COVID-19: Deal dynamics for M&A transactions arising out of the pandemic

Ian Palm: Alright. Let's get started folks. I see we've got lots of people on the line so thank you again for joining us. I'm assuming we're going to get a few more people joining as we get going here but I think it's important that we start. This is the third installment in our webinar series. Gowling WLG's been running a series of M&A focused webinars under the banner of "M&A In Uncertain Times". As we all know we're living in interesting times and so we're making good use of that time in delving into some interesting issues from an M&A perspective and sharing them with you, our clients and friends. Today our panel will address some of the deal dynamics that we can expect to arise as a result of the pandemic. Some of you may recall that we had our first installment a couple of weeks ago. That focused on how the disruptive effect of COVID-19 as impacted M&A transactions in Canada at different stages during the deal life cycle. That one was sort of focused on the past and deals that were in the process at the time the pandemic came upon us. Our second installment, last week, addressed some of the many steps that parties can take during the lockdown and prepare for future transactions. This new session today is dealing with, and focused on, deal dynamics going forward, and deal dynamics for parties that are interested in proceeding with transactions today, and what we can expect over the coming months as the effects of the pandemic become a reality and we try to go back into a partially restarted economy and deal with other elements in our lives. If you missed any of the two webinars we've done so far today, you can get those on our website through our on demand feature so they're available for you to review at any time in the future. This webinar, as well, is being recorded and will be available in due course, probably in a couple of days for review at your convenience.

So, continuing on here, and before we get started I want to deal with some housekeeping items. To view the presentation and all speakers you can click on the speaker view in the upper right corner of your screen. For questions throughout the session, please use the Q&A button at the bottom of your screen. We will try our best to address all questions during the course of presentation but we're going to try and push them towards the end of the session. You should feel free to reach out to our team afterwards as well. If we don't address your question we'd be more than happy to address them on an individual basis too. I'll remind folks that for those who are lawyers, this program counts for 1 hour of Continuing Professional Development credit, in applicable jurisdictions. For example, in the case of an Ontario lawyer, 1 hour of substantive credits towards the mandatory annual CPD requirements of the Law Society of Ontario. Also, you'll see on your screen at the moment that we've put up a legal disclaimer. As you would expect, today's session will be high level overview only. For specific advice please contact your legal counsel. As you know the world we are living in at present is dynamic and changing daily so the advice we provide today should be taken in context with respect to the day that we're on. Continuing on here let's look at our speakers for today.

You'll see the pictures at the bottom of the screen. I'll just introduce our panel here. Let's continue on here as we go. The speakers today. We've got some M&A professionals in attendance that are involved in our M&A group. Pam Vermeersch, is the partner in our Hamilton office. Stefan Nasswetter, is an associate in our Montreal office and Ahad Ahmed is an associate in our Toronto office, as well joining us is Jonathan Ross, who is a restructuring and insolvency partner, based in our Vancouver office, and in addition we've got Ian Macdonald, a partner and one of our experts in competition, anti-trust and foreign investment review. My name's Ian Palm. I'm a partner in our M&A group and I will be moderating for today's session.

Continuing on, let's have a look at our agenda here. What we're going to try and do is focus on some deal dynamics. Here's the plan for the remainder of this hour. We will explore a number of different deal dynamics that we think will be at play in M&A deals going forward. We will delve into them from different view points. Pam, often acts for a number of multi-national businesses active in the M&A space. She will provide insights from the perspective of a buyer. Stefan, will be looking at our deal dynamics from the standpoint of a seller. Ian, Jonathan and Ahad will be providing input from a range of perspectives as we go forward on this discussion. Here are the different dynamics that we're going to try and delve into. First one is deal activity levels. The next, the importance of cash and the pain brought by the lack thereof. Valuation challenges. Cross border considerations and finally, distressed M&A transactions, which I anticipate that some of you have on your mind and we're going to try and delve into those, both from the perspective of an M&A professional, but also from the perspective of a restructuring professional, and we're going to let Jonathan lead us through that part of the discussion. As everyone knows, it's important that it's a collaborative process in that regard, so both M&A practitioners and restructuring practitioners are often hip to hip on these kind of situations. At the back end of the hour then, we're going to try to take you through some of the current trends and legal developments as reflected in M&A related agreements, publicly disclosed in Canada and the United States and we're going to get Ahad to walk us through those. Of course, as much as possible we want this to be interactive. We want this to be a discussion. This is not about just us presenting stuff so, again, we would love each of you to share questions and, again, we remind you that there's a Q&A feature on the screen that you can use to provide those. Please send them through and we will address towards the end of the session and, if necessary, we can even go over the hour a little bit and dig through those.

Now let's turn to the first deal dynamic. Activity levels. So, Ahad, could you please take us through some of the research that we've done in this regard?

