1. Canadian Public M&A Update Guest Speaker: Naizam Kanji Deputy Director, OSC, M&A, Corporate Finance Blakes Speakers: Shlomi Feiner Michael Gans Jeffrey Lloyd June 21, 2012
Speaker: Jeff

2. Agenda Public M&A activity overview Confidentiality agreements
Toe-holds and reporting of security holdings
Governance in M&A Transactions
Defensive tactics
Remedies for failure to obtain approvals
Speaker: Jeff
Approximate time for each of the sections:
Public M&A update – 5 minutes
Confidentiality agreements – 8 minutes
Toe-holds and reporting – 10 minutes
Governance – 15 minutes
Defensive tactics – 15 minutes
Remedies for failure to obtain approvals – 5 minutes

3. Canadian Public M&A Market – Blakes Canadian Public M&A Deal Study
Industry Classification
Transaction Size
Over US$5-billion (4%)
Oil & Gas/Energy (30%)
US$1-billion to US$5-billion
(18%)
Under US$250-million
(30%)
Mining
(44%)
Consumer (2%)
US$500-million to US$1-billion
(18%)
Technology & Communications (2%)
Real Estate (4%)
US$250-million to US$500-million
(30%)
Industrial/Utilities
(12%)
Financial Services (6%)
Speaker: Jeff
For 12 months ended May 31, 2012:
Oil & Gas/Energy – likely around 30% of top 50 deals
Mining/Basic Materials – likely around 42% of top 50 deals
Largest deal (by announced transaction size) was Viterra
Source: For the top 50 transactions (by transaction size) for the 12 months ended May 31, 2011, based on Blakes Canadian Public M&A Deal Study, Fourth Annual Edition – 2012

4. Canadian Public M&A Market – Blakes Canadian Public M&A Deal Study
Buyer Type
Transaction Structure % %
Speaker: Jeff
In last 12 months, still very limited Canadian public company by financial sponsors. Recent financial sponsor acquisitions:
Birch Hill Equity Partners acquisition of Distinction Group
Madison Dearborn/Teachers’ joining BCE in acquisition of Q9 Networks
Strategic
Financial
Plan of arrangement
Take-over bid
Other shareholder-approved transactions
Source: For the top 50 transactions (by transaction size) for the 12 months ended May 31, 2011, based on Blakes Canadian Public M&A Deal Study, Fourth Annual Edition – 2012

5. YTD M&A Market Canada (Q1 2012)
245 transactions worth $50.7 billion announced
14% drop quarter-over-quarter relative to the 286 transactions worth $33.5 billion announced in Q4 2011, but significant increase in average deal size
Most active sectors were Oil & Gas (58 deals worth $16.3 billion) and Real Estate (50 deals worth $6.2 billion)
Increase in deals over $1 billion, led by Glencore/Viterra, Pembina/Provident Energy and BCE/Astral
Speaker: Jeff
Sources: Data from Financial Post Crosbie: Mergers & Acquisitions database

6. Confidentiality Agreements – Nature and Scope
Confidentiality agreements (CAs) typically entered into at outset of a transaction
Enable parties to exchange sensitive information and conduct due diligence while protecting such information and imposing limitations and conditions on its use
In a public company context, this should prevent the coercive or opportunistic use of information
CA will define nature of information, permitted use of information and limitations on use, permitted disclosure of information and related matters
CA may also impose other prohibitions on party, including non-solicitation of employees and/or customers and standstill on acquisitions of securities of other party
Speaker: Shlomi

