10 key Indigenous issues in infrastructure and natural resources projects M&A

Torys Quarterly: M&A Trends 2021

Indigenous issues are increasingly playing an important role in the acquisition of significant infrastructure and natural resources projects in Canada.

The following are 10 key issues that may arise in such deals.

1. M&A can trigger issues or resolution. M&A can be a key trigger for Indigenous groups and others to raise, pursue and/or resolve major issues. M&A activity may be seen as a significant leverage opportunity for potentially-affected groups. We have also seen M&A play a role in resolving Indigenous issues, often through agreement, and de-risking a number of projects and resource operations.

2. Tailored Indigenous diligence. Diligence regarding the essence of the past and current engagement and relationship between the seller and/or its project team, on the one hand, and potentially-affected Indigenous group(s) on the other hand, is critical. For operating projects and other resource operations, diligence questions should assess whether the duty to consult was adequately discharged and whether there is any outstanding challenge to the project’s or operation’s permits. If the project is in development, or expansion to resource operations is planned, diligence questions should also cover the proposed plan for discharging the duty to consult. This is to ensure that the requisite project permits are issued in accordance with the business plan’s timing. A common pitfall is to use a pro forma diligence approach that fails to provide meaningful information to the acquiring deal team, which may result in a number of issues, including overvaluing the project, entity or assets (since the costs to manage Indigenous issues may be underestimated), and failing to flag the need for special attention on engagement and relationship building post-closing.

3. Impact benefit or other agreements. Since most significant projects and resource operations in Canada use impact benefit or other agreements with Indigenous groups to align interests and provide support for the project or operations, it is important to ensure that the costs of complying with any such agreement are included in the financial models and the scope of any such agreement is appropriately factored into the valuation of the project, entity or assets. For example, an acquiror will likely want to consider whether each agreement addresses potential project extensions or other operational changes. If not, those changes or extensions will likely require further negotiation—and thus, result in additional risks and costs—to obtain the approval of Indigenous group(s) to facilitate the issuance of the requisite permits. If further agreement is not possible, the duty to consult will still need to be discharged, which also involves added planning, time, cost and risk.

4. Managing multiple groups. Most significant infrastructure and natural resources projects may impact multiple Indigenous groups. This often complicates the management of Indigenous relationships. For example, neighboring Indigenous groups may perceive the extent of each other’s rights and interests in the project area differently and, as a result, the extent of the relative impact. Each such group may therefore expect significantly more benefits and/or more time with senior deal team members than a neighboring group, on the basis that most benefits should flow to the Indigenous group which perceives itself to be exposed to the greatest potential impact. The relationships between Indigenous groups should not be overlooked.

5. Evolving approach. Indigenous legal issues (and expectations of what constitutes satisfactory resolutions) have evolved significantly—and will likely continue to evolve—in Canada. This factors into a diligence assessment. The ongoing evolution of the duty to consult and (if appropriate) accommodate is most recently demonstrated in Canada’s Federal Court of Appeal decisions on Trans Mountain’s pipeline expansion project in Alberta and British Columbia. In its August 2018 decision, the Court found that the federal government’s consultation was inadequate, and further consultation was required1. The federal government re-initiated consultations with potentially-affected Indigenous groups, and developed additional accommodation measures in response2. When reviewing the re-initiated consultations in February 2020, the Court concluded that the federal government’s duty had been met. In so doing so, the Court provided further clarity on several aspects of the duty to consult and accommodate, including that the duty to consult is not a veto or a de facto veto, and the analysis of what constitutes appropriate accommodation3. In our experience, if Indigenous issues have not been managed procedurally and/or have not resulted in outcomes consistent with the evolved standards, past issues often are later raised (e.g., when the project has some new “ask”). During the diligence process, it is important to consider this evolution when assessing whether efforts to deal with Indigenous groups in respect of a project have been adequate.

6. Free, prior and informed consent. Increasingly, Indigenous groups in Canada are taking the position that project proponents and resource operators must obtain, and some Canadian regulatory regimes seek to obtain, the “free, prior and informed consent” (FPIC) of Indigenous groups in respect of projects and resource operations (e.g., on-going environmental monitoring with the results tied into the province’s or territory’s regulatory regime). As a result, we suggest that the implications of FPIC and other regulatory mechanisms should be considered as part of the Indigenous issues diligence.

7. ESG considerations. ESG considerations for projects and resource industries are as important as ever. Indigenous aspects of ESG may arise for the acquiror or others, including the acquiror’s investors and lenders, as described in more detail in “The growing importance of ESG in M&A transactions”. As a result, acquirors may want to consider Indigenous ESG issues alongside the Indigenous legal diligence and, if desired, assessments can be prepared to assist with Indigenous aspects of ESG.

8. Relationship building. Early, meaningful relationship building with Indigenous groups potentially affected by a transaction is a key factor in developing a mutually-beneficial relationship for the future life of the project or resource operations. In practice, relationship building requires careful planning and execution both during the transaction and post-closing. Common pitfalls include treating relationship-building initiatives as “box checking” exercises, not involving sufficiently senior personnel (which may be perceived by Indigenous groups as disrespectful), and after successfully building the relationship during the deal, not proactively sustaining it afterwards.

9. COVID-19 impacts. A key practical issue in the current COVID-19 environment is how to build relationships with new Indigenous groups, who often place a great deal of importance on meeting in person and often on the relevant lands. That may not be feasible in a COVID-19 constrained environment, especially since many Indigenous groups in Canada have restricted or prohibited people who are not part of the Indigenous groups from visiting their communities. While such COVID-19 constraints can be—and have been— successfully managed, there is generally not a “one size, fits all” solution. Crafting a solution may require time, additional technology and other resources and creativity.

10. Partnership approach. The potential impacts on one or more Indigenous communities may be regarded by the courts as significant in the context of large projects and resource operations. As a result, rather than risk litigation, it may be worth considering whether to use an approach consistent with developing a long-term, “partnership-type” relationship with potentially significantly-affected Indigenous groups to align long-term interests for the project or operations. Based on our experience acting for Indigenous groups (including on projects), governments and industry, the possibility of developing such relationships often exists—even if not necessarily readily apparent initially—provided the necessary time, effort, creativity and other resources are invested in achieving such relationships.

Conclusion

Some or many of these 10 issues may arise in any particular project or resource-industry transaction. As Indigenous law and relationship issues become increasingly important in M&A deals, the early flagging of these potential issues will support both successful transaction execution and the management of those issues in the short and long term.

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1 Tsleil-Waututh Nation v. Canada (Attorney General), 2018 FCA 153.

2 Torys advised on and participated on the federal government’s re-engagement.

3 Coldwater First Nation v. Canada (Attorney General), 2020 FCA 34.

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