Ahad: Absolutely. Thanks, Ian. Unsurprisingly the first thing that we'll notice when looking at deal activity is that there has been a decline in M&A activities. That isn't a surprise. I'm sure that most of us have experienced some sort of pause. Whether the transactions have slowed or have gone on hold for the time being. The reasons are clear. There's social distancing protocols. There's lockdown protocols in place, practical constraints have limited the ability to conduct due diligence and have added logistical constraints such as obtaining shareholder or court approval or regulatory approvals, and there are creative ways that we're seeing in how to address these challenges, but we'll discuss some of these later when we talk about current trends and developments. Now, in order to better understand the general macro level trends of how the M&A industry is going to be affected, we thought it would be helpful today to look at some historical data. And as the old adage goes, study the past if you want to define the future. Likely the most relevant example for all of us that comes to mind is the 2008 financial crisis. Which brought about a chilling effect on M&A activity that is likely most analogist to today's environment. Now there were some surprises. Intuitively, you would think that a financial crisis would lead us to believe that deal volume would fall off a cliff and that it would last for a long time. Typically as both buyers and sellers tighten their belts, or prepare for prosperity measures or shift their attention to day to day operations and management. But in our examination of Canadian M&A deal volume from 2008 to 2010 that simply wasn't the case. The studies that we looked at we noticed that M&A quarterly announcements declined in the midst of the economic crisis but not to a point where the market came to a standstill. Approximately 169 M&A deals were announced in Canada at the peak of the crisis, which we define as the first quarter of 2009, but as you'll notice in the graph that we have listed here, the market bounced back relatively quickly. Within 18 months the market had reached pre-crisis levels. So by the end of 2010 the market stabilized. Importantly the M&A activity was ongoing through the crisis, keep in mind that the numbers we're talking about here are M&A deal announcements, only, which means there was quite a bit of activity going on underneath. So the Canadian M&A market was still quite active in the midst of this crisis. This isn't to suggest that M&A's bulletproof in anyway but it is quite resilient as an industry. It is worth noting that deal value did fluctuate, most associated with increases or decreases in mega deals, or larger transactions that are greater than a billion dollars. But the mid-market sector remained pretty active and was very much the driver of activity in this time period. Now to contextualize this information to current time periods and to move to more recent data, M&A activity in Canada in the first quarter of this year, 2010 including March, was 797 announcement actions. This a pretty staggering number when we compare to the numbers we looked at earlier. But it also suggests that the industry was in pretty good shape prior to the outbreak. The number of announced transactions since the first quarter of 2018, which you'll see in the graph on screen, was on average 826 deals. So while a decline in activity may occur it does not necessarily mean a shortage of transactions. Nevertheless, when you're drawing the lessons of the 2008 financial crisis we do anticipate some challenging months ahead. I will add the caveat, at the word not economist. We are in the midst of a pretty unprecedented time. COVID certainly poses a unique set of challenges, many of which are different fundamentally from those that were proposed by the 2008 crisis. There's definitely going to be new challenges but are expectation is that the markets will continue to be resilient. Some of the measures associated with the crisis, such as the lockdown and the social distancing that we're seeing, may contribute to decline to near term, but for our long term prognosticators out there, there's some hope for a return to normalcy within a short period of time.

Ian Palm: That's great. Thanks so much, Ahad. I think it's important that we use the data that we have to help us sort of consider some of the opportunities that are going to present to us going forward. Pam, I wonder if you might provide some of your perspective as an advisor to buyers in M&A transactions, as to what your thoughts are on the details that Ahad's presented to us here.

Pam: Happy to do so, Ian, and thanks, Ahad. That was a great summary and a great look back. Certainly what I am seeing in the M&A activity is a pause, as Ahad had mentioned. Been a lot of transactions which have been delayed or have been completely cancelled. In addition to some of the practical matters that Ahad mentioned, certainly also the delays and cancellations have related to just the uncertainty that the economic shutdown has caused on the target. I'm also seeing some challenges on the buyer's side of getting the financing to complete the transactions. I do believe that this is going to be a short pause. I'm certainly seeing a lot of potential buyers who are excited about finally seeing a turn in the market from what had been a fairly long running seller friendly market. I also think that there will be plenty of sellers out there. Not just those who are in distress but I also know a number of clients who were putting off selling. They were either waiting for a better price to come along or waiting for a succession plan to come to fruition. I think talking with some of those owners, now with the turn in the market, they're just increasingly willing to look at selling. They don't really have the energy to go through the uncertainty about potentially long economic downturn and the effort and the risk that's needed from them to keep the business going and afloat through these times. A pause, for sure, but I do think that things will pick up soon.

Ian Palm: Thanks. I would echo that. I think we're seeing, from my perspective, I wouldn't disagree. Stefan, what might a seller take away from the information that Ahad presented to us and, I guess in some respects, Pam's already provided some detail but what's your perspective?

Stefan:     Thanks, Ian. Well, essentially, as you both said and I totally agree, I think it's a pause, a delay and not a stop. I think that what people are seeing is that, for example, financial institutions and whatnot, have to put out fires and have more other priorities right now other than looking at, for example, expansion and whatnot. I think that once, and all the players have had a better chance to grasp all the impacts and deal with those fires, that we'll see an increase in deal activity. Like I said, it's not just a pause in the sense that we're not seeing any activity at all. There's some deals that are still going on. Sometimes with delays but I think that once the fires are put out we'll see an increase in deal flow.

Ian Palm: I agree with that. Let's hope that's the case and if it's not we can deal with the situation that's presented to us in due course. Let's shift the focus now. Let's talk about cash. So we're going to continue on to our next deal dynamic. I'm reminded of Warren Buffet's quote about market downturns and I'm going to paraphrase a little bit here. It's not until the tide goes out before you discover who is swimming without a bathing suit. The importance of sufficient cash on hand is a key consideration for both buyers and sellers. Pam, as someone who represents large multi-nationals from time to time, who presumably some of them will have significant amounts of cash, why don't you start us through this deal dynamic.

