Ahead of the game

Innovative changes to Canadian corporate law go a long way towards challenging its conservative reputation. Kevin Carroll provides a rundown of the main developments

The conventional wisdom is that Canada managed to avoid the worst of the ­financial crisis and resulting recession because of its innate conservatism and aversion to risk. While that certainly fits the widespread stereotype of Canadians, the reality is a little ­different.

Canada owes at least as much to its ­traditional focus on the fundamentals of business. Moreover, recent developments in Canadian corporate law demonstrate that rapid change and innovation, and not ­conservatism, are the real driving forces in ­Canadian business today. Here are just a few examples in areas such as competition law, M&A and corporate governance, as illustrated by lawyers from some of Canada’s largest corporate firms.

Competition law: a whole new world

Competition law in Canada has undergone dramatic change this year, with major amendments to the federal Competition Act. These changes gave the Competition Bureau more leverage under a reformed merger review procedure and increased enforcement powers under certain sections of the Act. Not only that, they will transform conspiracy law when those provisions take effect in 2010.

What triggered these changes? Paul Collins, head of the competition and antitrust group at Stikeman Elliott in Toronto, points to a perception that Canada needed stronger doses of deterrence in the law.

“If you compare [Canada on a proportionate basis] to other jurisdictions in Europe and the US, either through government action or being susceptible to private actions and lawsuits, penalties are far, far greater [elsewhere], even with the changes,” he says.

One example of the new approach is in misleading advertising. While the laws themselves have not changed, enforcement powers have been greatly increased. In the past, a company found to be engaged in deceptive marketing would be fined C$100,000 (£56,072) for the first violation, with subsequent violations carrying fines of C$200,000. Now, first violations cost companies C$10m, with subsequent violations C$15m each.

“The analogy I use with clients is that the speed limit stays the same, but the fines for speeding have gone up dramatically,” explains Collins.

The competition act also now includes an administrative monetary penalty for abuse of dominance. Before, ­injunctive relief in the form of a cease-and-desist order was ­typically the only available relief. Now, ­substantial fines in the millions of dollars can be levied.

The merger review process has also changed substantially under the new regime, moving Canada to a US-style second-request (or secondary information request) ­procedure. Before the recent amendments, the ­waiting ­period before closing a deal was 14 or 42 calendar days, depending on whether a short- or long-form merger filing had been made. This gave the ­Competition Bureau limited time to review a merger, unless it obtained an injunction to block the transaction.

But the most controversial changes are still to come. Conspiracy law in Canada has not changed for the better part of a century, but there were growing concerns that the law was too weak: it required proof of an agreement between parties that had a ­negative impact on the market. Collins points out that the law could be considered both over-inclusive and under-inclusive.

“Over-inclusive, because it had a chilling effect on arrangements that were good, legitimate and competitively neutral,” he argues. “Under-inclusive, because it required a market impact, it didn’t capture what some people called a naked price restraint – those agreements that were clearly seeking to harm competition but slipped through the net because they didn’t have an impact on competition.”

Under the new law, criminal conduct, ­fixing prices, allocating customers or ­markets and agreeing supply will be ­captured, regardless of the market impact. A new civil provision will be introduced to cover legitimate conduct that substantially lessens competition.

The difficulty, adds Collins, is trying to codify it in a way that properly draws the ­distinction between the two.

M&A: case law trilogy

Mergers and acquisitions in Canada are changing too, thanks to a trio of recent ­decisions.

First, the Ontario Securities Commission’s (OSC) January 2009 decision in ­HudBay Minerals has led the Toronto Stock Exchange (TSX) to propose an amendment to its rules. Listed companies would be required to obtain shareholder approval for an acquisition of another public company if the transaction involves the issuance of more than 50 per cent of the listed ­company’s outstanding shares.

Sharon Geraghty, co-head of the M&A practice group at Torys in Toronto, thinks that rule will come into force.

“In the US, you’d have to get approval in that context,” she points out.

