Canadian Lawyer InHouse

19 CANADIANLAWYERMAG.COM/INHOUSE NOVEMBER 2016 Every time someone new joined the team, they were given a note with the code names for the different parties. "Taurus" was TransCanada's moniker, while "Constella- tion" was the name of the project. Columbia called itself "Capricorn." Staff was so condi- tioned to think about the companies in code names that they still tend to stick. TransCanada's deal is one of several cross-border energy M&A in the past cou- ple of years, following the wild ride in the oil and gas sector. Enbridge's $37-billion deal with Houston-based Spectra Energy, announced in early September, punctuated a string of energy deals by Canadian com- panies. Canadian fi rm Emera bought U.S.- based TECO Energy for US$10.4 billion. Smaller deals included Gran Tierra Ener- gy's acquisition of three Columbian prop- erties, while TSX-listed Bankers Petroleum Ltd. sold off Albanian assets to Chinese Geo-Jade Petroleum for $575 million. Gregory Turnbull, partner at McCarthy Tétrault LLP's business law group, explains the motivation for both buyers and sellers in a volatile energy market. The fi rst group is doubling down. "We have a number of clients who have managed to raise equity in the last few months and go on a spend- ing spree," he says. They may buy overseas companies in consolidation transactions or those that enable them to exploit their technical skills. The second group is driven by debt hold- ers, Turnbull says. The oil and gas sector in particular is driven by debt, much of which was taken on when oil was at $100 per bar- rel. Now, with banks getting antsy and calling in loans, some companies are be- ing forced to divest selected assets to cover those payments and avoid sinking into pro- tection under the Companies' Creditors Arrangement Act. "As long as there's change, there's trans- actions, so there are lawyers on different sides of all these deals," Turnbull says. "You're acting for the banks, you're acting for the management team, for the consoli- dator or for the employee." Lawyers also have to help their clients through some hard decisions and tough times. Legal professionals should also be pre- pared for a painful process in the boardroom. Canadian fi rms are often lured across the border in an industry where assets are often highly tied to particular locations. TransCanada wanted to expand its access to gas basins, for example. Columbia was a good fi t, with its 24,000 kilo- metres of pipeline network and access to basins in areas includ- ing Appalachia. Going across borders typically muddies already complex legal pro- cesses, though, so lawyers like John- ston have to balance the need for secrecy and expertise. "The confi dential nature of transactions means keeping the deal team as small and tight as possible, but there's an inherent tension because you're trying to do it under deadline and you want to throw as many resources on to your diligence team as possible," Johnston says. DILIGENCE Diligence is the fi rst of three phases in an M&A deal. The second, closure and com- pliance, is followed up by integration. Each of them is rendered more complex by cross- jurisdictional issues, and the nature of the en- ergy sector brings its own additional demands. Due diligence is of particular impor- tance to Canadian companies, especially when it comes to U.S. acquisitions. The rate of post-acquisition litigation is mind- boggling, warn experts. "Whenever there's a public company deal, there's often a question of value. Val- ue tends to be in the eye of the beholder, which in this case is often the judge," Turn- bull says. "If you can show that the highest value was not achieved or that the deal was ap- proved too quickly without enough due diligence, there may be a case to argue that damages should be paid." Such ambiguity over value leads to liti- gation following large numbers of public company acquisitions, he says. In many cases, this litigation isn't even instigated by shareholders, says Johnston. There are law fi rms that often mine the pub- lic announcements of transactions and issue news releases arguing that there's a case to in- vestigate the value. Consequently, the more that an acquirer can do at the due diligence stage to stave off such cases, the better. U.S. LEGISLATION During these diligence practices, Canadian acquirers must be acutely aware of specifi c U.S. legislation, which applies across many sectors but can have particular signifi cance in energy deals. For example, they must protect them- selves from liability under the U.S. 1977 Foreign Corrupt Practices Act that ren- ders them vulnerable to prosecution if the company they acquire has been engaged in illegal conduct. In June 2016, the SEC is- sued new FCPA-related disclosure rules for payments made by energy companies in ex- change for oil and gas commercial develop- ment rights. Canadian companies must also pay at- tention to the U.S. Hart-Scott-Rodino An- titrust Improvements Act, says Turnbull. "You always have to be aware when there are two companies in the same industry transacting," he says. "What's the size of the deal? What's the size of the market? Are you creating a competition problem?" The third big issue that may come up in U.S. legislation is satisfaction of require- ments of the Committee on Foreign Invest- ment Review, a cross-sector agency estab- lished when concerns were mounting over OPEC investments in U.S. assets. This as- sesses the impact of foreign investments on U.S. national security. There's a similar degree of rigour in Canada, where the Investment Canada Act requires government approval for foreign

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