VimpelCom's sale of Wind mobile last month included the offloading of all regulatory burden onto the purchasers, highlighting a trend that, some lawyers say, is growing as regulatory issues take centre stage in a growing number of M&A deals.
Over the past few years, as regulators have ramped up oversight of big transactions in sensitive industries, sellers have increasingly moved from a neutral position on regulatory risk toward one that seeks to shift risk onto willing buyers — and the strategy has been picking up as of late.
“It really is something that we've been seeing increasingly over the last couple of years,” says Alicia Quesnel, a competition and foreign investment lawyer at Burnet, Duckworth & Palmer LLP. “But this year in particular, some of the major transactions … we can see that, effectively, the purchaser is assuming the regulatory risk at a very high level.”
Last month, the consortium of investors that purchased Wind from VimpelCom approached the Amsterdam-based company with the offer to take on all of the regulatory burden. According to lawyers working on the deal, the offer distinguished the buyers from other bidders in the highly sought-after stake and allowed the deal to close on the very same day.
“What allowed this group to stand out and ultimately win the asset was that they came to the table and said, ‘Look, we'll allow you guys to walk away with your funds – the purchase price – without having to deal with Ottawa,'” says Mark Rasile, a partner at Bennett Jones LLP who led the deal for VimpelCom. “‘We'll take on all regulatory risk; we'll structure this in a way that gets you out on day one.'”
According to Sheridan Scott, a competition lawyer at Bennett Jones who worked on the deal, VimpelCom had to structure the deal to minimize the number of regulatory reviews; and those reviews, according to Rasile, could stem primarily from the Radiocommunications Act.
Until recently, foreign entities were restricted from controlling telecommunications companies in Canada. This had limited VimpelCom to a one-third voting interest. But because of VimpelCom's sizeable debt position in Wind, a broad interpretation of the Act might lead the Industry Minister to determine that VimpelCom actually controlled Wind. This would, Rasile says, trigger change-of-control provisions and an automatic review.
Scott says the Radiocommunications Act posed problems over the time VimpelCom wanted to sell Wind because the regulatory landscape was changing. “The [Radiocommunications] Act was extremely challenging, in part because the government changed the rules midway — the rules for transfers, particularly if they involved incumbents, to any degree, or major financial investors. The rules might be engaged, so in that case we structured it so the issue would fall to the purchaser not the seller.”
Lawson Hunter, a counsel at Stikeman Elliott LLP, says that regulatory risk-shifting may have started with the failed 2008 acquisition of MacDonald, Dettwiler and Associates by US-based Alliant Techsystems Inc. — the first rejected case based on national security concerns.
Then came the 2010 rejection of BHP Billiton Ltd.'s bid for Potash Corp. of Saskatchewan Inc., and then finally, in 2012, when Ottawa rejected Malaysian state-owned Petronas's acquisition of Progress Energy Resources Corp. All three invoked the Investment Canada Act.
These deals “put the spotlight on the ability of the minister of industry to refuse transactions involving a foreign company, so clearly there's more [regulatory issues],” says Frédéric Cotnoir, a partner at McCarthy Tétrault LLP. “The importance of those [regulatory] negotiations is greater than it used to be.”
Now with increased regulatory uncertainty in the wake of these deals and others, sellers are looking to offload the costly risk.
“I think there's been just a general increase in the complexity and the vendors asking for more on the regulatory-risk, deal-certainty side than used to be the case,” Hunter says. “Some of it is driven by market; some of it driven by changes in regulatory policy, but it's a bit of each — it's not just one thing.”
Indeed, regulatory policy has become ever more prominent, with regulators taking a more active approach to transactions in recent years.
“Our enforcement agencies have become a lot more proactive in the last three to five years,” Quesnel says. “They are being very public, being very proactive — they are not a rubber stamp. It's not a pro forma exercise to go through and do aCompetition Act filing or an Investment Canada filing like it was, perhaps, a little while ago.”
Quesnel adds that the trend of transferring risk over to the buyer was a US practice that Canada trailed by one or two years, but because some recent significant transactions have included both a US and Canadian company, it has effectively crossed the border.
And those large and recent deals have included conditions for the buyer to accept in order to consummate a transaction. According to analysis provided to Lexpertby Burnet, Duckworth & Palmer, in Burger King's proposed acquisition of Tim Hortons, Burger King is assuming all regulatory risk except in a case where the regulatory outcome affects its future adjusted EBITDA by more than an agreed amount.
The firm's analysis highlights nine other deals in 2014 where the buyer has taken on all regulatory burdens with some conditions, including assuming regulatory burdens that “would not have a material adverse effect on the buyer or the target” (now defunct deal between Auxilium and QLT); and would “not require any action to be taken with respect to its existing businesses, product lines, assets or subsidiaries" (closed deal between Grupo Bimbo and Canada Bread).
“I think the big difference in terms of what we're seeing in the market is that the parties are much more sophisticated and much more specific about the obligation of the parties and the risk that will be accepted by each of those parties,” Cotnoir says.
In very rare cases, a buyer may be comfortable enough to accept a “Hell or high water” provision with no conditions, which is a standard-of-effort clause that states the buyer must close the transaction regardless of what is asked by the regulatory authorities — be it to divest a chunk of its own assets or to sell the whole business. In a case where a buyer cannot close the transaction after regulatory review, a reverse break fee may be required of the buyer to the seller.
Where at one time parties might have agreed with neutral, buyer-friendly conditions, they are in some cases being replaced by provisions that are shifting the risk, according to Omar Wakil, a competition lawyer at Torys LLP.
VimpelCom is not burdened by the regulatory outcome of its deal, nor is it held up by any conditions if the deal on the buyers' side falls through, which makes it an exceptional case of buyer confidence in a new world of regulatory risk.
Quesnel, however, says she believes regulatory clearance should be a shared risk: “To me a regulatory risk … what we call a true condition precedent … requires both parties to do what they need to do in order to get the transaction to close. So it requires co-operation.”
Wakil, for his part, agrees that increased enforcement has led to increased risk-shifting, but says it's difficult to accurately tell without adequate data.
“Although there may be an upward trend, it may in some cases not really be meaningful,” he writes in an email. “I would also say that negotiated M&A agreements usually involve trade-offs between parties on a wide range of issues, regulatory risk being one, and so it is sometimes difficult to isolate competition in the mixture.”