The case involved a bid by HudBay ­Minerals for Lundin Mining that was going to result in a 100 per cent dilution of existing HudBay shareholders. Existing rules required shareholder approval of transactions involving the issuance of 25 per cent or more of a company’s outstanding shares, but that did not apply if the transaction did not materially affect control of the listed company.

The shareholders complained, but the TSX concluded that their approval was not required because there was no material impact on control, since the shares were widely held. That position was overturned by the OSC, however, which said that even though it found no material impact on ­control, it was inappropriate not to obtain the approval of the HudBay shareholders.

The OSC ruled: “Fair treatment of ­shareholders is fundamentally more ­important than any consideration as to ‘deal ­certainty’ in assessing the impact of the transaction on the quality of the ­marketplace.”

Second was the Ontario Superior Court of Justice’s January 2009 decision regarding Research in Motion’s (RIM) hostile bid to buy Certicom, a case with important ­implications for negotiating terms of ­confidentiality agreements.

RIM and Certicom had entered into non-disclosure agreements in 2007 and 2008. One contained a standstill provision that prohibited RIM from launching a hostile bid for Certicom for 12 months, and both limited the purposes for which RIM could use the confidential information.

RIM launched a hostile bid for Certicom in 2008. The trial court found that the ­company used confidential information in connection with the hostile bid in breach of the non-disclosure agreements. This ­outcome, according to Geraghty, suggests that companies should erect walls to keep people with access to confidential ­information untainted.

Finally, in its widely read December 2008 BCE decision, the Supreme Court of Canada ruled on directors’ duties in change-of-control transactions. The high court ­rejected the application of the duty to maximize shareholder value in the context of change-of-control transactions, in favour of acting in the best interests of the ­corporation.

“On the positive side,” says Geraghty, “there’s broad leeway for the directors to exercise their business judgment.” As a director, you owe your allegiance to the company, but “as long as you think about [everyone’s interests], then you should have a lot of scope for discretion.”

On the foreign investment side, the ­federal government has also taken steps to reduce the number of M&A transactions subject to the Investment Canada Act. The standard review threshold will be increased from C$295m in assets to C$1bn in ­enterprise value over the next five years.

“The government wants to make foreign investment easier and it’s doing that by bumping up thresholds,” notes Torys ­partner Omar Wakil.

Corporate governance: getting complex

As in many countries, shareholders in ­Canada increasingly demand a voice on executive compensation.

“There has been a lot of concern expressed right around the Western world about the amount of pay for certain people considered to be the ones who led us into the economic crisis,” says William Orr, a partner at Fasken Martineau DuMoulin in ­Montreal.

But the challenge, he continues, is that the complexity of today’s compensation packages makes it difficult to determine what is fair and how to make comparisons. Between short- and long-term incentive programmes, options and other share ­ownership programmes, base salaries and ­bonuses tied to performances, boards are looking at between four and six different drivers and mechanisms of compensation.

Meanwhile, an obiter comment from a recent OSC decision is being taken ­seriously by lawyers advising boards that are relying on fairness opinions from financial advisers with a vested interest in the transaction at stake.

In the HudBay Minerals case previously referenced, the OSC said large success fees “create a financial incentive for an adviser to facilitate the successful completion of a transaction when the principal focus should be on the financial evaluation of the ­transaction from the perspective of ­shareholders.”

There is a lot of controversy over the implications of the comment, according to Orr, because it was not argued by counsel and it appeared at the tail-end of the ruling. But it has already had a significant impact on how transactions are done.

“People are being a little bit more careful,” says Orr.

Many firms were already thinking that it made sense to sometimes get a second ­opinion from someone with no vested ­interest in the transaction, but Orr expects to see it happen more often.

“It’s a safer way to ensure you have an expert opinion to rely on that isn’t tainted,” he adds.

Canadian corporate law is in a ­particularly dynamic state right now and there is every indication that that will ­continue. Despite the recession, globalisation is not going away and business law in Canada will continue to evolve at breakneck speeds as it affects, and is affected by developments worldwide.

There is no appetite for complacency ­anywhere, especially in Canada.

Kevin Carroll QC is a partner at Carroll Heyd Chown and president of the ­Canadian Bar Association