7. Confidentiality Agreements – Recent Cases
Martin Marietta Materials v. Vulcan Materials (Delaware Court of Chancery 2012)
Chancellor Strine enjoined US$5.3 billion hostile take-over bid on the ground that CAs between Martin Marietta (bidder) and Vulcan (target) prevented the bid
CAs limited parties’ rights to use confidential information solely for the purpose of evaluating a business combination transaction “between” the parties
Court held that CAs prohibited Martin Marietta from using confidential information for any transaction other than a contractually negotiated business combination between the parties
Speaker: Shlomi
Threshold factual question: was confidential information used by Martin Marietta? Strine concluded that that it had used confidential information in formulating its bid, particularly with respect to synergy estimates and antitrust analysis.
Key factors influencing legal conclusions:
natural reading of “between the parties” language was to prohibit the use of information other than in connection with a negotiated business combination
external evidence that, during negotiations, Martin Marietta was insistent on confidentiality regarding the potential merger and that its CEO was focused solely on a negotiated merger
the safe harbour exception for “legally required” disclosures was not triggered by Martin Marietta’s unilateral decision to go hostile – can’t create a situation to take advantage of an exception

8. Confidentiality Agreements – Recent Cases (cont’d)
Effectively operated as a standstill, despite the CAs containing no standstill provision, for four months (time between the launch of Martin Marietta’s hostile bid and the expiration of the CA, and the amount of time requested by Vulcan)
Chancellor Strine cited 2009 Ontario Superior Court of Justice decision of Certicom Corp. v. Research in Motion Ltd, where court enjoined RIM’s hostile bid for Certicom as a result of RIM’s breach of its CAs with Certicom
In Certicom, RIM was enjoined permanently from taking any steps to advance its hostile take-over bid for Certicom
Speaker: Shlomi
Remedy of specific performance was granted based on the agreed-upon contractual provisions in the CA.
Strine was not concerned about a slippery slope and reading beyond the negotiated provisions – rather, saw the remedy merely as implementing the bargain that Martin Marietta had struck with Vulcan.
What is the appropriate venue in Canada for such disputes? In Certicom, original approach was made to OSC to hear application, but OSC directed the parties to the Ontario courts as the proper forum

9. Confidentiality Agreements – Practice Points
Consider possible constraints that CA may impose upon a subsequent transaction
Consider wording of the “permitted use” provision, e.g., if described as a transaction “between” the parties, could prevent use of confidential information in connection with a hostile bid
Consider length of confidentiality obligations, as they may impose an effective standstill even if the standstill provision itself has expired or no standstill provision has been included
Consider limitations of “permitted disclosure” exceptions in CAs, e.g., exceptions for “legally required” disclosure may be construed narrowly
Consider practicality of “clean team” for subsequent transaction (i.e., persons that are not involved in the negotiations and that have had no access to, and are prevented by ethical walls and security procedures from accessing, the confidential information)
Speaker: Shlomi
In negotiating CAs, incumbent on bidder to make it clear that, when the standstill expires, the party receiving confidential information is free to proceed with a hostile bid
Needs to be an exception to both the “use” and the “disclosure” restrictions Question about whether targets will be open to releasing such restrictions – what is the true bargain struck with the bidder?
The concern may also arise from bidders use and possible disclosure of sensitive information.

10. Toe-holds and Reporting
Public disclosure of a holding in a Canadian public issuer governed by insider reporting and early warning reporting regimes
Early warning
acquisition of, or ability to exercise control or direction over, 10% or more of any class of voting or equity securities of issuer must be promptly disclosed via press release and regulatory filing
subsequent acquisitions (while above 10% level) of 2% or more of voting or any class of equity securities must also be disclosed
Insider reporting
acquisition of, or ability to exercise control or direction over, 10% or more of the voting securities of an issuer causes buyer to become an “insider” of that issuer
any trading in securities of that issuer while above the 10% threshold must be disclosed
Speaker: Mike

11. Toe-holds and Reporting (cont’d)
Alternative monthly reporting available for passive investors
Derivative exposure only needs to be reported if already an insider
Purchase of target securities permitted in advance of formal take-over bid, but pre-bid integration rules apply for those within 90 days prior to bid (e.g., equal/same form of consideration)
Speaker: Mike
- mention Sears Canada commentary on use of public interest jurisdiction

