International Promissory Note Texas Mexico - DOC

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TO:                   International M&A Subcommittee

DATE:                 January 10, 2007

RE:                   Report on October 20, 2006 Meeting (Dallas, Texas)

       The International M&A Subcommittee met from 9 a.m. to 11 a.m. on Friday, October 20,
2006 in connection with the Negotiated Acquisition Committee’s stand-alone meeting at the
Adolphus Hotel in Dallas, Texas.

Remarks by Income Business Law Section Chair

        The meeting began with remarks by the future Chairman of the Business Law Section,
Charles E. McCallum of the law firm of Warner, Norcross & Judd LLP. He said that the
Business Law Section already has a significant international membership and that an increased
international focus would be a principal emphasis of his chairmanship. He further praised the
work of our Subcommittee and of the Negotiated Acquisitions Committee in general.

Presentation on M&A in Germany

        The meeting continued with an informative discussion of current trends in M&A
transactions in Germany by Robert Wethmar of the Hamburg, Germany office of
TaylorWessing. A copy of the PowerPoint slides for Robert’s presentation (“Doing M&A Deals
in Germany”) accompanies this report and has also been posted on the Subcommittee’s website.

Future Programs

        The Subcommittee then turned to a discussion of possible future programs, either for
general presentation at future ABA meetings for presentation or as the Committee Forum portion
of future Negotiated Acquisitions Committee meetings. John Leopold suggested that we develop
programs based on the Subcommittee’s recent or imminent publications, including those relating
to the international stock purchase agreement project and the international due diligence project.
We also discussed ideas for programs relating to international LBO and MBO transactions and a
program on international tax principles important to cross-border M&A transactions. Freek
Jonkhart suggested that we consider a program on controlled auction sales of companies in the
international context. Rick Silberstein and Phillip Risbjørn agreed to take the lead in developing
the international LBO program idea. Peter Haver agreed to take the lead in organizing a program
on international tax principles for M&A lawyers, with the idea that it would be aimed at broad
concepts that international M&A lawyers should be familiar with, rather than being a program
tailored for tax specialists.

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Non-U.S. Deal Points Market Study

        Freek Jonkhart then described the project he is leading for the Market Trends
Subcommittee to survey international business combination agreements to develop a market
trends summary and analysis similar to the very successful market trends projects that have been
conducted for U.S. public and private transactions by the Market Trends Subcommittee. He said
it had been tentatively decided that the agreements to be surveyed would be those for
transactions involving €20 million or more. Members of our Subcommittee who would like to
work on this project or who can contribute agreements for analysis as part of the project should
contact Freek directly. His contact details are available on the Subcommittee’s website.

International Model Asset Purchase Agreement

        Subcommittee Co-Chair Stan Freedman then led a discussion of the status and proposed
work plan for preparation of the international version of the Model Asset Purchase Agreement,
which is one of our Subcommittee’s principal current projects. After discussion of the assumed
fact pattern on which the agreement will be based, it was agreed that it would be useful to
re-circulate the draft statement of the fact pattern that had previously been prepared by Daniel
Rosenberg and Stan and tentatively agreed upon by the Subcommittee. A copy of that draft of
the fact pattern is enclosed with this report.

        Stan then described that the plan is that work on the agreement will be allocated to
subgroups for drafting purposes. Each subgroup will be responsible for drafting a specific
portion of the agreement, and considering the relevant legal and business points that are most
commonly encountered in the respective portions of cross border acquisition agreements. The
drafting groups will then make presentations at Subcommittee meetings of their portion of the
agreement, including a summary of key business and legal points, to form the basis for group
discussion by the Subcommittee. The drafting groups will then take the results of Subcommittee
discussion, revise their drafts as appropriate and develop commentary for further review by the

        Stan then asked for volunteers for the drafting groups. Jim Walther, Jay Lefton and Rick
Silberstein volunteered for the first section of the agreement, setting forth the basic terms of the
transaction. Frank Picciola volunteered to prepare the section dealing with arbitration and
related provisions. Freek Jonkhart and Franziska Ruf volunteered to work on the financial
statement representations section. Additional volunteers are needed for these sections and for the
remainder of the model agreement. To facilitate organizing drafting teams, an outline of the
entire agreement, showing the proposed allocation of drafting teams, will be circulated to the
Subcommittee in advance of our next meeting.

