Regulatory Approvals in M&A Deals
Recent proposed mergers blocked by the Canadian government and other regulators, such as the Minister of Industry’s ruling against BHP Biliton’s proposed hostile take-over bid for Potash Corporation in November 2010, the recent CRTC decision to deny BCE’s friendly bid for Astral Media and the initial rejection by the Minister of Industry of the proposed negotiated acquisition of Progress Energy by Malaysian Petronas suggest that the negotiation of the provisions in merger agreements that relate to government and regulatory approvals will become increasingly important, and will be reviewed with greater scrutiny by the parties and their boards of directors.
In this context, it is interesting to review the various levels of covenants related to regulatory approvals and to compare the relevant provisions in this regard contained in the Petronas/Progress arrangement agreement with those in another proposed deal where government and regulatory approval has received a considerable amount of attention, namely the proposed acquisition of Nexen by CNOOC.
Regulatory approval covenant clauses vary in nature and can range from an undertaking to use reasonable commercial efforts, to a “hell or high water” clause whereby the purchaser agrees to comply with any undertakings or actions required by the Competition Bureau or the Minister of Industry, including divestitures of specific assets or business lines and adhering to significant undertakings. In addition, reverse break fees are a growing trend to allocate regulatory risk.
The acquisition agreement in the proposed acquisition of Progress Energy by Petronas created a very friendly regime for the purchaser with respect to the completion risk related to Investment Canada approval, where Petronas is required to use reasonable commercial efforts to complete the transaction but is not required to provide any undertakings in relation to Investment Canada or Competition Act approvals that are not considered commercially reasonable. In addition, the arrangement agreement does not contain any reverse termination fee for the failure to obtain regulatory approval, thereby ensuring that the target company bears most of the regulatory risk. A similar regime may be found in the arrangement agreement relating to the proposed acquisition of Celtic Exploration by Exxonmobil.
In comparison, in the proposed acquisition of Nexen by China’s CNOOC, which is currently under review by the Minister of Industry, the purchaser’s covenants relating to regulatory approvals, while not the most onerous in nature, are more favourable to the target company than in Progress and Celtic. In this case, CNOCC has to use reasonable best efforts to obtain and maintain the regulatory approvals but is not required to make or agree to any undertaking to obtain and maintain such regulatory approvals that would have a substantial negative financial impact, or impose a substantial negative burden on CNOOC or Nexen. Furthermore, the arrangement agreement provides for a $425 million reverse termination fee (equal to approximately 2.8% of the value of the transaction) to be paid by CNOOC to Nexen in the event of termination of the agreement due to a failure to obtain regulatory approvals.
Due to the open ended nature of the undertakings that may be required by the Minister of Industry to determine that an acquisition passes the “net benefit” test under the Investment Canada Act, we don’t expect that purchasers will agree to “hell or high water” provisions. However, it is likely that a target company will seek to allocate greater regulatory risk to the purchaser than has been the practice historically.