around USD 38M), and is proposed to be raised to ILS 250 million (around USD 63M). The other minimal turnover threshold relates to at least two separate merging parties, and it will remain ILS 10 million. The General Director proposes that even if this threshold is not met, if one of the parties to the merger has a worldwide turnover exceeding ILS 1 billion, a filing of pre-merger notification will be required.
A pre-merger notification is also required where the merger would create a monopoly or if a party to the merger is already a monopoly. The General Director proposes adding a condition to this requirement, requiring that the merging parties have a joint turnover of at least ILS 100 million (around 25M USD). This new condition would decrease the number of transactions requiring merger notification, but as explained above, such mergers will still be subject to the substantive test.
Authorizing the General Director to extend the merger review term
Currently, the Israeli Restrictive Trade Practices Law allows the General Director 30 days to decide whether to approve a merger. In order to extend the 30-day period, the General Director must receive the approval of the parties to the merger or the Antitrust Tribunal. The General Director’s view is that such 30-day period is not sufficient in order to review complex mergers. Therefore, it is proposed to grant the General Director with unilateral authority to extend such period to up to a total of 120 days (excluding the initial 30-day period, i.e. a grand total of 150 days).
This proposed amendment removes the checks and balances existing today with respect to the duration of a merger review, and would deny the parties the ability to turn to judicial review by the Antitrust Tribunal if they feel the review process is prolonged without ample justification.
Other proposed amendments in the Memoranda
Other proposals include enhancing transparency of the merger review process by requiring the publication of an abstract of the records and minutes of meeting of the mergers and exemptions committee; and expanding the General Director’s investigative authority regarding disruption of proceedings in antitrust violation cases. Currently, such investigative powers are limited to disruptions during the General Director’s inquiries. The amendment will broaden the scope of investigation to disruptions prior to the commencement of the inquiry (such as destruction of evidence regarding cartel agreements or tender coordination, intended to obstruct future investigations).
Removal of import barriers
In December 2014, the recommendations of the Import Committee to reduce barriers on import were adopted by the government. This proposed amendment seeks to apply the prohibition on the abuse of monopoly power to authorized distributors that do not hold a monopoly position, to the extent that their behavior impairs or impedes parallel import. The proposed amendment also authorizes the General Director to issue orders against authorized distributors that abuse their position and cause potential significant harm to competition from parallel import. Such authorized distributors may be subject to criminal sanctions (if intent to reduce competition from parallel import is proven) and administrative sanctions.