The United States private M&A market features a very well-developed level of market-practice for private M&A transactions, with a relatively large sample size of publicly available transactions and a universe of sophisticated buyers and sellers. In particular, private equity sponsors are active as both buyers and sellers, and therefore inform overall market development on key issues relating to deal/price certainty and the post-closing obligations/liabilities of the seller. Developments in the U.S. M&A market continue to influence Canadian M&A, particularly in cross-border transactions. We expect this trend will continue in 2013 and will include:
- The increased presence of "materiality scrapes" in which all "materiality" qualifications (including MAE) to a seller's representations are removed for purposes of whether a breach has occurred and for determining damages – thereby making the deductible the materiality threshold. We have also seen "knowledge scrapes" on occasion.
- In a cautious business environment, the continued use of earnouts, earn-ins and other mechanisms to determine contingent values (such as contingent value rights and structured equity).
- In a few transactions involving the exit by mid-market private equity investors, the "merger" (termination) on closing of most representations and warranties. This leaves the buyer with little, if any, post-closing rights to indemnity. Typically any such termination of representations and warranties on closing only occurred with larger PE exits.
- In the context of privately-negotiated, non-auction sale transactions, buyers are able to negotiate more conditionality, including in some cases very broad financing and due diligence outs.
- In this more buyer-friendly Canadian M&A market, buyers continue to chip away at survival and indemnity limitations by expanding the scope of "seller fundamental representations and warranties" to include such matters as employees, employee benefits and related-party transactions.
- Continued negotiations over sandbagging and anti-sandbagging provisions. Historically Canadian M&A agreements almost exclusively provided for the clear right of a buyer to seek indemnification for breach of warranty, irrespective of pre-closing knowledge of such breach. The Canadian response has been varied, including the agreement being silent on the issue; the agreement containing a sandbagging provision but a warranty of the buyer to the effect it is not aware of any material breaches based on demonstrable evidence; and, less frequently, an anti-sandbagging clause.
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