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global perspectives M&A REGULATION: Piecing Together a Slava Gutsko/iStockphoto New Paradigm By John M. Toth In a decision with far-reaching implications, Canada’s Competition Tribunal ruled in March 2007 that the country’s Competition Bureau could not delay the closing of Labatt Brewing Co. Ltd.’s proposed $201.4 million CAD takeover of Lakeport Brewing Income Fund. The decision by the Tribunal, a specialized court that decides controversies under Canada’s Competition Act, paves the way for faster completion of Canadian company acquisitions—a significant advantage in the current active M&A market. It also reverses a nearly 30-year global trend toward complex and timeconsuming regulatory scrutiny of M&A transactions. Central to this paradigm shift was a well-conceived, high-stakes plan by Labatt and Blake, Cassels & Graydon LLP, the company’s outside counsel, to force closing the Lakeport acquisition within the statutory period defined for Competition Bureau review, regardless of any delay sought by the agency. The perspectives of Blakes Partners Brian A. Facey and Craig C. Thorburn and Labatt General Counsel Susan M. Rabkin explain the success of a strategy that Rabkin defines as “plan properly, understand your objective, be thorough—and execute.” What’s the Game Plan? According to Facey, there is a dichotomy between “the need of the parties in a public market transaction to get deals done quickly and the inclination of the regulators to review these details in intricate detail, regardless of competitive realities.” In this deal, Canada’s leading beer company, Labatt, an indirect subsidiary of InBev SA, itself the leading global brewer, sought to acquire “…the Bureau’s policies of taking five months to review a complex acquisition, and of rejecting hold-separate agreements before review is complete, were merely recent unilateral declarations that were not supported by the law.” Lakeport, a rapidly growing brewer in the discount segment of the Ontario beer market. Lakeport management vowed to call off the Labatt acquisition if there was a major delay due to competitive review, so Labatt retained Blakes, where Facey was co-counsel in the most recent successful challenge to the Competition Bureau’s review process. The game plan was to announce that the Lakeport acquisition would close within the 42-day minimum statutory review period, and to propose placing Lakeport in a separate trust (a hold-separate agreement) if the Competition Bureau needed more review time. “We were confident in this strategy,” Facey relates, “because the Bureau’s policies of taking five months to review a complex acquisition, and of rejecting hold-separate agreements before review is complete, were merely recent unilateral declarations that were not supported by the law.” The Bureau sought an order to delay the deal and rejected the hold-separate plan. Labatt persuaded the Tribunal that enough time had passed and 14 www.martindale.com
the Tribunal upheld the company position. “The decision was viewed as a tremendous upset, but we were not surprised,” says Facey. The deal closed the next day as a full merger between the companies. An Extraordinary Offer “Lakeport’s concerns in structuring this acquisition centered on competition rather than finance,” recalls Thorburn, “so we made addressing those concerns the key to our transactional structure.” Labatt’s terms How Canada Regulates in part by a trust amendment that the companies had negotiated to prevent holdouts. Thorburn believes that prior to the Tribunal decision, publicly held companies increasingly shied away from deals with antitrust issues, often opening the door to private equity interests as purchasers. Now, he asserts, “the regulatory playing field has been leveled, and the rewards will go to those companies that are innovative and aggressive in taking advantage.” The Competition Bureau is part of Industry Canada, a federal government department, and is responsible for maintaining and encouraging fair competition in Canada. The Bureau administers four key pieces of federal legislation, including the Competition Act and the Consumer Packaging and Labelling Act. Competition litigation in Canada involves representing clients before the courts on criminal matters and before the Competition Tribunal on civil proceedings initiated by the Competition Bureau. The Competition Tribunal is a strictly adjudicative body that operates independently of any government department and that hears and decides all civil controversies that arise under the four competition statutes. The Competition Bureau has said it intends to appeal the Tribunal’s Labatt decision to the Federal Court of Appeal, which has broad jurisdiction to hear federal civil and criminal matters, but a ruling is some months off and would not void Labatt’s acquisition of Lakeport. kept the pressure on ourselves to meet every deadline the Bureau set.” When the Competition Bureau issued a Section 11 Order requiring substantially more documents within a 21-day period, the Labatt team relied on companywide resources to comply. Such effort and preparation were the foundation of Labatt’s decision to assume the risk of the deal through the breakup fee. “For both our own management and the Lakeport unit holders, the risk was a calculated one for the right reward,” says Rabkin. “We knew the marketplace and were confident in the arguments we prepared. The Tribunal agreed with our position.” Future acquisition transactions in Canada may indeed adopt a similar approach to the regulatory review process. Susan M. Rabkin is vice president and general counsel – North America of Labatt Brewing Co. Ltd. She may be reached at susan.rabkin@labatt.com. Brian A. Facey is a partner in the Competition Law practice of Blake, Cassels & Graydon LLP. He may be reached at brian.facey@blakes.com. Craig C. Thorburn is a partner in the Business Law practice of Blake, Cassels & Graydon LLP. He is Peer Review Rated. Craig may be reached at craig.thorburn@blakes.com. included what Thorburn calls the “extraordinary offer” of paying Lakeport a $5 million CAD breakup fee if the deal did not go through on time. The confidence of the company and its counsel in their regulatory review strategy justified the riskreward trade-off. Lakeport was owned by unit holders (including its founders) of an income trust, and the transaction itself was a cash offer of $28 CAD per unit. The units traded on the Toronto Stock Exchange and their price had fallen in the days before the Tribunal ruling on fears of an unfavorable result. Once the ruling was announced, all remaining outstanding units were tendered within 24 hours—a result made possible Keeping the Pressure On Rabkin, as in-house counsel, took the lead in convincing Labatt’s corporate parent that the competition risks of the Lakeport transaction were justified by the potential market advantages, and selected Blakes as the law firm to manage those risks. “Our whole strategy was predicated on the belief that competition law is changing, and that the right arguments could present a sophisticated case for approval,” she asserts. Labatt had previously lost an acquisition target to an offshore competitor during the delay caused by extended regulatory review, so the company was already prepared to offer the information the Competition Bureau would require. Rabkin adds, “We Blake, Cassels & Graydon LLP has over 500 lawyers across Canada, the United States, the United Kingdom and China. The firm’s integrated office network provides access to a full spectrum of capabilities in every area of Canadian business law. JULY 2007 15
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