In this month's Addendum...
- In-House: How to prepare for and survive a major product recall.
- Securities: The effect of new expanded material contract filing duties.
- M&A: Material adverse change, specific performance and reverse termination fees.
- Environmental: Canada moves towards a domestic emissions trading market.
- Privacy: PIPEDA review: the response to the Commons Committee report.
- Contract: The implied term of good faith and fair dealing: recent developments.
CBA Interim News Editor
Penny Bonner, Ruth Elnekave, Garth Girvan, Vanessa Grant, Martha Healey, Kirsten Iler, Sven Milelli, Shannon Kathleen O’Byrne, Kathleen Ritchie, David Young, Jeff Zabalet
Addendum is published by National magazine, the official magazine of the Canadian Bar Association. The views expressed in the articles contained herein are solely the views of the authors, and do not necessarily represent the views of the Canadian Bar Association.
Recalls 2008: are you ready?
By Martha A. Healey and Penny S. Bonner, Ogilvy Renault LLP Tag and save to del.icio.us
The number of recalls and public notices of voluntary product withdrawals that have been issued over the last year is unprecedented in Canada. These recalls and notices have resulted in a far greater visibility and awareness of product safety and quality issues. Ensuring product safety and quality — and reassuring the public that products are safe — have now taken on a significantly heightened prominence and importance.
1. Can Canadian regulators require a company to recall a product?
In Canada, there are very few circumstances under which a regulator could require a company to recall a product. The Canadian Food Inspection Agency, for example, has the power to order a recall of a food if the CFIA reasonably believes that the food poses a risk to the public. There are also limited circumstances in which a manufacturer (or other participant in a production or distribution line) is statutorily required to notify regulators of a recall or a product safety issue.
Canadian regulators do, however, often have power to make other compliance orders. These powers include the ability to control the sale of suspect products by seizing or detaining products, stopping imports at the border and, potentially, taking other regulatory (and non-regulatory) action such as issuing public advisories. The effect of such compliance orders may, in the end result, be tantamount to a recall order. The impact of a public advisory, for example, is significant — it is notice to the general public that a regulatory authority considers the product in question to be unsafe. These notices may have a dramatic (negative) effect on product sales and on the reputation of the manufacturer.
“Ensuring product safety and quality — and reassuring the public that products are safe — have now taken on a significantly heightened prominence and importance. ”
2. Voluntary action by manufacturers
Manufacturers and retailers regularly take voluntary, proactive steps to ensure that unsafe or suspect products are removed from the market. However, a recall or product withdrawal may also arise in the case of a non safety-related technical regulatory infraction. A manufacturer may also withdraw a product if that product fails to meet the manufacturer’s high standards (which could, in fact, be higher than a regulated standard).
Even if a recall or product withdrawal is precautionary (i.e., no safety issue exists) there could still be an impact on a manufacturer’s, distributor’s or retailer’s reputation. In addition, to the extent that a manufacturer may be a product input supplier for a further manufacturer or a supplier for an end distributor or retailer, business relationships may also be negatively impacted.
3. How to avoid a recall — proactive steps
Proactive steps that a company could take to try to avoid the likelihood of a recall arising would include:
- comprehensive product testing and design assessment to ensure the product is safe;
- constant vigilance to ensure that changing regulatory standards (in all jurisdictions in which the product will be sold) are monitored and observed.
In addition, a company should also ensure that:
- consideration is given to adopting the most rigorous product standard — even though an international standard may be stricter than that required in Canada;
- product purchased from suppliers is re-tested before use to confirm it meets regulatory requirements;
- any third party processor, manufacturer or supplier used by the Canadian company can provide direct evidence of their adherence to quality standards and processes;
- any contracts for third party processing, manufacturing or supply incorporate quality standards, direct oversight by the ultimate manufacturer, employee training and audit rights;
- if a third party processor, manufacturer or supplier is outside Canada, consideration is given to hiring an independent party to periodically audit or review the foreign manufacturer’s or supplier’s facility;
- contractual audit rights are exercised as frequently as necessary and that any audit is thoroughly conducted; and
- consideration is given to incorporating random, unannounced inspections of suppliers to verify compliance with quality and safety controls and standards.