Current Developments Discussion

        The meeting concluded with a general discussion by Subcommittee members regarding
legal developments in their jurisdictions relevant to M&A practice and particular issues they
have encountered. Among others:

                 Mireille Fontaine of McCarthy Tétrault (Montreal, Canada office) described stock
         option repricing developments in Canada;

28697234.1 42000548                              2
                 Rick Silberstein of Góme-Acebo & Pombo (Barcelona, Spain) summarized
         legislative developments in Spain of interest to M&A practitioners;

                 Henry Lesser of DLA Piper, USA (Palo Alto, California office) summarized
         recent amendments to the US Securities and Exchange Commission’s best price rule
         (Rule 14d-10(a)(2)) intended to clarify that bona fide employment compensation
         payments will not be considered tender offer consideration that would require increasing
         the price paid to all tendering stockholders; and

                 Nick Dietrich of Gowlings (Toronto, Canada office) reported on the Sears
         Holdings Corp. / Sears Canada Inc. take over contest involving, among other interesting
         points, an important issue under the “collateral benefits” rule (an analogue to the US
         “best price” rule for tender offers) in the Ontario Securities Act.

       Brief summaries of these topics are enclosed with this report and may also be found on
the Subcommittee’s website.

       Our next meeting will be held in connection with the ABA Business Law Section’s
Spring Meeting in Washington, D.C., March 15-18, 2007. We expect to have conference
telephone arrangements for those who will not be able to attend in person. Specific meeting
information, including time, location and agenda, will be sent to members by email
approximately two weeks before the Spring Meeting.

                                                     Daniel P. Rosenberg
                                                     James R. Walther

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                                                                               V4 March 2004




The following facts are assumed as background for the Model Agreement:

Seller is a multinational [privately-held] corporation based outside and incorporated
outside the US. It is the parent company of a group which operates a number of
divisions in multiple non-US jurisdictions.

Buyer is a privately-held US corporation which, through its own subsidiaries
incorporated or to be incorporated in the relevant local jurisdictions, intends to purchase
one of Seller's multiple divisions. In each case, the local operations of the division to be
acquired are held, alongside the operations of the divisions to be retained by Seller,
within wholly-owned subsidiaries of Seller incorporated or to be incorporated in the
relevant jurisdiction.

However the individual subsidiaries of Buyer and Seller are not to be parties to the
Model Agreement. Instead Seller will agree to cause Seller's subsidiaries to transfer
the relevant sale assets to Buyer (or as it may nominate) and that they will take all other
action required of them under the Model Agreement, in each case before, at and after

Buyer and its subsidiaries will acquire substantially all of the operating assets of the
relevant division as an ongoing business, which Buyer intends to continue to operate
after closing. Since it will take Buyer some time to integrate the business into its own
operations, Buyer will need to utilize and share some of Seller’s premises, facilities,
equipment and personnel until the transition can be completed.

The stock held by Seller in its subsidiaries will be excluded from the transaction,
together with cash in the bank and cash equivalents.

The business is conducted from a number of sites, some of which are leased and some
of which are owned by Seller and its subsidiaries. In most cases the sites are used only
by the division being acquired, but in some cases the relevant division occupies merely
a small part of the relevant site, the remainder of which is occupied by the divisions to
be retained by Seller and its subsidiaries.

Only certain specified liabilities of the division being acquired will be assumed by Buyer
at closing, including the following: (1) trade accounts payable reflected in interim
financial statements or incurred after the date of the interim financial statements in the
ordinary course of business; (2) liabilities to customers for outstanding orders; (3)

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liabilities to customers under written warranty agreements; (4) liabilities to third parties
under specifically identified contracts to be assumed by Buyer; and (5) other disclosed
ongoing liabilities of the business. Buyer's position is that it will not assume any other
liabilities of Seller, including the existing bank debt, environmental matters, tax liabilities,
undisclosed product liability claims and other undisclosed liabilities.

Seller and its subsidiaries have granted security interests in substantially all of their
assets as collateral for Seller's group credit facilities. These interests are to be released
on or before closing from the assets to be acquired.

A number of key contracts are not assignable without the consent of the relevant third
parties, who are unrelated.

In certain jurisdictions, Buyer will purchase the division's accounts receivable at face
value, less reserves, with Seller indemnifying Buyer for any losses on accounts
receivable exceeding reserves that are not collected. In other jurisdictions (particularly
where there are sizeable transfer taxes on sales of receivables) Buyer will not acquire
accounts receivable but instead will agree to collect them on behalf of Seller and its
subsidiaries, in return for a percentage fee.