Pam: Thanks, Ian. I think as most of us are probably aware, traditional lenders, they're going to be pretty risk adverse. As Stefan mentioned a lot of the traditional lenders right now are preoccupied putting out fires with their existing clients. They're really looking to help them to figure out how to finance those clients just to continue to operate their business. They're not really looking at financing acquisitions. So near term, those buyers who have been dependent on leveraged financing for their acquisitions, will find it difficult to get financing. This means buyers with significant cash on hand will be in a great position to take advantage of declining valuation. At least in the near term. As Ian mentioned, in my practice I deal with a lot of multi-national organizations. What we would typically think of as the strategic buyers and I'm certainly expecting those strategic buyers will be fairly active in the short term for a number of reasons. Most particularly, they already have a good sense of the market that they are in. They really understand better than anybody else the risk that COVID places on that market so they're going to be more willing to enter in to an acquisition. They also will have strategic growth plans in place and, quite frankly, will probably already have a wish list of targets. They'll understand which of their competitors will fit nicely with their business. I do think those strategic buyers are going to be looking hard for opportunities to expand the markets there and strengthen their balance sheets. With the difficulties of financing I think there's going to be fewer buyers having access to financing. So the buyers with strong cash reserves are really going to have significant power in the market and they're going to be able to obtain more favourable deal terms. Which means pushing a lot more of the risk onto the sellers than what we've seen in the past. What exactly that's going to look like, I expect it's going to be fairly deal specific, but certainly larger escrows and holdbacks will be out there. More aggressive price reduction mechanisms. Certainly expecting to see broader representations and warranties and more scrutiny on some of these reps and warranties that we really didn't focus on as much as we did in the past. So for example, your accounts receivables, your customers, your supply chain, all of that is going to need to be a lot more diligence around those items. I also think, going forward, we're going to see a turn and much more buyer friendly indemnify arrangements. Looking out a little further, other buyers are going to want to take advantage of the turn in the market. We'll start to get more creative on how they structure their civil actions to bridge the gap in financing. This may include larger vendor takeback arrangements with sellers. Or potentially structuring the deals with a much larger equity component initially with the intention to refinance in the future when things have stabilized. So definitely right now, cash is king, for those businesses with strong cash reserves, they are in a great position and should be getting prepared to take advantage of the opportunities that are coming their way.

Ian Palm: Thanks, Pam. That's a great summary. Stefan, if I'm sitting in the shoes of a seller, Pam's painted a pretty strong picture from a negotiating standpoint. As counsel to the seller, how do you respond to that? How do you address some of the concerns and still proceed and get a deal done for a seller here?

Stefan:     Absolutely. One thing that Pam mentioned is very, very true. We were in a seller's market for a very long time. This sellers are probably going to see buyers want to impose more risk to sellers and the deals that are proposed, and potentially, less favourable terms. So in that context, cash is king for the seller as well because, obviously a seller that's facing unfavorable terms will probably want to delay, or find ways to buy time before facing a sale. In that context there's obviously the regular financing that you can look at it to try and gain some time, gain some traction, and hopefully go through the next coming months, or hopefully go through the entire downturn, and so I see, I think, a lot of sellers looking to other ways to try and buy some time in that context. For example, co-investors, or equity or debt financing from a variety of sources. Obviously one thing that can't be forgotten is all the government programs are presently being put in place from the Federal, Provincial and Municipal levels. Obviously we can spend a long time discussing this and I'm actually very grateful that some colleagues have taken on the task of going through and detail all of these various programs that are available. So for the attendees that are interested in looking into this a little bit more I invite you to look at the multiple articles on the matter that are available on the website. Many of them also provide consolidated details on the various programs. Obviously I won't go further into this because we've dealt with this a few times already but, essentially, the sellers will want to buy some time and as Pam put it, cash is king for the sellers that want to try and postpone the deals when the context is less favourable.

Ian Palm: That's great. Thanks a lot, Stefan. Jonathan, we're going to get to you in further detail when we talk about distressed M&A but, you've been sitting here listening patiently to our colleagues and myself speak, and I wonder whether you have any thoughts on the notion that cash is king, particularly when you're dealing with companies that are, in some cases, have a severe lack of cash or the appearance of a severe lack of cash in the future.

Jonathan: Yes. Thanks, Ian. I was thinking as Stefan was talking about buying time and I think one thing that when you see your cash reserves running low, and perhaps you're running into a liquidity crunch, a seller needing to buy some time to hold off it's creditors, but they should always keep in the back of it's mind the availability of creditor protection under various insolvency statutes. Which we always recommend that you consider and start thinking about before the eleventh hour. I'm speaking about options such as a proposed lender, the Bankruptcy and Insolvency Act, or Companies' Creditors Arrangement Act proceedings. Both ways to buy some breathing room, hold creditors at bay and also potentially obtain some relief from a liquidity crunch.

Ian Palm: Good thoughts. Hopefully we don't have to take advantage of those things, and no one would want to unless they have to, but those are there as options. I'm also mindful that the last webinar we did, the one that was led by Karen Hennessey in moderating last week, we went into detail on a whole bunch of things that you can do now. As Jonathan's indicated, preparation is key and if you're well prepared then you can consider a variety of options and then, both Stefan and Pam have raised those points as well. Let's move on to our next dynamic here. You'll see on the screen that we've described it as valuation challenges. Stefan touched upon it briefly when he was talking about the perspective of the seller, but I'll let Stefan take us through this one to start with. Stefan, what are some of the valuation challenges that a seller needs to address in the circumstances. We had a seller's market before and perhaps we don't have one now. What are some of the things they're thinking about?