Apart from these steps, employee sensitivity to product quality and safety issues is essential — not only at a management level, but at the level of employees who are actively involved in the manufacturing process on a day-to-day basis. Employee/management training should be specifically included in a company’s compliance manual, undertaken for each new hire and regularly updated/renewed for employees and management (i.e., at least annually and more often if necessary).
4. Planning for the day a recall or product withdrawal takes place
In addition to the precautionary steps to avoid a recall, it is essential that manufacturers, retailers, suppliers, importers and distributors have in place a comprehensive recall plan that could be launched into action at the first indication of the need for a recall or product withdrawal. A recall management plan must ensure that a response/investigation is initiated immediately and must:
- have senior management support and “buy-in”;
- set out, specifically, the recall team – including representation from all relevant business/manufacturing sectors, senior management, quality control/quality assurance, communications, marketing and legal;
- specify any notification/recall obligations that the company may have;
- identify relevant stakeholders for notification purposes;
- confirm the person responsible for notifying regulators if necessary or if the company decides to do so voluntarily;
- outline how the initial investigation will proceed;
- have been tested (to ensure the plan will work when needed); and
- have addressed, depending on the product, any immediate steps that could be taken while an investigation is pending. For example: should affected production lines be stopped temporarily? Should product be quarantined? Should alternative suppliers be engaged on a temporary basis?
5. After the recall/product withdrawal has ended
Once the recall/product withdrawal has ended, the recall/withdrawal process must be reviewed to ensure that the recall management plan functioned appropriately and to assess whether:
- any changes need to be made to the recall plan or to the composition of the recall team;
- any employee disciplinary action or additional training is necessary;
- any third party contracts should be modified and/or whether audit procedures incorporated in those contracts are appropriate;
- the communications aspect of the plan ensured that all appropriate information was communicated to the public in a timely fashion; and
- regulatory authorities were advised as appropriate and the company responded appropriately to questions or information requests by such authorities.
At the end of the day, the equation is simple. The more active steps that a company takes to avoid a recall or to prepare itself for a recall, the more the company will be able to minimize the effect of the recall. Its response to a recall/product withdrawal must be swift, commensurate with the gravity of the issue(s) that gave rise to the recall and fully responsive to queries from regulators and the public.
Martha A. Healey is a partner at Ogilvy Renault and is based in Ottawa. She specializes in federal and provincial regulatory matters, including competition, health and agricultural and consumer products regulation. Penny S. Bonner is a senior partner at Ogilvy Renault and practises life sciences law. She is based in Toronto and is Chair of the firm’s Life Sciences and Recall and Crisis Management Teams.
Expanded material contract filing obligations came into effect on March 17, 2008
By Kathleen M. Ritchie and Jeff Zabalet, Gowling Lafleur Henderson LLP Tag and save to del.icio.us
The Canadian Securities Administrators (the “CSA”) has amended National Instrument 51-102 - Continuous Disclosure Obligations (“NI 51-102”) and its related Companion Policy (“CP 51-102”) to broaden the obligations on reporting issuers to file material contracts with applicable securities regulators on SEDAR (the “Amendments”).
Counsel should be sought in each specific circumstance to determine whether a particular material contract entered into in the ordinary course of business should be filed on SEDAR.
The significance of the Amendments is that: (i) reporting issuers will now be required to file on SEDAR certain material contracts entered into in the ordinary course of business; and (ii) there will be limitations on redacting material contracts to be filed on SEDAR. Also, the CSA has clarified that schedules, side letters, exhibits and amendments to material contracts must be filed on SEDAR. The Amendments came into effect on March 17, 2008.
Requirement to file material contracts
Since March 30, 2004, each reporting issuer has been required to file, with applicable securities regulators on SEDAR, a copy of any contract that it or any of its subsidiaries is a party to, other than a contract entered into in the ordinary course of business, that is material to the reporting issuer and was entered into within the last financial year, or before the last financial year but still in effect. A reporting issuer was not required (and is still not going to be required) to file a material contract entered into before January 1, 2002.
