CANADA LAW AND PRACTICE Contributed by: Kevin West, Andrea Hill, Priya Ratti and Meryam Kellow, SkyLaw
tion are often established to evaluate the terms of the transaction. They may also: • consider strategic alternatives; • negotiate the proposed transaction; • provide recommendations to the board about the proposed transaction; and • if applicable, supervise a valuation or fairness opinion. It is common for target boards to establish special committees in business combinations involving a related party. Special committees are required by Multilateral Instrument 61-101 (MI 61-101) in certain circumstances when one or more directors have a conflict of interest. Mem - bers of the special committee must be free of real or perceived conflicts. Courts will often consider whether and at what time in the process of a transaction a special committee was formed and the procedures it fol- lowed in evaluating the transaction. Establishing a special committee as soon as possible and before the material terms of a transaction are in place is a way to show that directors’ decisions Directors are provided a high level of deference at common law. Canadian courts have recog - nised the “business judgement rule” , which sets out that a court should not substitute its own decisions for those decisions made by directors, and deference should be accorded to business decisions of directors provided they are taken in good faith and within a range of reasonableness in the performance of the functions the directors were elected to perform by the shareholders. If directors act independently, in good faith and on an informed basis in a way that they reason- have been made without conflicts. 8.3 Business Judgement Rule
ably believe is in the best interests of the corpo- ration, courts generally will defer to their judge - ment. 8.4 Independent Outside Advice Independent outside advice is commonly given to directors in a business combination from:
• investment bankers; • outside legal counsel; • financial and tax advisers; • public relations firms; and • proxy solicitation firms. 8.5 Conflicts of Interest
Under Canadian corporate law, if a director is a party to a transaction with the corporation, is a director or officer of a party to the transaction or has a material interest in a party to transaction, the director must disclose the nature and extent of this interest and may be required to refrain from voting on the matter. Under Canadian securities law, MI 61-101 reg - ulates transactions with potential conflicts of interest. This instrument provides procedural protections for minority shareholders. Depend- ing on the type of transaction, the following may be required: • a formal valuation by an independent valuator supervised by a special committee; • majority of the minority shareholder approval; and • enhanced disclosure, including disclosure of prior valuations prepared for, and offers received by, the target in the past two years. MI 61-101 encourages, but does not require, targets to form special committees and encour- ages the formation of a special committee in any transaction to which MI 61-101 applies.
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