Stefan:     Thanks, Ian. First off, to put into context I think the reality of it is that there's a negative impact deal valuations. The timing and how much time that remains to be seen. As everyone has seen in the stock market, there's substantial declines in most sectors, and obviously to varying degrees, and as Pam mentioned there's fewer buyers. Fewer option style elimination processes although they're still going on and I'm actually still in the process of handling one these days, but there's a smaller pool of bidders for those option processes, so overall less competition between the buyers, so less favourable for the sellers. As to how you address that, I think it's very, very fact dependent in the sense that are quite a few important questions that need to be answered to see how best to deal with it. One of the important questions is when you look into setting a price on a transaction, the question of timing of when it was set is very important to determine what other alternatives or mechanisms do you want to attach to that price so that you can reflect, perhaps, an upside for the sellers. Also, like I said, are we dealing with a pre-pandemic offer? Does the seller have interim financing options? Does it have sufficient cash to weather the downturn? Or are we looking at a seller that doesn't really have other options, or viable options, and is looking at this as sort of a last resort and has to go through with the sale? Now, one of the things that I think Pam mentioned earlier was the question of price reduction mechanisms that would be suggested by some buyers. Now, obviously, this is favourable only to a buyer and so from a seller's perspective, instead of having a mechanism that can only reduce the purchase price, I think one of the things that they're going to try to do is become creative and do alternatives. And now one of them is obviously the earnouts because depending on how its structured it can give an upside to a seller. Now obviously that depends on whether or not that earnout is taken out from the price that would have been set  or in addition to the price that was initially offered by the buyer. Along with their earnouts, are obviously the question of how long of an earnout period are you looking at, and from a seller's perspective the longer the period the better to try and benefit from the ramping up of the economy once we've gone through this downturn. One final aspect with regards to earnouts is, there's going to be some heated discussions with regard to the base plan and how you calculate the base line for the earnouts, to determine whether or not the seller's are allowed to get an upside to that. Obviously, if you take into consideration the metrics from this current period it would be advantageous, from the seller's perspective, but if you're looking at, for example, data from 2019, it might obviously take a longer time to reach those metrics. I'm sure Pam will have some thoughts about earnouts in a few seconds. Otherwise, from a seller's perspective there's the equity component, for example, adding on to simply the cash paid out as a purchase price, the equity component could give a greater potential for upside to the sellers, and one alternative that I've also seen is the balance of sale. Instead of, for example, only offering a price reduction mechanism, I've seen a seller suggest that, "Well, look. I know you're not in a position right now to offer more money because you're obviously dealing with cash being very important right now in your operations. But what we suggest, in order to give us a more fair valuation, is to have a balance in sale where the delay to payback will be greater if certain metrics are not met. Obviously if things go very well, and things pick up within 6 months, then the balance of sale will be paid off in a shorter period."

Pam: Yes, maybe if I could just interject there quickly on the earnouts I know that Stefan knows my thoughts about the earnouts from the buyer's perspective on that. Definitely they're interesting mechanisms that can help bridge valuations between, a valuation based on pre-COVID results, what the sellers are going to be really looking for, and the buyer's uncertainty as to whether the changes have been a permanent change to the target's results. But when you're considering the earnouts as a buyer, who's buying to integrate the business into their own and to take advantages of the synergies of that business within their own, it's important to keep in mind that earnouts do come with restrictions on the operation of the business, typically, and were a buyer looking to integrate that business quickly, a long earnout is going to really limit their ability to integrate and take advantages of those synergies. So just a caution to buyers when you're thinking about an earnout.

Ian Palm: That's a good point, Pam. I wonder they might think about a B2B in that kind of situation where you still have control of business and you can still do a consolidation but there's a payout over time. There's an opportunity here to kind of bridge the arrangement between buyers and sellers but who knows? The circumstances are such that you're going to have to deal with the circumstance you're in. There's a lot to unpack there. I think that that area is pretty interesting. One of things that we've been seeing come up, and I'm sure some of the people attending will have seen it, it's sort of a new acronym, instead of the EBITDA it's now EBITDA, with a C at the end, or a P at the end after pandemic, or after COVID. I wonder whether we're going to see some of our buyers and sellers try and negotiate some financial calculation that carves out the pandemic in some manner. I think there's some interesting negotiations to be had as we proceed. Let's focus on the next deal dynamic here and they're somewhat related. So continuing on you'll see the next one we really have is cross border considerations here and one of the is valuation related. I'm going to let Pam speak to it and then the next one is a regulatory matter that we're going to get Ian Macdonald to speak to. When I say it's valuation related, Pam, do you want to take us through the realities of Canadian cross border deals from an exchange rate perspective?

Pam: I think most of us in the Canadian M&A world understand that a majority of the Canadian deals have some sort of cross border component. Could be a foreign seller, or a buyer, or a group of investors that are foreign investors, perhaps a lending syndicate that's based outside of Canada. Right now we are seeing the Canadian dollar exchange rate at more than 3 year low as compared to the US dollar. Historically, what's that meant is certainly a significant inflow of US and also other foreign buyers, seeking out Canadian target businesses at a discount. I do think that we can anticipate that history will repeat itself and we're going to see a similar experience in the near term, while the Canadian dollar remains low as compared to the US dollar.

