Canadian Lawyer InHouse

23 CANADIANLAWYERMAG.COM/INHOUSE NOVEMBER 2016 Energies Canada. The deal was a cross- border transaction because the vendor was owned by Methes Energies International, a Nevada corporation, which acquired Methes Energies Canada in 2007, a year be- fore the construction of the Sombra plant. "When we did the Sombra deal, I don't think we actually appreciated until we were midway through this deal that there was this Nevada component, and we had to go and get Nevada counsel to weigh in and do the analysis," says Biox CEO Alan Rickard. Many jurisdictions will have a test to see if the sale of an asset is substantial enough to require shareholder approval, says Char- lie Malone, partner at Wildeboer Dellelce LLP, who advised Biox on the deal. Nevada corporate law uses different language, re- sulting in a test with a lower standard. "It took time to ensure that we were all agreed that there wasn't a shareholder ap- proval requirement on that transaction," Malone says. "It's coming up more and more because you're seeing more Nevada- incorporated companies especially in en- ergy or mining. Nevada seems more relaxed even than Delaware, which is one of the more friendly jurisdictions that we know." North America may have a patchwork of state-level regulatory frameworks for en- ergy M&A, but at least they're well defi ned. "Two-thirds of the world doesn't have that, and they're making up the rules as they go along," says Turnbull. "You're always going to have a curveball thrown at you some- where in the deal. The more you're outside the rule of law, the more important political currency becomes." As lawyers at North American companies venture further into these waters, they must ask themselves more politically nuanced questions, Turnbull says. Is their company creating jobs and tax revenue with its acquisi- tion? Is it a better operator than the outgoing one? What is its reputation as a purchaser? Lawyers can fi nd themselves adrift cul- turally when dealing with companies fur- ther afi eld. In China, says Turnbull, there's an inherent distrust of legal service provid- ers in many areas. "In other countries, ac- countants run transactions," he says. When working in these other areas, Canadian lawyers need a solid cultural grounding and a strong head for diplomacy. INTEGRATION After the deal has been approved, the participants will be on to their last phase: integration. This is where they unify their resources and processes to oper- ate smoothly together. Keeping in touch with key stakeholders is crucial at this point, but the ex- ternal counsel that had been help- ing guide the acquirer may not be as involved from here on, says Osler's Macfarlane. "This is more the bailiwick of in-house counsel working with their various busi- ness units to integrate the acquired busi- ness into the existing business," he says. "The success of the transaction ultimately will depend on the post-deal integration and there will be a tremendous amount of resources put into that by the companies." The acquirer faces issues from the board room downward, warn legal experts. "On day one, you have to be ready to run a new company and have all their employees," says TransCanada's Johnston. Lawyers at TransCanada had to tie to- gether many operational loose ends, such as arranging the appropriate legal and fi - nancial signing authorities, and putting spending thresholds in place. Insiders had to be identifi ed and notifi ed of trade re- porting obligations, and annual disclosure processes had to be defi ned in accordance with Sarbanes-Oxley rules. All appropriate lawyers also had to be in contact with the appropriate business units to ensure that they had the right legal support. "You also want some sensitivity to the or- ganization you're working with. You don't want to march in and change all their poli- cies," says Johnston. "That's where a cul- tural alignment between the two companies was very helpful and important." Integration issues can also vary accord- ing to the subsector, says Reid. In acquisi- tions of rate-regulated utilities, companies are typically buying standalone businesses rather than trying to consolidate, meaning that management is unlikely to be making a lot of people redundant, he says. In consolidation transactions, acquirers will become acutely aware of differences in labour laws, according to Turnbull. "Americans are much more fungible with people, and they have lower requirements for paying people if you terminate them, whereas Canada is more employee-friendly than the U.S. is," he says. This will have ramifi cations for the acquirer, who must take this into account when planning post- integration consolidation. The signals are mixed for cross-border M&A in Canada. On one hand, strong buy- ers and forced sales are setting the scene for an excess of M&A activity in the sector over the next few years, according to Good- mans' McGlaughlin. "There's a lot of debt out there that will become due in the next couple of years, and who knows if there will be debt to replace it with?" he says. "That will drive M&A by necessity." On the other hand, regulatory changes are making things harder. The Alberta Energy Regulator recently increased the liability management ratio required for ac- quiring companies to 2.0 or higher, which means that the value of a company's produc- ing wells must be twice the cost of abandon- ment. That decision, resulting directly from a case involving a bankrupt producer earlier in the year, could have a chilling effect on M&A activity in the region. Regardless of coming deal volumes, such conditions make cross-border energy M&A an exciting and challenging pro- cess. Whether you're taking a company into a new geography, picking up assets at bargain-basement prices or simply saving your fi rm from the bankruptcy courts in a debt-ridden, depressed market, the stakes are high. It's high-octane stuff. IH

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