12. Toe-holds and Reporting – Potential CSA Reforms
Timing for reporting of acquisitions
Nature and extent of required disclosure
Effect of derivatives and similar transactions on reporting requirements
Speaker: Naizam
Telus Press Release Excerpts:
“The empty voting trading tactics of hedge fund Mason Capital and lack of regulatory oversight of the practice make it apparent a vote to be held at TELUS’ annual general and special meeting of shareholders on May 9 would not succeed. Empty voting is buying shares to vote them while simultaneously short selling shares in the same company, a troubling practice that gives a fund more votes than its economic stake warrants. In this case, Mason Capital was voting $1.9 billion worth of TELUS’ common shares with only a $25 million net economic stake.”
“If Mason Capital’s shares are factored out, TELUS’ proposal was on track to be overwhelmingly approved by both classes of shareholders, with 92.4 per cent of voted shares in favour of the proposal.”
“Further, Mr. Entwistle called upon public companies, investors, securities regulators, market participants and all those with an interest in the proxy voting system to work against the practice of empty voting and help improve the quality of the shareholder voting system in Canada. TELUS employees own 8.2 million TELUS shares while Mason Capital has a net ownership of 416,400 shares, one-twentieth that of TELUS employees. Due to its empty voting tactics, however, Mason Capital was able to exercise approximately 33 million votes, four times more than TELUS employee shareholders.”
“However, Mason Capital rapidly acquired common shares only after TELUS announced the proposal, taking it to a position of 19 per cent of the common shares, while simultaneously shorting a similar number of non-voting and common shares. Mason’s goal was to defeat TELUS’ proposal and thus widen the gap in trading value between TELUS’ share classes in order to profit from its short trades. This runs contrary to the interests of other TELUS shareholders, as it is likely to depress the value of TELUS shares.”
Questions
What are your views on situations such as TELUS, including those related to (a) transparency of the voting process and ownership reporting, (b) securities lending practices and its effect on voting and (c) the substantive question of whether voting rights should be tied to actual economic interests.
Should the Alternative Monthly Reporting system be changed to deal with situations such as Mason Capital in TELUS?

13. Governance in M&A Transactions
Public company boards must pay special attention to governance where fundamental changes to the company are contemplated – often, a special committee of the board is established for such purpose
Special committee of independent directors is mandated in only limited circumstances under Canadian securities laws
Regulators’ view is that it is good practice for negotiations for a transaction involving an “interested” party to be carried out by or reviewed and reported upon by a special committee of disinterested directors
View is also that committee should include only directors who are independent from the interested party, with non-independent persons not being present at or participating in the decision-making deliberations of the committee
In Ontario and Quebec, transactions subject to Multilateral Instrument
Speaker: Mike

14. Governance in M&A Transactions – Recent Cases
In re Southern Peru Copper Corporation Shareholder Derivative Litigation (Delaware Court of Chancery October 2011)
Chancellor Strine held process undertaken, and the price paid, by Southern Peru (the controlled public entity) to its controlling shareholder, Grupo Mexico, for the purchase of Minera Mexico was not entirely fair and awarded plaintiffs US$1.26 billion in damages
Entire fairness is not a level of scrutiny adopted by Canadian courts
Court found special committee process was not one that it would have expected in an arm’s-length negotiation:
mandate was too narrow (limited to evaluating the Grupo Mexico transaction; silent on power to negotiate with Grupo Mexico or to consider alternative transactions or structures) – Court concluded that committee did not have the ability to exercise real bargaining power
committee focused on ways to implement Grupo Mexico transaction as opposed to determining whether the transaction was a good idea in the first place, in particular in negotiations over the purchase price
Potential conflicts involving one of the committee members were not identified early in the process, and while the director abstained from the final vote, Court determined his participation throughout the process was problematic
Speaker: Mike