Definition of a “material contract”
NI 51-102 now defines a material contract as any contract that an issuer or any of its subsidiaries is a party to, that is material to the issuer. CP 51-102 provides that a material contract generally includes a schedule, side letter or exhibit referred to in the material contract and any amendment to the material contract. CP 51-102, also provides that the new redaction provisions in NI 51-102 and CP 51-102 discussed further below, also apply to these schedules, side letters, exhibits and amendments.
Changes to the ordinary course of business exception
Effective March 17, 2008, reporting issuers are obligated to file on SEDAR a copy of the following material contracts entered into in the ordinary course of business:
- a contract to which directors, officers, or promoters are parties other than a contract of employment;
- a continuing contract to sell the majority of the reporting issuer’s products or services or to purchase the majority of the reporting issuer’s requirements of goods, services, or raw materials;
- a franchise or licence or other agreement to use a patent, formula, trade secret, process or trade name;
- a financing or credit agreement with terms that have a direct correlation with anticipated cash distributions;
- an external management or external administration agreement; and
- a contract on which the reporting issuer’s business is substantially dependent.
The amended CP 51-102 provides guidance as to the above categories of material contacts entered into in the ordinary course of business as follows:
Contracts of employment
The CSA has indicated that one way for reporting issuers to determine whether a contract is a contract of employment is to consider whether the contract contains payment or other provisions that are required disclosure under Form 51-102F6 as if the individual were a named executive officer or director of the reporting issuer.
External management and external administration agreements
The CSA has indicated that external management and external administration agreements include agreements between the reporting issuer and a third party, the reporting issuer’s parent entity, or an affiliate of the reporting issuer, under which the latter provides management or other administrative services to the reporting issuer.
Contracts on which the business is substantially dependent
The CSA has indicated that a contract on which a reporting issuer’s business is substantially dependent is a contract so significant that the reporting issuer’s business depends on the continuance of the contract. The CSA has further indicated that some examples of this type of contract include:
- a financing or credit agreement providing a majority of the reporting issuer’s capital requirements for which alternative financing is not readily available at comparable terms;
- a contract calling for the acquisition or sale of substantially all of the reporting issuer’s property, plant and equipment, long-lived assets, or total assets; and
- an option, joint venture, purchase or other agreement relating to a mining or oil and gas property that represents a majority of the reporting issuer’s business.
Counsel should be sought in each specific circumstance to determine whether a particular material contract entered into in the ordinary course of business should be filed on SEDAR.
Grounds to redact material contracts prior to filing
NI 51-102 still provides that a provision in a material contract filed may be omitted or marked to be unreadable if an executive officer of the reporting issuer reasonably believes that disclosure of that provision would be seriously prejudicial to the interests of the reporting issuer or would violate confidentiality provisions. However, effective March 17, 2008, NI 51-102 prohibits the redaction of the following types of provisions:
- debt covenants and ratios in financing or credit agreements;
- events of default or other terms relating to the termination of the material contract;
- or other terms necessary for understanding the impact of the material contract on the business of the reporting issuer,
(collectively, the “Non-Redactable Provisions”).
Further, under NI 51-102, if a provision is omitted or marked to be unreadable, the reporting issuer must include a description of the type of information that has been omitted or marked to be unreadable immediately after the provision in the copy of the material contract filed by the reporting issuer. CP 51-102 confirms that a brief one-sentence description immediately following the omitted or redacted information will generally be sufficient.
Certain guidance on when disclosure may be seriously prejudicial, certain limitations on the applicability of confidentiality provisions and when terms are necessary for understanding the impact on the business are now included in CP 51-102 as follows:
Disclosure seriously prejudicial to interests
The CSA has indicated that one example of disclosure that may be seriously prejudicial to the interests of the reporting issuer is disclosure of information in violation of applicable Canadian privacy legislation.
However, the CSA has also indicated that, in its view, in situations where securities legislation requires disclosure of the particular type of information, applicable privacy legislation generally provides an exemption for the disclosure.
Further, according to the CSA, disclosure of information that a reporting issuer or other party has already publicly disclosed will generally not be seriously prejudicial to the interests of the reporting issuer. Counsel should be sought in each specific circumstance to determine whether privacy legislation would prohibit disclosure and whether an exemption is available.
CP 51-102 confirms that the Non-Redactable Provisions may not be omitted or redacted even if disclosure would violate a confidentiality provision, including a blanket confidentiality provision covering the entire material contract.
The CSA advises that when negotiating material contracts with third parties, reporting issuers should consider their disclosure obligations under securities legislation. The CSA has indicated that a securities regulatory authority may consider granting an exemption to permit a Non-Redactable Provision to be redacted if the disclosure of that provision would violate a confidentiality provision and the material contract was negotiated before the adoption of these new requirements.
The CSA has further indicated that the regulator may consider, in deciding whether to grant an exemption, whether an executive officer of the reporting issuer reasonably believes that the disclosure of the provisions would be prejudicial to the interests of the reporting issuer and whether the reporting issuer is unable to obtain a waiver of the confidentiality provision from the other party.
Terms necessary for understanding impact on business
The CSA has indicated that terms that may be necessary for understanding the impact of the material contract on the business of the reporting issuer include the following:
- the duration and nature of a patent, trademark, license, franchise, concession or similar agreement;
- disclosure about related party transactions; and
- contingency, indemnification, anti-assignability, take-or-pay clauses, or change-of-control clauses.
Time for filing material contracts
The rules for filing material contracts have not changed. If the making of the material contract constitutes a “material change” for the reporting issuer, then the material contract must be filed no later than the time the reporting issuer files a material change report in Form 51-102F3 (within ten days of the material change).
Otherwise, if the material contract was made or adopted before the date of the reporting issuer’s annual information form (“AIF”), then the material contract must be filed no later than the time the reporting issuer’s AIF is filed pursuant to NI 51-102 (within 90 days of the financial year end). For such issuers with December 31, 2007 year-ends, this means that material contracts have been filed in the manner required by the Amendments with the reporting issuer’s AIF no later than March 31, 2008.
If the reporting issuer is not required to file an AIF pursuant to NI 51-102, if the material contract was made or adopted before the end of the reporting issuer’s most recently completed financial year, then the material contract must be filed within 120 days after the end of the reporting issuer’s most recently completed financial year. For such issuers with December 31, 2007 year-ends, this means that material contracts have been filed in the manner required by the Amendments no later than April 29, 2008.
Reporting issuers should review their material contracts entered into the ordinary course of business and not previously filed on SEDAR, to ascertain whether any of these contracts must now be filed on SEDAR.
Reporting issuers will also need to take note of the new redaction provisions in respect of material contracts negotiated prior to March 17, 2008 but not yet filed on SEDAR. If the material contract contains confidentiality provisions, the reporting issuer may need to seek a waiver from the other party to the contract. If such a waiver is necessary and cannot be obtained, the reporting issuer may need to seek an exemption from the securities regulatory authorities to permit certain required redactions of the material contract.
Kathleen M. Ritchie is a partner in the Corporate Finance, Securities and Public M&A practice group in Gowlings’ Toronto office. Jeff Zabalet is an associate in Gowlings’ Toronto office, where he practises in the Corporate Finance department with a focus on public M&A and securities and private equity.
Deal protection and broken deals: questions of material adverse change, specific performance and reverse termination fees
By Garth M. Girvan, Vanessa Grant and Sven O. Milelli, McCarthy Tétrault LLP Tag and save to del.icio.us
The recent failure of several high-profile M&A transactions in the wake of the credit crunch that began last July has cast a spotlight on the negotiation and drafting of “deal protection” clauses in merger agreements, and the remedies available to a target company where a buyer seeks to renegotiate or walk away from a deal with no or limited liability.
“The United Rentals and Genesco decisions highlight two important M&A trends of the last two years.”
Recent U.S. court decisions in two such transactions provide interesting lessons for companies and their advisors regarding the remedies available to targets and buyers, the conduct of negotiations, the drafting of key deal protection clauses and the importance of sustained due diligence on the target company.
In both Genesco, Inc. v. Finish Line, Inc., UBS Securities LLC et al. and United Rentals, Inc. v. Ram Holdings, Inc. et al, the courts addressed a target company’s claim for specific performance of a merger transaction which the buyer sought to abandon. In the United Rentals decision, the Delaware Chancery Court upheld the contractual right of a private equity buyer to walk away from its proposed buy-out by paying a reverse termination fee. In contrast, in the Genesco decision, the Tennessee Chancery Court ordered the buyer to complete its acquisition of the target.
The United Rentals and Genesco decisions highlight two important M&A trends of the last two years.
The first has been the emergence of the reverse termination fee, introduced primarily in private equity transactions to replace the financing out condition which was traditional in those transactions prior to 2005. In many private equity M&A transactions, the payment by the buyer of a reverse termination fee — generally between 3% and 5% of the total transaction value — is often the seller’s sole recourse for a buyer’s failure to complete a transaction. Indeed, the United Rentals case arose from a fundamental disagreement between the parties as to whether the seller’s recourse was in fact limited in this manner.
A second trend has been the increased willingness of buyers to invoke “material adverse change” or “MAC” (or “material adverse effect”) clauses in their merger agreements in an attempt to abandon transactions without having to pay the reverse termination fee or as leverage against the seller to reduce the purchase price. The recent downturn in private equity-led M&A activity, as well as the numerous failed-deal lawsuits currently underway, are likely to see increasing attention being paid to “deal protection” terms in merger agreements, and possibly a shift toward increasingly buyer-friendly remedies.
The United Rentals/Cerberus decision
On July 22, 2007, United Rentals, Inc. (URI), the largest equipment rental company in the world, announced that it had entered into a merger agreement with entities controlled by Cerberus, a private equity firm, under which Cerberus would acquire URI for approximately $4 billion.
In November 2007, following approval of the transaction by URI’s shareholders, Cerberus declared that it was unwilling to proceed with the transaction, citing deteriorating conditions in the credit markets. In its letter to URI, Cerberus declared that it was prepared to either negotiate a reduced purchase price or pay to URI the $100 million reverse termination fee contemplated in the merger agreement. Cerberus did not claim that URI had suffered a material adverse change, as changes in credit market conditions were specifically carved out of the MAC clause in the merger agreement.
URI brought suit in the Delaware Court of Chancery seeking specific performance to compel Cerberus to complete the transaction. In response, Cerberus argued that the merger agreement precluded URI from seeking any remedy — including specific performance — other than the $100 million reverse termination fee payable by Cerberus.
Central to the arguments of each party was the interpretation of the remedy clauses in the merger agreement, which were ambiguously drafted. Although the agreement contained a broadly drafted specific performance clause, which supported URI’s position, the clause was made subject to another provision in the agreement which expressly limited URI’s remedies in connection with any breach of the agreement to the payment of the $100 million reverse termination fee.
In reviewing the merger agreement, the Delaware court concluded that both URI’s and Cerberus’s interpretations were reasonable, and ordered that a short trial be held to determine the common understanding of the parties with respect to the remedies under the merger agreement.
Following an in-depth review of the negotiation and drafting history of the merger agreement, the court concluded that the evidence did not lead to an obvious, objectively reasonable interpretation, and instead relied on an obscure rule of contract negotiation referred to as the “forthright negotiator principle.” Under this rule, a court may consider, and impose on both parties, the subjective understanding of one party where this understanding has been objectively manifested and is known or should be known by the other party, and the opposite is not true.
Applying this test, the Delaware court concluded that both parties had engaged in a “deeply flawed negotiation in which neither clearly and consistently communicated their client’s positions.” However, the court determined that Cerberus had clearly indicated to URI and its counsel its view that the transaction was an “option deal” that it could walk away from without any liability other than payment of a reverse termination fee.
By contrast, the court determined that URI had “categorically failed” to communicate its client’s understanding that it had preserved a right to specific performance. Because URI knew or ought to have known Cerberus’s understanding of its remedies, but failed to clarify its own contradictory position, its petition for specific performance was denied.
Shortly after the Delaware court released its decision in December 2007, URI terminated the merger agreement and Cerberus paid to URI the reverse termination fee.
The Genesco/Finish Line decision
On June 17, 2007, Finish Line and Genesco signed a merger agreement for Finish Line to acquire Genesco for approximately $1.5 billion. The merger agreement provided, among other things, that if the transaction was not closed by December 31, 2007, either party could terminate the transaction. Unlike the United Rentals/Cerberus merger agreement, the Genesco-Finish Line merger agreement did not contain a reverse termination fee and clearly stipulated that either party was entitled to an injunction to prevent breach of the agreement.
A few months after the merger agreement was signed, Genesco’s quarterly earnings fell well short of projections, and were the lowest they had been in ten years. Genesco obtained shareholder approval for the merger and demanded a closing, but UBS Loan Finance LLC, which was providing the acquisition financing, refused to proceed without additional financial information.
On September 24, 2007, Genesco filed suit in the Tennessee Chancery Court asking for the court to compel Finish Line and UBS to complete the acquisition before the December 31, 2007 termination date. Finish Line and UBS argued that they were not obligated to close the transaction either because Genesco had suffered a material adverse effect (MAE), or because Finish Line had failed to receive material information concerning Genesco’s financial performance in May of 2007 and updated financial projections prior to the signing of the merger agreement.
After a rapid trial (from December 10 to December 18, 2007, with memorandum and order issued on December 27, 2007), the Chancellor found that Genesco had suffered a material adverse effect (as defined in the merger agreement), but that the MAE was due to general economic conditions and Genesco’s decline in earnings was not disproportionate to its peers in the industry. This fell within one of the exceptions to the definition of the MAE in the merger agreement and consequently did not excuse performance by Finish Line.
The Chancellor also found that Finish Line and UBS had failed to prove that Genesco fraudulently induced Finish Line to enter into the agreement by not providing the material information regarding Genesco’s May 2007 results. The court found that Genesco’s May 2007 results had not been calculated at the time UBS requested them on behalf of Finish Line and that neither the law nor the parties’ agreements required Genesco or its advisor to provide the information voluntarily once it became available. The court stated plainly that “[t]he fault is with Finish Line’s advisor UBS for not requesting the information.”
The court ordered that all conditions to the merger agreement had been met and required Finish Line to specifically perform the terms of the merger agreement, including,
- closing the merger,
- using its reasonable best efforts to take all actions to consummate the merger, and
- using its reasonable best efforts to obtain financing.
The court, however, specifically did not rule on any issues as to the solvency of the merged entity. Although a letter attesting to the solvency of the merged entity was a pre-condition to the financing, a similar condition was not included in the merger agreement. UBS has filed a lawsuit in New York seeking to void its commitment letter, on the grounds that Finish Line will not be able to deliver the solvency certificate required to close the financing. As at the end of January, it was reported that Finish Line and UBS intended to appeal the Tennessee ruling.
Although their applicability in the Canadian context is uncertain, the Genesco and United Rentals cases are instructive. Companies engaging in M&A activity, as well as their financial and legal advisors, should bear in mind the following points:
The Genesco case represents an interesting development where specific performance, instead of damages, was awarded in a cash transaction. This represents a significant departure from previous case law. While injunctive relief is often specifically contemplated by the provisions of a merger agreement, it is rare for courts to award it where damages would be an adequate remedy.
Reverse termination fees
Sellers need to understand the implications of the reverse termination fee structure. In United Rentals, the reverse termination fee in effect turned the merger agreement into an “option” for the buyer to acquire the company — an option which Cerberus chose not to exercise.
Both the United Rentals and the Genesco cases highlight the importance of careful drafting of key provisions of merger agreements, particularly where these provisions are made to interact with other provisions in ways that attempt to limit or modify their scope. When drafting MAC clauses, acquirers should consider not only general economic conditions, but industry specific and even company specific conditions. Of course, relative bargaining power will determine whether the buyers’ or the sellers’ drafting prevails.
“Parties should also ensure that the closing conditions to acquisition financing are mirrored in the merger agreement. ”
Parties should also ensure that the closing conditions to acquisition financing are mirrored in the merger agreement to avoid a situation like the one in Genesco, where the solvency condition included under the financing arrangements was not included as a condition of the merger agreement.
“Forthright negotiator principle”
The “forthright negotiator principle” articulated by the Delaware court is probably restricted to an unusual fact situation where extrinsic evidence did not resolve a contractual ambiguity. As a general rule, Canadian law does not currently recognize the “good faith” requirement in the negotiation of agreements.
The Finish Line decision indicates that courts may not penalize a party for responding only to specific information requests and not providing updates where these have not been requested by the other party. This highlights the importance for buyers to continue their due diligence review process through to the signing of an acquisition agreement and beyond.
Garth M. Girvan is a senior partner in McCarthy Tétrault’s Toronto office who practises in the areas of corporate finance, mergers and acquisitions, corporate governance and financial institutions regulation. Vanessa Grant is a partner in McCarthy’s Toronto office whose practice focuses on corporate finance, mergers and acquisitions, and private equity. Sven O. Milelli is a partner in McCarthy’s Vancouver office who advises public and private corporations in a wide range of industries regarding mergers and acquisitions, public and private securities offerings and corporate governance matters.
Canada moves forward on domestic emissions trading market
By Kirsten Iler and Ruth Elnekave, Stikeman Elliott LLP Tag and save to del.icio.us
On March 10, 2008, the government of Canada released much anticipated details of its Regulatory Framework for Industrial Greenhouse Gas Emissions, part of its Turning the Corner climate change plan first announced in April 2007.
“Industry has expressed concern that the growing regulatory patchwork of federal and provincial schemes, if not harmonized, will result in increased costs, confusion, and decreased investment.”
The framework document and accompanying policy documents set out mandatory intensity-based (i.e., per unit of production) reduction targets, details of certain compliance mechanisms, and new measures to address Canada’s leading industrial greenhouse gas (GHG) emitting sectors: electricity and oil and gas. A significant aspect of the government’s announcement is its emphasis on carbon capture and storage (CCS) technology as a key solution to reduce emissions — not surprising in light of the $250 million for CCS announced in the government’s February Budget Plan.
Under the Framework, the government intends to establish a market price for carbon and set up a compliance-based emissions trading market. Sixteen major industrial sectors would be required to reduce their emissions intensity by 18% from 2006 levels by 2010, with 2% continuous improvement in each subsequent year. The government says it will reduce Canada’s GHG emissions by 20% (approximately 165 megatonnes (Mt)) from 2006 levels by 2020. These targets will not make Canada compliant with its obligations under the Kyoto Protocol.
The government plans to transition from an emission-intensity based target system to a fixed emissions cap system in the 2020-2025 period. It has indicated that in determining the level of the cap, particular consideration will be given to climate change-related regulatory developments in the U.S., with the aim of establishing a North America-wide emissions trading system.
In addition to emissions trading between regulated companies, the Framework also elaborates on some of the voluntary reduction compliance mechanisms available to meet the targets. These include:
Domestic offset system
Credits would be issued for incremental, real, verified domestic reductions or removals of GHG emissions. Functional details of the system, including verification of reductions and issuance and use of offset credits, are set out in the Framework. The government has also indicated that consideration would be given to reductions originating in the U.S. once the U.S. has a regulatory system in place and compliance-based cross-border emissions trading is feasible.
Credit for early action program
Companies that took verified early action to reduce emissions would be eligible for a one-time allocation of 15 Mt in bankable, tradable credits. In addition, firms with eligible reductions above that amount would be allocated credits based on each firm’s proportional contribution to the total emission reduction achieved. To qualify, reductions must have been the result of an incremental process change or facility improvement (i.e., they cannot have been the result of business as usual conditions).
Companies would be able to contribute to a fund that would invest in a range of clean technology development projects in exchange for credits that could initially be used to comply with up to 70% of their regulatory obligations. This contribution rate would decline through 2018, at which time this mechanism would be phased out and replaced by other measures, including internal abatement actions and carbon trading. Contributions to other funds that meet the necessary requirements could potentially also be recognized under this compliance mechanism (e.g., provincial funds).
Additions to the April 2007 framework include:
- Pre-certified investments: Companies would also have the compliance option of investing directly in pre-certified large-scale projects (e.g., CCS projects). As an added incentive for participation, firms in the oil sands, electricity, chemicals, fertilizers and petroleum refining sectors could be credited for their investments up to 100% of their regulatory obligation through 2018 (in contrast to the limited, declining contribution limit under the Technology Fund mechanism).
- Oil sands upgraders, in-situ plants (i.e., on-site soil remediation facilities) and coal-fired electricity plants that come into operation in 2012 or later would be obliged to comply with targets described as “tough” by the government, which will provide incentive for facilities to be built carbon-capture ready. These targets are expected to generate an additional 30 Mt in reductions in 2020.
- The electricity sector, Canada’s top emitting industrial sector, would face an 18% reduction target at the facility level and a task force will be established to work with the provinces and industry to explore ways to meet an additional 25-30 Mt reduction goal from the electricity sector by 2020.
The government calls the Framework “one of the toughest regulatory regimes in the world to cut GHG emissions,” but reaction has been mixed. Certain affected industries expressed cautious approval of the Framework, while federal opposition parties and environmental groups were critical of its use of intensity-based targets (rather than absolute reductions) and its emphasis on CCS technology rather than energy efficiency, or more proven technologies.
Ontario and Quebec expressed disappointment over the lack of recognition for companies that have taken early measures to cut emissions. Further, some said that provincial green plans and provincially-driven efforts to establish an inter-provincial cap-and-trade system (perhaps linked with the U.S.) would have a more immediate impact than the Framework.
Business and environmental groups alike have repeatedly called for a uniform approach to carbon regulation in Canada. Industry has expressed concern that the growing regulatory patchwork of federal and provincial schemes, if not harmonized, will result in increased costs, confusion, and decreased investment. While British Columbia, Quebec and Alberta already have regulatory schemes in place, the draft federal GHG regulations are expected in fall 2008. The final federal regulations are expected to be released in fall 2009, with the GHG provisions of the regulations coming into force on January 1, 2010.
However, experts predict that the new U.S. administration will establish a national cap-and-trade system and that Canada will be forced to follow suit. Accordingly, while the government is moving forward with its plans, the state of carbon regulation in Canada remains in flux.
Kirsten Iler is an associate practising in the Real Estate Group of Stikeman Elliott’s Toronto office. Ruth Elnekave is an articling student with the Toronto office of Stikeman Elliott.
PIPEDA review: the government's response to the Commons Committee report
Personal Information Protection and Electronic Documents Act (PIPEDA)
In mid-October 2007, Industry Canada released the government’s response to the report of the House of Commons Standing Committee on Access to Information, Privacy and Ethics resulting from its review of the Personal Information Protection and Electronic Documents Act (PIPEDA), presumably prepared with significant input from the Electronic Commerce Branch of Industry Canada, which has legislative responsibility for PIPEDA.
While the government responded directly to the Committee’s recommendations, it is reasonable to believe that, in preparing the document, Industry Canada had reference to submissions made by stakeholders in advance of the Committee’s deliberations, including the CBA Privacy Law Section’s two submissions in August and December 2005. In fact, notwithstanding that the response indicated that the government specifically declined to adopt certain of the CBA’s recommendations, the government’s analysis of a number of issues addressed in those submissions are reflected in its response.
Read the full article in the February 2008 issue of the CBA's Privacy Pages.
The implied term of good faith and fair dealing: recent developments
By Shannon Kathleen O’Byrne Tag and save to del.icio.us
This article assists common law practitioners to predict when good faith obligations are owed in the context of contractual performance by organizing recent case law. The article concludes by advocating for express recognition of a common law rule that would mandate good faith as the governing, default standard out of which parties must expressly contract.
“Alleging breach of terms going to good faith and fair dealing is an increasingly common feature of modern pleadings, particularly in the area of franchise and construction contracts.”
Alleging breach of terms going to good faith and fair dealing is an increasingly common feature of modern pleadings, particularly in the area of franchise and construction contracts. Even a cursory review of the case law demonstrates that good faith is exerting a growing influence in other areas, including employment and insurance.
There is also every argument that express recognition of good faith has improved the law because, as noted by Meehan J. of the Ontario Superior Court, it brings simplicity and clarity. But simultaneously, as the number of cases in the area grows, practitioners can find it challenging to advise clients on the occasion and scope of this obligation.
Read the complete article from the Canadian Bar Review (Vol. 86, No. 2, 2007).