Ian Palm: Which from a seller's perspective, Stefan, may be good thing, right? If you're a Canadian seller you're receiving some US dollars and it's at a premium, perhaps, that's a good thing. I don't know whether you want to comment on that or not.

Jonathan: Yeah. It is definitely a good thing and I think agree entirely with what Pam is saying. I think from a seller's perspective, I think it's just don't forget to make sure you're inviting all those potential buyers from the US.

Ian Palm: Very good. I see we're getting a few questions in here. I thank people for providing those and continue on to provide them. We'll address them towards the tail end of our hour here. I did want to take this opportunity to pass the baton over to Ian Macdonald who is, as I said before, is one of our foreign investment review experts and is compatriot on many, many transactions that involve cross border components. Ian's going to take us through some recent developments that are particularly relevant given the government's response to the pandemic so far. So, Ian, over t you.

Ian:  Thanks, Ian. One potentially significant new consideration relates to the Investment Canada Act, the statute that regulates foreign investment in Canada. On April 18^th, just 10 days ago, in response to the COVID crisis, the Canadian government announced that it's going to temporarily apply enhanced scrutiny under the Investment Canada Act to two categories of foreign investment transaction. The key takeaway from this new policy is that foreign buyers engaged in transactions that fall into one or both categories, are encouraged to notify the transaction to the Canadian government at least 45 days before closing. They potentially expose themselves to problems if they don't. The two categories covered by the new policy are, number one, foreign direct investments of any value, including non-controlling investments, into Canadian businesses that are related to public health, or involved in the supply of critical goods and services to Canadians or to the Canadian government, and number two, all foreign investments by state owned investors, or SOE's, regardless of their value, including private investors who are assessed as being closely tied to or subject to direction from, foreign governments. This new approach will continue to apply until the Canadian economy has recovered from the effects of the COVID-19 pandemic. When announcing this new policy, the Canadian government acknowledged that foreign investment is critical to the Canadian economy and stressed that Canada remains open to foreign investment that benefits Canadians. However, at the same time, the government is concerned that COVID-19 related declines in business valuations could lead to some opportunistic investment behaviour, and also, with respect to state owned enterprises, that they may be motivated by non-commercial imperatives. Which is a risk that is perceived to be amplified in the current context. A moment ago I mentioned notifying the government at least 45 days before closing. The reason for this is that the Investment Canada Act gives the government very broad and discretionary national security review powers to review foreign investments, of any size including non-controlling investments, and to block a proposed investment, allow it with conditions, or even to order a post-closing divestiture. The government has up to 45 days from receipt of a completed notification to invoke these powers. Note that there is a limited exception that relates to non-control level acquisitions that we don't have time to get into here today. But it is addressed in the written materials that accompanied the invite. From a foreign buyer's perspective it is advisable to insist on notifying, at least 45 days before closing, if the transaction does or could reasonably be seen, again, as perceived by the government here, as falling into one of the categories covered by this new policy. The categories are very broad and while the government has provided a lot of guidance as to what falls within them, that guidance is not exhaustive and the boundaries are not entirely clear. It also remains to be seen, because the policy is so new, how the government will apply it, particularly in the context of transactions that may be closer to the fringes than to the core.  Proposing to notify more than 45 days before closing can be easier said than done in practice. This depends on the negotiating dynamics of the transaction. This is primarily because sellers may pressure foreign buyers to close without doing so. For example, in an auction context where one of the competing bidders is Canadian controlled and therefore not subject to the Investment Canada Act, or where two competing foreign bidders have different national security risk profiles, and all other things are equal, like roughly equal purchase prices and whatnot. For example, why the hell did you ask you a public company compared to a Chinese state of enterprise. Sellers may resist allowing notification more than 45 days before a closing at all or they may attempted to insist on a reverse ... as a condition of doing so. So these are the kind of issues that transacting parties are going to have to grapple with, or may, if they involve a foreign buyer, as a result of the government's new policy. Back to you, Ian.

Ian Palm: Thanks a lot, Ian. Appreciate that. One quick question while we're talking about it, is there consultation between practitioners, like yourself, and government officials who were called upon to interpret this stuff? I know we're kind of living in a world where life's changing on a regular basis, but if someone were in a sector which touches upon this but may or may not be fully within the scope of this new policy, do you have opportunities to kind of consult with your contacts within the government, on these points?

Ian:  Great question. To a degree, yes. So the government's official policy, and I should say that this file 45 days in advance of closing approach is something that is not entirely new to COVID-19. There's a whole bunch of staggered national security risk factors that if any of them are tripped, under normal circumstances, the parties should approach at least 45 days before closing. The government has simply expanded that during COVID-19. The government's formal approach is that you notify more than 45 days before closing and you wait 45 days to know that you're in the clear. Having said that, it is possible in some circumstances, to call them or email them and disclose some information and get a soft, or informal, read. But they won't put anything in writing and they're quite clear that if you don't wait 45 days that you're taking a risk. It may be an educated risk but a risk nevertheless. One thing that it's still too early to tell, we're only 10 days in, is we have a combination of the investment review division officials are all working from home, and, as a result of this new policy, they're going to be getting more filings in advance of closing. It's not just those officials who make the national security decisions. They consult with a broad array of other government officials who are in different departments depending on the transaction in question. The ability for them to do all that and give an informal read, more than 45 days before closing, may be further constrained by the current circumstances. The short answer is to some degree, yes, it is possible but limited and the only way to get certainty is to file more than 45 days before closing.