15. Governance in M&A Transactions – Recent Cases (cont’d)
Magna International Inc. (OSC, June 2010, January 2011)
Plan of arrangement by Magna that eliminated its multiple voting share structure and included a substantial payout to its controlling shareholder, Frank Stronach
Arrangement was exempt from requirements applicable to related party transactions as the aggregate value was less than 25% of Magna’s market capitalization
Magna board voluntarily made transaction conditional upon approval by a majority of votes cast by disinterested shareholders at its special meeting, but did not make a recommendation as to how shareholders should vote
OSC determined that, while the transaction was not abusive to shareholders or the capital markets, the disclosure provided in the information circular was inadequate
OSC also found a failure by Magna special committee to play a sufficiently active role in the negotiation of the arrangement, with a mandate that was too narrow
Magna amended its information circular and the arrangement proceeded, with subsequent court challenges of the arrangement by shareholders unsuccessful
Speaker: Jeff

16. Governance in M&A Transactions – Potential MI 61-101 Reforms
Would amend the existing related party transaction rules to introduce additional protections for minority shareholders
Related party transactions would be required to be completed under the supervision of a special committee of independent directors
Special committee would be required to negotiate or oversee the negotiation of transaction terms and either (a) recommend that the board support the transaction and that shareholders vote in favour of it, or (b) determine that the transaction is fair to minority shareholders, but provide no recommendation
Exemption from shareholder approval requirements would only be available if value of transaction was less than 10% of issuer’s market capitalization
Requirement to obtain a formal valuation would continue to apply if related party transaction had a value in excess of 25% of issuer’s market capitalization
Speaker: Naizam

17. Defensive Tactics
Boards of Canadian public companies have historically been unable to implement permanent structural defenses against unsolicited take-over bids
Canadian securities regulators have been of the view that unrestricted auctions produce the most desirable outcome for target shareholders
Views set forth in National Policy – Take-Over Bids – Defensive Tactics
Speaker: Mike

18. Defensive Tactics – Strategic Private Placements
In Nov. 2011, Resolute (formerly Abitibi Bowater) entered into “hard” lock-up agreements with three of Fibrek’s largest shareholders (aggregate of 46% of outstanding shares) and announced an unsolicited bid to acquire all of the shares of Fibrek for the equivalent of $1.00 per share
The offer was formally launched on December 15, 2011
In response, the Fibrek Board obtained a valuation showing value of $1.25 to $1.45 per share and adopted a rights plan
On February 9, the Fibrek rights plan was cease traded by the Bureau de décision et de révision
On February 10, Mercer International made an offer at the equivalent of $1.30 per share
Fibrek simultaneously agreed to issue to Mercer 32 million warrants at $1.00 each, which gave Mercer 19.9% of Fibrek once exercised, as a means of diluting the locked-up shareholders. The private placement was not contingent on the success of the Mercer offer
Fibrek also entered into a support agreement with Mercer, which provided Mercer with an $8.5M break fee, representing 5% of shareholders’ equity
Resolute sought to have the private placement and the break fee set aside as contrary to the public interest -- the AMF opposed Resolute’s application
Speaker: Mike

19. Defensive Tactics – Strategic Private Placements (cont’d)
On Feb. 23, the Bureau issued a cease trade order in respect of the private placement but did not cease trade the Mercer offer
Not its place to assess whether the Board has complied with its fiduciary duties, but tasked with determining if there were improper defensive measures
Took issue with Fibrek’s contention that the primary purpose of the special warrant offering was to raise capital
Rather, the purpose of the private placement was to combat the Resolute offer
Distinguished earlier ARC/Profound Energy case of the ASC (which upheld a strategic private placement) on the basis that the Profound Energy private placement (to Paramount Energy Trust) was not made to dilute shareholdings of locked-up shareholders and there was a demonstrated pressing need for capital
Held that the 5% fee was unwarranted
Court of Quebec overturned the Bureau on the basis that it was unreasonable
In the Court’s view, the maximization of shareholder value is a principle which overrides the benefits of preserving validly negotiated lock-up agreements
Court of Appeal then reversed, on the basis that the Bureau had not been shown sufficient deference -- leave to appeal to Supreme Court of Canada was denied
Speaker: Mike
mention Lion’s Gate debt to equity conversion and court dismissal of claim
Questions
What would the OSC do in a situation such as Fibrek?
What is the proper forum for hearing such cases? In BC, it seems to be a matter for the courts, while in Alberta, the securities regulator seems to be more willing to consider these issues.