The purchase price will be a combination of cash and a promissory note. Buyer will
have the right to offset against amounts due under the promissory note any claims for
indemnification. A portion of the purchase price will be held in escrow by a third party to
secure Seller's indemnification obligations. No allocation of the purchase price as
between Seller's subsidiaries has been discussed.

The purchase price will be based on the balance sheet presented by Seller to Buyer
reflecting the working capital of the relevant division and the price is to be adjusted after
closing to reflect changes in the working capital of the relevant division as of closing.

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               Open-mike session at Stand-Alone Meeting in Dallas

                                    October 2006

The following materials have been kindly provided by our Subcommittee members:

   Mireille Fontaine of McCarthy Tétrault, Canada

   Richard Silberstein of Gómez-Acebo & Pombo, Spain

   Henry Lesser of DLA Piper, USA

   Nicholas Dietrich of Gowlings, Canada

   M Jorge Yanez of Barrera, Siqueiros y Torres Landa, S.C., Mexico

and relate to the short presentations they made at our recent meeting in Dallas.

Daniel P Rosenberg
James R Walther

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What you need to know before any repricing of

The business press has recently reported that, in the United States, the Securities and Exchange
Commission has been investigating a number of Fortune 500 companies for having improperly
backdated options that had been issued to employees or insiders, namely directors and senior officers.

In its Staff Notice 51-320 – Options Backdating, the Canadian Securities Administrators noted that
historically different stock exchange and securities regulatory requirements in Canada may have
reduced the opportunity for backdating or timing of options. While backdating (to take advantage of a
lower stock price at an earlier time) is, of course, improper, repricing of options is an entirely different
exercise, and when done properly, can offer advantages to an issuer.

Specifically, issuers who have experienced a devaluation of their listed shares may have an interest in
repricing their outstanding options to better align the interests of optionholders with those of

For issuers listed on the Toronto Stock Exchange (TSX), the rules applicable to a repricing of options
will vary depending on whether the beneficiaries of the options are employees or insiders.

For options held by employees who are not insiders, the TSX will generally allow a repricing of options
at the market price of the underlying listed shares, subject to the terms and conditions of the stock
option plan governing the options.

For options held by insiders, the TSX will generally allow a repricing of options at the market price of
the underlying listed shares but only with disinterested shareholder approval (i.e., excluding the vote
of shares held by the insiders benefiting from the repricing). If the issuer cancels options held by
insiders and then re-grants them under different terms (including a lower exercise price), the TSX will
consider this a repricing and will require disinterested shareholder approval (unless the re-grant occurs
at least three months after the related cancellation).

The TSX advised in June 2006 that issuers have until June 30, 2007, to adopt proper amendment
procedures in their stock option plans (including with respect to any potential repricing). After such
date, issuers who have general amendment provisions in their plans will no longer be able to make any
amendments (including any repricing) without, in all cases, disinterested shareholder approval.

We reported1 more extensively on the TSX requirement for amendments of stock option plans in our
previous issue of CoCounsel: Business Law Quarterly.


Patrick Boucher in Montreal at

 Link to Daryl Mclean’s article entitled TSX to End Grace Period for Amendments to Option Plans at

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                                                                                                     Avda. Diagonal, 407 bis - 08008 Barcelona
                                                                                                     Tel.: (34) 93 415 74 00
                                                                                                     Fax: (34) 93 415 84 00

Legislative developments in Spain of interest to the M&A practitioner

November 2006

Catalan Civil Code

The peculiarities of local legislation will have to be considered when issues of rights in rem
arise. Certain liens, similar to workmen’s liens, may exist even though they will not appear
on the balance sheet. Due diligence needs to take this into account and the appropriate
reps and warrants need to be given.

The initial analysis of the procedure for executing pledges is that it is much clearer in
Catalunya than in the rest of Spain. This should create more confidence in the guaranty
created by the pledge.

Another thing to keep in mind is that to pledge future streams of income the debtor needs to
be notified on constitution of the pledge. Some creditors may not want to do this.

Draft Law to Implement Directive 2004/25 on Takeover Bids.

The draft, published in mid October, several months behind schedule is set to enter into
force this coming Spring.