Ian Palm: Thanks a lot, Ian. We're all dealing with a degree of uncertainty here and it's always nice to be able to sort of delve into some detail here, and figure out how we can at least measure the data we can, and approach things and address risks as ... as possible. I want to turn now to distress M&A's. This is the final deal dynamic that we wanted to focus on as a broad subject. As we indicated earlier, a deal dynamic which comes hand in hand with an economic downturn, it's unfortunate but in some situations you have companies that are not going to be in the best financial shape and need to consider what their options are. In addition we've got buyers who probably are eager, and probably experts at, buying businesses that are not capitalized in the best way they could be. But the underlying businesses are strong. We've got Jonathan Ross here, who's one of our partners in our construction practice, who is one of our important partners in these kinds of situations. Jonathan, do you want to take the group through your thinking with respect to distressed M&A and the dynamics that will be at play going forward in deals that you're likely to be involved in.

Jonathan: Yeah. Thanks, Ian. In the time allowed I can't get into all the details on everything that we could say about a distressed M&A and I do think, Ian, I think you may be able to give the time for a more in depth session that is planned coming up, for distress in the M&A. But I do have a couple things to say about it in these particular circumstances. First, what do I mean when we talk about distressed transactions, or distressed M&A, what I mean is transactions that occur both inside of formal insolvency proceedings, such as a proposal or a Creditor's Company Arrangement Act, that's CCAA proceeding, or in a receivership. But not only those transactions, also transactions that occur under the thread of that kind of proceeding. What unites both those formal proceedings and circumstances and the thread of those proceedings is the leverage that a creditor has over the sale. They happen in the context of a credit default or an intending credit default. That allows the lender to have some control over the sale. It can either be direct control through the appointment of a receiver, whereas the receiver is selling an asset for the benefit of the secured creditors, or the creditors. But it can also be indirect. It can also be indirect leverage through the exertion of pressure on the seller. The thread of a receivership. That kind of pressure can force the seller to either capitulate and dance to the creditor's tune, if you will, or resist that pressure through creditor protection remedies such as a proposal or a CCAA proceeding. That's what a distressed transaction is. That's sort of the focus of what I'm saying and I have two things to say. The first is that in a distressed transaction the creditors can be expected, to a large extent, to behave like other sellers. That means they are hot mindless automatons who see a default and then immediately move to enforce and sell the asset. They will react to and make decisions in the face of the market conditions. If they're faced with a default, and the creditor determines that it's a good time to sell it's collateral, then it will likely be more aggressive in pushing for or forcing that sale. If a default occurs during bad market conditions, when it's a bad time to sell the assets, there's very few buyers, the creditor will likely prefer to negotiate with his borrower, to revise the terms of the credit agreement, to assist the borrower to weather the downturn, or at least allow the borrower to hold on until market conditions improve. In the last month and a half, as the COVID-19 crisis has unfolded, it's clearly not been a great time to sell. I think this relates to the pause that my colleagues have discussed. As a result we have not yet seen a rush by creditors to enforce on defaulted loans. We have seen some action, and most of that activity I would say has been, with regard to borrowers, companies that were teetering before that, they were on the bubble. It wasn't clear whether they were going to make it or not and unfortunately the pandemic ended that question. But otherwise it's been uncertainty. There's just no clarity as to what the long term effect of the pandemic has been on so many industries. So there's been a bias towards trying to buy some time, working with debtors to buy some time. As the uncertainty around the shutdown starts to fade, and hopefully slowly becomes replaced with a clarifying picture of the prospects for recovery, I think we'll see some more movement by creditors and hopefully some more buyers coming into the market, and a little bit more of a traditional market for distressed assets that we see in the downturn.

So the second thing I want to say about distressed transactions is, and again this is primarily for buyers but, cash is king but having cash is not necessarily enough. So, very often if a creditor's calling the tune, the creditor wants to be repaid it's loan in cash. It's not always the case, for example, I recently was acting for a buyer in some cannabis assets out of the receivership, the receiver was the seller. The receiver normally would recover cash and pay it to the creditor and in this case the buyer was able to negotiate a sale price that was entirely shares in the buyer. Really unusual. Made possible by two factors that were specific to these circumstances. One was the willingness of the obviously non-traditional lender to accept shares in a cannabis company as repayment for debt. And the second was the particular circumstances of the cannabis industry right now which is experiencing quite a scarcity of cash. It's not always the be all and end all to have cash. There is opportunity for creative solutions around that but, as a rule, cash puts you in a very strong position in any transaction, but particularly so in distressed transactions. But not enough. In addition to cash available it's important to have a strategy that is customized for the particular asset, the target, the particular seller, the market circumstances. In the development of this strategy, for the approaching of a target, that insolvency counsel can assist your usual M&A team with preparing for and pursuing a transaction. So what are some of these things that you take into account in developing your strategy in a distress situation? We've already spoken at length today about market conditions, so that's one. Other considerations, who's the seller? Is it the company? Is it the target or the parent of the target? Is that seller already operating within a formal insolvency proceeding such as a proposal or CCAA? Is the seller rather a court appointed receiver? Appointed by a creditor likely with the primary role of liquidating the asset or selling the target. In either of those cases, who are the creditors and what are their motivations? You can be sure they're pulling the strings behind the scene. Is the creditor a potential buyer? A creditor who also has an interest in the target has the ability to credit bid its debt, and therefore pay without new cash, so it can give it a significant advantage in the market place. If the creditor's not interested in buying is the creditor interested in selling its position? It may be not interested in dealing with enforcing its security. Perhaps you can acquire that position and then get the creditors position and strength. Something else to consider.