20. Defensive Tactics – Poison Pills
Target board may use a shareholder rights plan (poison pill) to delay an unsolicited bid for a reasonable period of time as it seeks alternative offers
Typically been a question of when, not if, a poison pill must go
Despite period of uncertainty over the last few years, historic approach has been affirmed for majority of situations
Absent a partial bid or other unusual circumstance involving shareholder approval of a poison pill in the face of a bid, regulators have typically cease traded a pill after a reasonable auction period has elapsed
Speaker: Shlomi
How does a shareholder rights plan work?
issuer’s shareholders (other than person triggering the right) have the right to buy additional shares at a steep discount if a triggering event occurs
triggered when, for example, one shareholders acquires 20% of issuer’s outstanding shares
result is that purchases by public shareholders will dilute the bidder's interest, and the cost of the bid will rise substantially
Typically also include a “permitted bid” concept that enables a bidder who is willing to conform to the requirements of a permitted bid (e.g., duration of bid, offer for all shares, extension following initial take-up, etc.) to acquire the issuer by take-over bid without triggering a flip-in event

21. Defensive Tactics – Potential CSA Reforms
Would permit target board to employ a poison pill, which has been approved by its shareholders, to defend indefinitely against an unsolicited take-over bid
Pill must have been approved either at the most recent annual general meeting or following the announcement of the bid
Disinterested target shareholders would have the ability to remove a pill with a “majority of the minority” vote in favour of such action
Speaker: Naizam

22. Dealing with Regulatory Risk
Era of heightened anti trust and other regulatory scrutiny
Increasingly addressed in public and private deals
Provisions dealing with regulatory risk are on a spectrum from buyer-friendly to seller-friendly
no obligation to make any divestitures/commitments
take “reasonable commercial efforts/best efforts” but no obligation to make divestitures/commitments if result is any material impact on seller
... would result in a divestiture in excess of [negotiated metric]
... would result in an MAE on seller/buyer/combined entity
“hell or high water” covenant
new alternative: reverse break fee paid by buyer to seller if deal fails due to regulatory condition not being met (all other conditions must be satisfied or capable of being satisfied)
Is fee the sole and exclusive remedy of the vendor/target?
Speaker: Shlomi

23. Dealing with Regulatory Risk (cont’d)
AT&T/Deutche Telecom: reverse break fee of
(i) $3 billion in cash,
(ii) spectrum holding a value of $2 billion and
(iii) roaming agreement (total value equivalent of 15.4% of equity value)
Divestiture covenant (value up to $7.8 billion)
Sole and exclusive remedy
Google/Motorola Mobility: reverse break fee of $2.5 billion in cash (approximately 21% of equity value)
No specific divestiture covenant
Motorola could also seek damages up to $1 billion for failure to comply with anti-trust covenant
BCE/Astral: reverse break fee of $125 million, escalating to $150 million if BCE, at its option, extended the drop-dead date under acquisition agreement (approximately 5% of equity value)
Divestiture covenant (so long as not material and adverse to BCE/Astral business)
Speaker: Shlomi

24. Presenters Naizam Kanji Ontario Securities Commission
Tel:
Shlomi Feiner
Blake, Cassels & Graydon LLP
Tel
Michael Gans
Tel:
Jeffrey Lloyd
Tel: