New foreign investment rules will lead to strategically timed takeovers

May 13, 2015

Julius Melnitzer, Lexpert

(Recap)

Recent changes to the methodology for calculating net benefit review thresholds under the Investment Canada Act could add some strategic wrinkles to foreign takeover tactics.

“There’s definitely room for manoeuvering in public bids, both in planning stages and in deciding when to make the ICA ruling,” says Michelle Lally of Osler, Hoskin & Harcourt LLP in Toronto. “These rules could also create a first-to-file advantage in auction scenarios.”

“Where the announcement of a first bid has the effect of increasing the target’s share price, it may result in an uneven playing field amongst foreign bidders,” Lally explains. “While the first bidder would not be subject to ICA review, if there is a significant time gap in between bids such that the enterprise value has increased as a result of the first offer, the subsequent bidders may be subject to ICA review if the enterprise value threshold is exceeded.”

Whatever their degree of impact, these consequences were not unforeseen. “Various stakeholders, including the Canadian Bar Association and our firm, thoroughly discussed the implications of using enterprise value as a standard with policymakers and Industry Canada,” Lally says. “The government knew that there could be instances in which there might not be a level playing field, but decided that the consequences were not that significant.”

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