From where we stand today, the COVID-19 crisis will not likely end until a vaccine is widely available or broad immunity has been achieved in some manner. In the meantime, social distancing and other measures will remain in place, to varying degrees.
Once the infection curve flattens, commercial activities will resume and recovery in certain business operations will start to develop in the coming months. This is expected to occur on an incremental basis and on a staggered timetable by country and region, by design, to avoid a second wave of COVID-19 spread.
There is also commentary of moving to an “80% economy” as social distancing measures remain in place: many office workers would continue working at home; work sites would operate at less than normal capacity; domestic and international travel would be limited and subject to restrictions; more retailers and restaurants would re-open under strict guidelines; large gatherings would remain prohibited; and schools would re-open with social distancing measures implemented.
Governments and business leaders are now planning for this partial recovery for the period between shutdown and the wide availability of a vaccine. As we move toward recovery, Torys will continue to provide commentary on important legal issues that businesses are likely to face.
In this article, we offer observations on selected issues we expect to be particularly relevant in an interim period of a recovering “80% economy”.
Government will be a major player. Federal and provincial governments have taken unprecedented measures to assist businesses and individuals during the crisis.
In this crisis, Canada’s governments have moved extremely quickly and aggressively. With some businesses and industries decimated by the first wave of COVID-19 closures, governments may in this next phase need to expand their role through more invasive economic intervention and increased regulation of certain business transactions and industries. Governments may also make direct investments in, or take ownership of, certain aspects of vital businesses and industries as we witnessed in the 2008-2009 global financial crisis. The last time we experienced such an acute level of government intervention was during the wage and price controls and the more widespread government ownership of businesses in the 1970s and early 1980s.
For all businesses, it will be essential to understand legislative and regulatory actions as they are proposed and implemented, and their implications for the business’ strategy and stakeholders. Business leaders will need to make government relations an increasing priority.
Liquidity issues: next phase. During the shutdown phase of the COVID-19 crisis, many businesses took immediate steps to access credit facilities and/or the debt markets for liquidity in the event of a weeks-or-months-long period of substantially decreased revenue. Over the next few months, companies may look to the equity markets, for equity or convertible debt offerings, to rebalance their capital structure.
Stock market volatility will present periodic market windows which may quickly close. Issuers should put in place mechanisms to access the equity markets on short notice—such as shelf prospectuses and ATM (at the market) programs. Issuers should maintain regularly updated electronic data rooms to enable underwriters to conduct due diligence in short order. Issuers should ensure their disclosure documents are up to date, including appropriate risk factors and, if applicable, revised or withdrawn guidance to reflect current conditions. (It should be noted that issuers which take advantage of Canadian securities regulators’ permitted delay of annual filings this year cannot file a prospectus until their continuous disclosure record is current.)
In Canada, the bought deal structure may not be available for some issuers, who may need to look to marketed offerings or private placements with significant investors (and an associated discount to market) to access equity financing. Termination rights in underwriting agreements may be subject to more negotiation and scrutiny than before. Regulators may be more amenable to providing exemptions to permit financings on a timely basis—for example, the TSX exempting certain shareholder approval requirements due to financial hardship.
M&A emerging from the shutdown: deal issues. The impact of the pandemic will likely drive consolidation across a wide range of industry sectors as businesses look to bulk up to survive, and as entities with access to capital make opportunistic plays. These transactions are likely to feature an increased use of share consideration to preserve cash and lower levels of leverage in the case of cash deals. These transactions may also proceed on a faster timeline as companies seek to take decisive steps coming out of the crisis, and may occur in an environment of competitive processes with fewer viable bidders than would have been the case before the crisis.
M&A emerging from the shutdown: competition law issues. Competition enforcers assessing M&A transactions will face challenges: they will be asked to assess the competitive vigour of target firms that may be failing or flailing; they will be asked to accept greater levels of concentration than before; they may have to factor into their assessments government intervention or regulation; and more broadly, they will be asked to base their assessments of future competitive effects on historical market share and other data that may be of limited relevance. Moreover, enforcers will be doing this in an environment where policy makers may be questioning the desirability of assessing transactions based solely on competition considerations where broader public interest considerations, such as encouraging employment, may favour different outcomes.
M&A emerging from the shutdown: cross-border issues. Consolidation is likely to be cross-border as well, and there could be an influx of inbound foreign direct investment. This prospect will face a burgeoning skepticism of globalization, and governments and a population intent on securing ongoing domestic production capacity and potential stockpiling of vital supplies. National resiliency will compete with efficiency. The crisis may lead the Canadian federal government to take a different and broader view of net benefit and national security tests under the Investment Canada Act.
Conclusion: Canada’s advantage
To be sure, Canada will face significant headwinds in the post-COVID-19 world: from the pressing need to improve productivity across the economy; from a resumption of global trade which is likely to be less free and open and may recover and grow at a slower pace than before; and not least, from challenges in the relationships with the United States and China, our two largest trading partners.
With all that said, Canada is fortunately well positioned to succeed and thrive in the post-COVID-19 global economy. During the crisis, Canadians have demonstrated strong social cohesion and trust in our institutions. The country’s financial institutions are global leaders in strength of capitalization and financial prudence. Our universal healthcare system is a competitive advantage.
In the post-pandemic business environment, Canada’s governments and business leaders will need to build on our many advantages and strengths in order to navigate these challenges and plot the way forward in a changed world.
To discuss these issues, please contact the author(s).
This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.
For permission to republish this or any other publication, contact Janelle Weed.