A number of novelties for Spanish quoted companies are introduced.

The system of partial obligatory bids of 10% when reaching interests of between 25 and
50% is eliminated and substituted for a mandatory bid for 100% after acquiring 30% or
more of the voting rights. No obligatory bid is required if upon reaching the 30% plateau
there are other shareholders with equal or greater interests.

There is a sunset provision for those holding between 30 and 50% when the new law comes
into force. No obligatory bid is required unless they acquire in one or several transactions
5% or more in any one year or when they obtain voting rights of greater than 50%.

For the first time in Spain squeeze out rights are established. Forced sales may be carried
out when there has been an offer for 100% of the share capital and it ahs been accepted by
owners of securities representing 90% of the voting rights different from those already
owned by the offeror. Minority shareholders also have the right to put in the same
conditions. The procedure and requirements for the obligatory put and call will be set out in
regulations to come. As it stands the price for either operation is to be “fair”.

                        Madrid ● Barcelona ● Bilbao ● Las Palmas de Gran Canaria ● Málaga ● Sevilla ● Valencia ● Vigo ● Bruselas

                                    GÓMEZ-ACEBO & POMBO Abogados, S.L. • Domicilio Social: Castellana, 216 • 28046 Madrid
         Registro Mercantil de Madrid • Tomo 20788 • Libro 0 • Folio 180 • Sección 8 • Hoja M 368387 • Inscripción 1 • N.I.F. B81089328 • V.A.T.ES-B81089328
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Frustrating actions are permitted if approved in advance by the shareholders. The meeting
may be called on short notice, 15 days. Once again future regulation will determine the
period and terms to be applied to frustrating actions.

Spain will apparently exercise its option to exempt companies from applying the requirement
that the shareholders approve frustrating actions when the offer is launched by a company
not subject to such rules or the equivalent. To exercise this right companies must have
approved the resolution no more than eighteen months prior to the bid being made public.

Spain has opted out of article 11 of the directive. Companies may (but are not required,
thus the opt out) decide to apply the following neutralization or breakthrough measures:

Make ineffective, during the period for accepting the offer, the restrictions on the transfer of
securities in shareholders agreements.

Make ineffective, at the shareholders meetings, deliberating over possible defense measures
such as restrictions on voting rights provided in the by-laws of the target company or in the
shareholder agreements.

Make ineffective the restrictions previously mentioned when the offeror has reached 75% of
the share capital that may vote.

If these restrictions are adopted they must be communicated to the Spanish Stock Exchange
Authorities, and the stock exchange authorities of other countries where the securities of the
company may be traded or it has applied for trading.

If the regulation required to make operative many parts of the law does not come into force
when the law does (the most likely scenario) then what should happen is that current
regulations will continue to be applicable to the extent not provided in the new law .

Rick Silberstein

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US Delaware Merger, Imported to Canada
November 4, 2006

In a recent acquisition of a Canadian corporation which held US assets, the ―plan of arrangement‖
provisions of the Canadian corporate statute were broadened to include a Delaware-style merger.

In particular, the target, Fairmont Hotels & Resorts Inc. (―Fairmont‖), proposed to amalgamate
Canadian corporations —a parent and a few subsidiaries— before the acquisition. One of the
subsidiaries owned US real property interests. A transfer of such property was subject to US tax under
the Foreign Investment in Real Property Tax Act of 1980 (―FIRPTA‖). However, the FIRPTA rules
exempt from taxation certain transactions, including upstream mergers that qualify under section 332
of the US Internal Revenue Code of 1986, as amended (the ―Code‖).

The issue was whether a Canadian amalgamation of a parent and its subsidiary qualified as an upstream
merger under the Code. The language that is used in Canadian law to describe a Canadian
amalgamation differs from that used in US law to describe a merger under most US state laws. The
principal difference is that under Canadian law, the two combining entities lose their separate legal
existence, while continuing within the amalgamated corporation. The Canadian amalgamation is
described as ―two rivers flowing together‖. On the other hand, under the Delaware statute (the most
common statute), the separate legal existence of one corporation ceases, while the other corporation
survives the merger.

In order to clarify and obtain certainty that the combination of a parent and its subsidiary qualified as
an upstream merger, Fairmont applied to the Ontario Superior Court of Justice (the ―Court‖) for a
determination that an upstream merger could be effected pursuant to the ―plan of arrangement‖
provisions of the Canada Business Corporations Act, (the ―CBCA‖) rather than the amalgamation
provisions of the CBCA. On April 4, 2006, the Court granted an order approving an arrangement which
has the effect of replicating a Delaware-type merger of a parent and its subsidiary, on the basis that
the upstream merger was a fundamental change which could not be otherwise achieved under the

Thus the plan of arrangement was approved whereby a parent and its subsidiaries merged with the
same effect as if they were amalgamated under sections 184 and 186 of the CBCA, except that the
separate legal existence of the parent did not cease and the parent survived the merger. The order of
the Court emphasized that (i) the separate legal existence of each subsidiary ceased without such
subsidiary being liquidated or wound-up, (ii) all the corporations continued as one corporation and (iii)
the property of each subsidiary became the property of the parent.

As a result of this broadening of the use of a plan of arrangement, significant uncertainty as to whether
the FIRPTA rules resulted in tax was eliminated. In addition, there may be other circumstances in
which it would be preferable to have a merger of this type.

Gabrielle Richards
McCarthy Tétrault LLP
Box 48, Suite 4700, TD Bank Tower
Toronto, Ontario, Canada M5K 1E6
T: 416-601-7766
F: 416-868-0673

28697234.1 42000548
                               SEC AMENDS BEST-PRICE RULE

The best-price rule requires that the consideration paid to any security holder pursuant to a
tender offer is the highest consideration paid for such security to any other holder during the
tender offer.1 The severe remedy for a violation of the best-price rule is to pay all security
holders an equivalent amount in respect of all shares tendered.

Since the rule’s adoption in 1986, courts have applied divergent standards when considering
whether payments to security holders under compensatory arrangements constitute additional
consideration for best-price rule purposes. The resultant uncertainties and potential risk of
liability have led M&A practitioners to avoid structuring transactions as tender offers if an
alternative structure, such as a merger, is available. The SEC hopes to eliminate the
disincentives to structuring acquisitions as tender offers by making clear that the best-price rule
does not apply to compensatory arrangements and that the analysis for best-price rule purposes
should turn on whether the consideration was paid for securities tendered into a tender offer,
irrespective of timing of the arrangement.

On November 1, 2006, the SEC issued Release No. 34-54684 in which the staff amended the
tender offer best-price rule to exempt “employment compensation, severance or other
employment benefit arrangements” with any security holder from the scope of the rule.
Amounts payable must be as compensation for past services performed, future services to be
performed, or future services to be refrained from performing by the security holder. Amounts
payable may not be calculated based on the number of securities tendered or to be tendered by
the security holder.

The new amendments also provide a non-exclusive safe harbor for such arrangements if
approved as an employment compensation, severance or other employment benefit
arrangement by a committee of independent directors. The arrangement may be approved by
either the subject company or, if the bidder is party to the arrangement, the bidder. If the bidder
or subject company, as applicable, is a foreign private issuer, any or all of the directors or any
committee authorized to approve arrangements under the laws or regulations of the home
country may approve the arrangement so long as such directors are independent.

A determination by the board of directors that the directors who approve an arrangement are
independent will satisfy the independence requirements of the safe harbor. If the bidder or
subject company, as applicable, is a foreign private issuer, the bidder or subject company
should apply the independence requirements of (i) an exchange or quotation system that has
independence requirements for compensation committee members that have been approved by
the SEC or (ii) the laws of the home country.

John Gilluly
Austin, TX

    Exchange Act Rules 13e-4(f)(8) and 14d-10(a).

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                                    Prepared by Nicholas Dietrich
                                   Partner, Gowlings Toronto Office

         For the time being, Sears Holdings Corp. (controlled by Edward Lampert) has been foiled
in its insider bid for Sears Canada Inc., as 62% of eligible minority shareholders opposed the
“take-private” transaction in a shareholder vote held on November 14, 2006.

        “Eligible minority shareholders” is the key issue here since the matter was litigated both
before the Securities Commission and in the Divisional Court of the Ontario Superior Court of
Justice. It would appear that the saga has now ended as Sears Holdings’ leave to appeal the
Divisional Court’s decision has been denied. The takeover battle has focussed attention on the
“collateral benefits” rule under subsection 97(2) of the Ontario Securities Act, a concept whose
flip side (identical consideration) is similar to the “best price rule” under the U.S. Securities
Exchange Act, as very recently modified by the SEC for employment compensation and tender
offer consideration. Interestingly, the U.S. best price rule (equal treatment of security holders)
applies only to tender offers, not one-step mergers, a distinction not observed in Canada.
However, the policy purpose behind the concept in both Canada and the U.S. is arguably to
prevent bidders from discriminating amongst target security holders.

        Briefly, the facts of the Sears case are as follows. At the time of announcing its bid
intention in late 2005, Sears Holdings held approximately 54% of Sears Canada. The structure
of the bid, as is customary in Canada, anticipated a possible second step compulsory acquisition
(going-private) transaction requiring “majority of minority” approval under applicable securities
law rules (Rule 61-501) and the bid accordingly contained the customary minimum tender
condition. Also customary was Sears Canada’s response to the bid: it formed a special
committee of independent directors with independent financial advisors to provide a formal
valuation. Sears Canada’s subsequent application to the Securities Commission to be exempted
from including a formal valuation in its bid circular was denied. Sears Holdings then announced
it was dropping its minimum tender condition and this was followed by the special committee’s
financial advisor opining that the bid was inadequate from a financial point of view.

        Sears Holdings subsequently extended its bid deadline and announced that if it did not
acquire a majority of minority of the Sears Canada shares, it would act to eliminate the quarterly
dividends historically paid by Sears Canada. At about the same time, Sears Holdings entered
into arrangements with a key financial institution holding Sears Canada stock, whose shares,
along with the shares of a previous shareholder who had agreed to be locked up, and those of two
additional shareholders who subsequently agreed to support the bid under an increased offer,
assured Sears Holdings of the required majority to effect a going-private consolidation or plan of
arrangement transaction.

Montréal      Ottawa      Kanata   Toronto   Hamilton   Waterloo Region   Calgary   Vancouver   Moscow
28697234.1 42000548

        Key to the support arrangements with the bank shareholders who agreed to support the
bid was an agreement by Sears Holdings to extend its bid to a specified date and to delay the
timing of its second step transaction, in order to accommodate specific tax treatment to the banks
(avoiding the “stop loss” provisions of the Income Tax Act). Dissident hedge fund holders of
Sears Canada stock applied to the Securities Commission on a number of fronts, including the
allegedly coercive and abusive actions of Sears Canada, inadequate disclosure and, most
importantly for our purposes, the granting of collateral benefits to the banks by structuring the
bid to result in specific tax benefits to them. Sears Holdings responded by arguing that all
shareholders were treated the same as to the timing of the bid and all received the same
consideration, so no foul.

        In the result, the Securities Commission agreed with the dissidents and cease traded the
bid until additional disclosure was made by Sears Holdings, including that the votes attached to
the shares of the banks could not be counted in the majority of minority approval required in a
going-private transaction under Rule 61-501. Sears Holdings appealed.

        Showing strong deference to the Securities Commission as a specialized tribunal with a
wide discretion to protect the public interest in matters falling within its expertise, the Divisional
Court examined what constitutes a “collateral benefit” or a “consideration of greater value”
under section 97(2) of the Ontario Securities Act, and concluded that the Securities Commission
was reasonable in its determination that the granting of the opportunity to the banks to negotiate
the terms of an amendment to the bid to guarantee that they would avoid being subject to the
“stop loss” provisions constituted a collateral benefit even though the amendments might equally
benefit other shareholders.

        The immediate take-away for bidders from the Divisional Court’s affirmation of the
decision of the Securities Commission is that when a bid is altered after launch to accommodate
the specific interests of shareholders entering into support or lock up arrangements with the
bidder, such an accommodation will be considered a collateral benefit to those shareholders and
their shares cannot be counted in the majority of minority approval required for a disinterested
endorsement of a compulsory acquisition transaction associated with an insider bid.

Montréal      Ottawa   Kanata   Toronto    Hamilton     Waterloo Region   Calgary   Vancouver   Moscow
28697234.1 42000548
              The Convergence Decree; A New Era of Telecomm Services in Mexico

    I.        Background

After an intense debate within the Telecommunications regulatory agencies of the Mexican
Government (together with the Federal Competition Commission, the Mexican antitrust agency)
and the private sector, in October 2, 2006, the Department of Communications and
Transportation (“SCT”, for its initials in Spanish) published the so-called “Convergence
Decree”. The Convergence Decree provides for the terms and conditions to authorize (i)
concessionaires of television and/or audio on demand (either cable or wireless, including
satellite; “TV Concessionaires”) to provide fixed local voice services (“voice services”), and (ii)
concessionaires of voice services (either cable or wireless; “Local Concessionaires”) to provide
television and/or audio services on demand (“video services”).

    II.       General Overview of the Convergence Decree.

       II.1. In order for TV and Local Concessionaires (jointly referred as “Concessionaires”)
to provide the additional services (either voice or video services) pursuant to the Convergence
Decree, they should fulfil the following fast track requirements and procedure:

                  1.      Submit before the SCT a boilerplate application (and pay the
         corresponding application process fees). The Concessionaires shall be in compliance of all
         the obligations provided in their licenses.
                  2.      The Concessionaires shall state under oath their express consent with the
         terms of the Convergence Decree, the Master Interconnection Agreement and the Number
         Portability Resolution2.
                  3.      If determined by COFETEL (by the beginning of January, 2007 and
         following certain proceeding), the Concessionaires shall pay a consideration to the
         Government for the authorization to provide the additional services.
                  4.      If the Concessionaires will use radiofrequency bands (previously licensed)
         for the provision of the additional services, they shall notify the SCT the amount of
         Megahertz to be used for such purposes (as long as the provision of the original services is
         not affected) and shall pay the applicable consideration to the Government.
                  5.      In certain cases, like the aggregation of local services within the same area
         by the same Concessionaire, the Concessionaire shall secure a favourable opinion from the
         Federal Competition Commission.

        II.2. The Local Concessionaires that, according to their original license, are forbidden
to provide video services (or broadcasting services), shall comply with the following specific
requirements (these are the so-called “Restricted Concessionaires”, including Telmex, which is
the incumbent/dominant carrier):

 . The Federal Telecommunications Commission (“COFETEL”) will publish the Master Interconnection Agreement
and the Number Portability Resolution by mid-December, 2006. It is the first time in Mexico that the Government
will issue an interconnection agreement model that all carriers shall execute.

28697234.1 42000548
                 1.     Restricted Concessionaires shall secure a favourable opinion from
       COFETEL regarding different conditions in connection with: (i) interconnection and
       interoperability with TV Concessionaires within certain periods; (ii) implementation of
       number portability within certain period; (iii) compliance with their obligations under their
       original licenses, and (iv) if determined by COFETEL (by mid-December, 2006 and
       following a complex proceeding), payment of a consideration to the Government for the
       authorization to provide video services.
                 2.     Restricted Concessionaires shall amend the original restriction provided in
       their licenses and therefore shall request such amendment to the SCT, considering that they
       should: (i) previously, have fulfilled different conditions basically related to the items
       referred in the previous paragraph; (ii) attach to the favourable opinion issued by
       COFETEL, and (iii) submit the boilerplate application and pay the fees for the analysis of
       the same.

        II.3. The Convergence Decree establishes that COFETEL shall determine (before
April, 2007) the consideration that other concessionaires different than the Concessionaires (i.e.,
paging, trunking, mobile services, and narrow band personal communication services) shall pay
in order for them to be able to provide additional voice, video and data services.

    III.     Conclusions.

         1.       Although finally the Government issued the terms and conditions to move
forward with the implementation of the triple play in Mexico, there are some drawbacks
identified in the Convergence Decree.
         2.       The mandatory Interconnection Agreement to be issued by COFETEL will be
drafted by a Committee, in which not only COFETEL participates, but also different
concessionaires and other organizations. Thus, each party may try to protect its interests and the
result of the agreement could not be the best for all or part of the telecommunications sector.
         3.       It is paradoxical that only economic agents holding “two or more public
network licenses” must secure a favourable antitrust consent to provide additional services and
the Restricted Concessionaires (i.e., Telmex) are not obligated to obtain such consent.
         4.       From a legal, regulatory, economic and antitrust perspective, it may be
considered a big mistake to allow the possibility that Telmex could provide video services, due
to its dominance and market power (could affect, distort and restrict competition in the market).
         5.       Convergence has been limited only to TV and Local Concessionaires and
implemented in various steps. The fact that convergence is not applicable to all the
telecommunications industry and lacks a comprehensive and consistent implementation may
cause severe problems in the market (with antitrust ramifications).

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Description: International Promissory Note Texas Mexico document sample