Ian Palm: And be the buyer through that kind of process.

Jonathan: Yeah. But the ability to credit it.

Ian Palm: Right. So lots of stuff here, Jonathan.

Jonathan: I'm running over time.

Ian Palm: <laughter> That's all good. There's lots to delve into and, as Jonathan indicated in part of his comments, there is a further session in our webinar series where we'll be focused on distress M&A and we'll go into even more detail at that stage. I do want to take a bit of time here to focus, as I said, part of the way which we're learning here is by pulling information that we can access, publicly, and so one of the things we're doing as a way to kind of track some of these trends and deal dynamics is to collect the information that's publicly available. I'm going to pass it over to Ahad to take us through some of the publicly available information that we've learned based on M&A deals that have been disclosed, publicly, and some of the information, some of the details that are in those deal terms, since the pandemic has taken hold of us. Ahad, over to you.

Ahad: I'm mindful of the time so I won't try to spend too much time on this. There are four main features that we've notice thus far and looking at new publicly available M&A transactions that have occurred since early March to today. So, not surprisingly the first is the revisions of definitions of material adverse affect or material adverse change, which now include carve outs for pandemics, or epidemics or COVID-19 specifically. As a reminder on M&A and MAC clauses, they're intended to serve as a form of relief where the circumstances leading up to transactions, COVID for example, during the negotiation stage have been altered so significantly by subsequent events that it affects the target value of the business and it's operations. So, by carving out COVID-19 and its effects, buyers and sellers are, in essence, limiting the circumstances under which they can trigger a MAC clause, in the course of pandemics. So this isn't surprising. COVID was not foreseeable but it will be interesting to track going forward in light of the market conditions we described and in terms of determining how case law is going to interpret MAC clauses going to work. Secondly, in exemptions of outside periods, purchase agreements are signed and then closed at a later date, that's known as an outside date. The deal documents are now providing for extensions of that outside date, by written agreement of the parties, and this invariably means a longer interim period. Third, in public entity transactions we typically require interim and/or final orders from courts. Obviously courts are suspended and the deal documents be provided, either apply for an extension for the time period to obtain the order, or to dispense with the requirement for interim orders in lieu of shareholder agreement or simply providing final orders be obtained some point in the future. Lastly, current trends include beefing up the interim periods. Like I said, if we were extending the outside dates, you're going to get a longer interim period. We've now seen customary provisions get revised to include operations of business to allow for what's called COVID actions, which is a general umbrella of activities that a seller can undertake to deal with the COVID crisis. That is actually as recent as yesterday. So we did see a deal come in that included the ability of the seller to continue to address COVID as they see fit. Interim periods are going to become more critical so the change is really just reflective of that reality. In terms of future developments, in terms of what we're looking at, we expect buyers and sellers to more heavily negotiate reps and warranties, particularly if there's concern about cash flow, insurance coverage or if there's any changes of law that can be accommodated. Like we said, the situation is fluid and evolving so there might be additional focus on other items by team management or even succession planning. As developments come in we will be updating the article on the website, the accompanying article to this to include any additional updates that we see as they come in.

Ian Palm: Thanks, Ahad. That's great. I wanted to give Pam and Stefan an opportunity to reflect upon some of these developments as advisors to buyers and sellers. What are your thoughts on the items that Ahad's presented here? Why don't we start with you, Pam.

Pam: Thanks, Ian. Yeah, I definitely think that we're going to see lots of creative ways to handle the COVID and the potential shutdowns. I do think that we need to keep in mind that even though it looks like we're getting to a place where the economy may be reopening, soon, there's lots of talks about potentially a second outbreak. I hate to say that but it's important to keep in mind. It's important to keep in mind something, like the M&A clause, you still want to really think about potentially how you would get out of the transaction for the buyer, and make sure that it's spelled out in that clause and think about things that could becoming down the road with a second shutdown. Definitely things to keep thinking about as we go through this and ... mind and really think about potential situations going forward and what those are going to look like.

Ian Palm: Thanks a lot, Pam. Stefan, any reflections from your perspective?

Stefan:     Yeah, I'll keep it brief. l know we're running out of time and want to answer some questions. Maybe two comments. One with regard to interim period covenants and the fact that we finally see carve outs to the blanket covenants. I was going to say, and I'm glad that it finally came out, ordinary course for COVID-19 is probably not ordinary course on a regular basis. I think that confirms my initial anxiety with those clauses and that one, perhaps, aspect with regards to reps and warranties is you're going to want to also get reps and warranties with regard to the government programs that the target has decided to, for example, request assistance and whatnot, to make sure that the criteria which are not necessarily studied right now as the money is dished out, because the government is trying to act quickly, you're going to want reps and warranties on that to ensure that if they ever come back that you're going to have a recourse. I limit my comments to that.

Ian Palm: Thanks a lot, Stefan. There's a lot of stuff we're trying to unpack in one short hour here. The whole notion of ordinary course is an interesting one. I do want to get to some questions but before we do that I just wanted to make sure everyone's aware of what we've done so far and what the plan is for the future. As you'll see on the screen, April 14 we held our Destructive Effects of COVID M&A Transactions event. That information is all on the website and there's also an article which accompanies that and it's a useful tool, even though it may not address, it looks like sort of in the past, but it also provides a whole lot of detailed information related to active transactions and future transactions. Then one of the ones that's probably most valuable for people thinking about a transaction in the next 9 months or a year, would be the one we did on April 21^st and that was Taking Control in Uncertain Times and How You Can Prepare for a Sale of Business Going Forward, it's on demand on our website together with an article put together a number of our practitioners. Then I'll remind people that we're are trying to do these things on a weekly basis. While there's a lot in life you can't control, and a lot in life that's uncertain, you can draw some comfort that at 1 o'clock Eastern on Tuesday, at least for the next little while you can anticipate Gowlings will have an interesting M&A focused webinar. The next one is a multi-disciplinary M&A focus exploring employment, tax, IP and environmental issues from practitioners across the firm. Then stay tuned for additional presentations that we will do in the following weeks.

Let's turn to some questions here and we're now at 2 o'clock but I think we can go on for another 5 minutes or so. I do want to take some questions. The first one I'm going to address to you, Jonathan, and the question, I'll just paraphrase it a little bit, if you know or suspect the seller is near breaching financial covenant and they still resist your COVID adjusted overtures, (I like that term), does it make sense at any point to have a discussion with the lender. One would have to be relatively careful with an NDA in place and so on and I guess that's from the perspective of a buyer. Do you want to comment on that question?

Jonathan: Yeah. At some point it's going to make sense to have that conversation and the question will always be, when is it? And you're quite right to point out you're going to have to make sure that you're complying with all your contractual obligations, whatever's included in the NDA. Also, be aware that a lender may have it's own contractual obligations to it's borrower and may be quite reluctant to engage in the kind of conversation that you want to have. It will depend on the lender. A traditional bank lender, I would expect would not be very receptive to that kind of conversation when the loan is with the account manager, and the receptivity may change when there is a covenant breach and that loan gets transferred to a special loans department, where it will now be managed by someone who's familiar with the process of enforcing and being the bad guy lender. Other lenders who don't have those separate functions might be much more cavalier in terms of the discussions they're willing to have. Unfortunately, like so many things in this area, the answer is it depends on when the right time would be.

Ian Palm: Right. But context specific.

Jonathan: Yeah. Context specific and absolutely the right kind of approach to be thinking about. You want to be there and be a potential buyer that people are thinking of.

Ian Palm: Okay. That's great. Anyone else want to provide comment on that one? Alright let's turn to the next question. Let's take this one and I'll address this one, first to Pam then maybe Stefan, you can comment. Are we seeing longer earnout periods? Or do we anticipate seeing longer earnout periods?

Pam: I have not yet seen transactions that involve longer earnout periods. I do expect that there may be some coming. I do maybe echo my points earlier that I really don't like that from the buyer's perspective, and we're in a buyer's market right now. I think a lot of that will be resisted but certainly, down the road I do think that there's going to be some longer earnout that we're going to start to see.

Ian Palm: Thanks. Stefan, any thoughts?

Stefan:     Yeah, thanks, Ian. I have seen more discussions about longer earnout periods. Up to now I haven't seen those deals close yet. I have seen, however, I was mentioning the balance of sale, I have seen that. But again, based on the fact that I've already seen discussions about longer earnout periods, I think it's a matter of time before we see more deals close with certain provisions of that nature, and longer earnout periods, yeah.

Ian Palm: Thanks very much. It's certainly, as Ahad has already indicated, we're tracking this stuff and we will make sure we include that in our compendium of developments. I will be, for one, interested to see where the push and pull is in some of these developments, at least amongst publicly available information. I think we have time for one more question. I'm going to address this one to Ian and the question, I'll just read it out loud so everyone knows the question, could it be reasonable to expect that foreign participation in government concessions, in particular, might be curtailed given the Investment Canada Act? Ian do you want to try and address that question?

Ian:  Sure. By government concessions, I'll answer that two ways but government concessions meaning projects that the Canadian government is sponsoring or facilitating and private sector bidders are bidding on. I don't think the Investment Canada Act would be the tool to constrain that, or to limit that. I could see it for the Canadian government to want to maximize participation by Canadian businesses and those kind of things, but I don't think that the Investment Canada Act would be the tool to do it. If by government concessions it means reduce investment by foreign investors that are themselves government owned, there may be some of that. I think the more likely answer is that transactions involving that category of state owned enterprises will just get more scrutiny, and depending on what the deal is, if it's relatively consistent with past practice kind of deals, that it will just get more scrutiny and be allowed to pass. If it's a deal where a state is buying up a whole bunch of medical equipment, and there doesn't appear to be commercial rationale, I think you'll see definitely less of that.

Ian Palm: Thanks a lot, Ian. I appreciate all the panelists taking the time to answer these questions on the fly. We will happily address other questions through emails and you're more than welcome contact us. The information's there. I'm going to have to unfortunately wrap it up there but thank all our participants for joining us today and thank all of our panelists, Ian, Ahad, Stefan, Pam and Jonathan, and all of the people who have worked in the background to help us put this together. This was a really, from my perspective, it was a fun opportunity to collaborate and engage in a good discussion about some of the deal dynamics we expect to see going forward. We do appreciate the opportunity to share this with you. Please stay tuned and please stay well and hope we get through this pandemic as quickly, but, as rationally as possible. So thank you for joining us and have a great day. Bye.