Canada: Immigration Considerations In Cross-border M&A Of Existing Canadian Companies

When acquiring or merging with a Canadian-based company, whether or not the target company currently employs foreign workers can trigger additional considerations during the due diligence phase.

Depending on the proposed transaction's structure, a change of ownership or ownership structure may interrupt and/or invalidate work permits of foreign workers employed by the Canadian company being purchased. If invalidated, the applicable work permits could need to be re-applied for and re-issued prior to any further work being completed in Canada by the impacted employee(s).

For the new employers, this can cause disruptions to operations or result in the loss of valuable employees. Such consequences are usually not anticipated or intended when the transaction was initially greenlit. In order to avoid these unintended consequences, MLT Aikins lawyers have found that it is prudent for a potential purchaser to request information on a company's foreign workers during the due diligence phase of the acquisition or merger.

The various types of work permits, conditions of the work permits and corporate structure of the pre- and post-purchase companies can dictate different responsibilities and obligations to foreign workers. Requesting the right information early on can assist a purchaser in determining:

• Whether a foreign worker's work permit will transfer to the new company;
• Obligations and responsibilities to the foreign worker if the work permit does transfer;
• Options for retaining the foreign worker if the work permit does not transfer; and,
• Reporting and compliance considerations for post-closure employees.

When considering merging or acquiring a Canadian company, the Mergers & Acquisitions and Immigration teams at MLT Aikins can aid in ensuring that all immigration considerations are reviewed during the due diligence phase and make appropriate arrangements for foreign workers employed by the purchased company.

More details

There are a number of important issues to consider when operating a business across borders (for our purposes, Canada and the United States). These issues come into sharp focus in the context of an M&A transaction, in particular as it relates to the proposed structure and due diligence process.

The process of evaluating an existing Canadian company as a potential target from an existing liabilities perspective, or assessing the synergies for a potential merger of two or more cross-border companies with Canadian operations, involves some unique considerations by virtue of the cross-border element.

Among other items, there are critical considerations from an immigration perspective for prudent purchasers and their advisors to keep in mind when evaluating an existing Canadian company for a cross-border acquisition. We discuss certain of these considerations below at high level with a view to improving issue identification and "asking the right questions" in the M&A and immigration context.

When acquiring or merging with a Canadian company

In order for most foreign nationals to legally work in Canada, they require a work permit from Immigration, Refugees and Citizenship Canada (IRCC). The nature and type of a permit, as well as the terms and conditions of employment afforded may vary significantly for each permit category.

The different categories of work permits include an open work permit, an employer-sponsored closed work permit, other closed work permit or even a student-based work permit (called a post-graduate work permit). All of these permit types may be treated differently when the current employer company is bought or merges with another company.

How soon is too soon to request information on foreign workers?

When cross-border companies are conducting due diligence in a commercial transaction, it is imperative to note and review any foreign workers currently employed by the acquired or merged company in Canada as soon as possible. Specifically, it is advisable to request:

• A list of all current employees;
• A list of all foreign workers employed by the target company in the past six years;
• Copies of all work permits used to undertake work with the target company by foreign workers;
• Copies of any materials used to support work permit applications made by the target company.
• A list of any and all IRCC audits where the target company was the subject

The M&A and Immigration teams at MLT Aikins suggest these requests are made as early as possible during the due diligence phase. This will ensure ample time to review the impacts of existing foreign workers on the transaction.

Whether an acquired or merged company has existing foreign nationals operating on work permit – why is this important?

There are at least three reasons why this information is needed:

ONE. To determine if the work permits will "transfer" to the new employer

Foreign workers who hold an open work permit will normally not be impacted by a merger or acquisition to new ownership. This is because an open work permit allows a foreign worker to work for any employer in any capacity. Open work permit holders can change or move employers at will without securing a new work permit.

Foreign workers who hold closed or employer-specific work permits are only allowed to work for the employer listed on the work permit. Therefore, if the ownership or corporate structure of their employer changes, so might the validity of their work permit.

While post-graduate work permits may sometimes be issued as open work permits, foreign workers who hold post-graduate work permits may also be impacted by a change in ownership or employer. Some post-graduate work permits contain course of study or industry-specific requirements (even though the documents were issued as open work permits).

IRCC implements a specific test to determine whether the acquiring or merging company will become a "successor in interest" to the acquired or merged company, as well as whether the foreign national employee's closed work permit will transfer to the new employee. The acquiring or merging company takes responsibility for any temporary workers at a business location included in an acquisition or merger if:

• It becomes the successor in interest by taking over the company's assets and liabilities
• It takes over the portion of business that employs the temporary workers

If this occurs, the acquiring or merging company may NOT need to submit an application for a new work permit for the foreign worker. However, at law, the employer (in this case, the purchaser or surviving merged company) would be required to provide the foreign worker with employment in the same occupation as that set out in the original offer of employment (inherited from the seller or original pre-merged company). This includes wages and working conditions that are substantially the same as, but not less favourable than, those in the same offer. As a result, if the new ownership is in fact a "successor in interest," whether a new work permit is needed will be dependent on:

• Both companies (the original employer and the new employer) run the same type of business
• None of the work permit conditions change, including wages, job duties and work location

If the new owner company meets the "successor in interest" test and if the type of business, wages, job duties and work location do not change, the existing work permit continue to be valid for that foreign worker.

However, if the wages, job duties or work location change, those workers impacted will need to get new work permits. These foreign workers CANNOT undertake work for the purchaser or surviving merged company until a new work permit is secured, even on an existing project. There is no grace period for continuing to work under an old permit.

This underscores the importance of reviewing and having a clear understanding of the employment terms and conditions for each worker prior to finalizing a cross-border transaction, and what the purchaser's expectations are for any such worker and for any ongoing projects from a post-closing or merger continuity perspective.

TWO. For post-merger or post-merger compliance

To identify employment terms and conditions requires referencing the underlying LMIA or the LMIA-exempt offer of employment that were filed to initiate each applicable work permit. The LMIA or the LMIA-exempt offer of employment is the employer's disclosure of employment terms and conditions such as wages, hours of work, location of work, benefits, vacation and over-time entitlement.

The terms and conditions included in the LMIA or LMIA-exempt offer of employment dictate the employer's responsibilities to the foreign worker. Responsibilities will shift to new ownership if the "successor in interest" and work permit tests are met. This puts the onus on the new ownership to meet and uphold all terms and conditions through the validity period of the work permit. All the more reason to request and review these documents as early as possible during the due diligence process.

In terms of the scope of a due diligence request, the question is often "how far back should we go?" and "what do we actually care about?" It is worth noting that IRCC has ongoing rights of audit in respect of the work permits it issues for a period of six years from the date of expiry of such work permit. A finding of non-compliance by IRCC can result in, among other things, a ban on using the foreign worker program altogether, other monetary penalties and an increase in inspection and audit requirements going forward. IRCC can also add the name of the employer to a public list, which will state the violation and penalty. For the employee, consequences may vary. These consequences can include fines, periods of unemployment or in extreme cases removal from Canada and temporary or permanent bans from travel to Canada for a limited or unlimited period of time.

In addition, prior to closing the transaction, a request may also be made for any related audits, audit outcomes, supporting documentation and correspondence from the regulator. It is prudent practice for a new/successor owner to have access to applicable offers of employment and appropriate supporting documentation in respect of such offers and historic audits as part of the transaction.

THREE. To determine the new owner's scope of responsibility for foreign workers

What if the new company doesn't want the responsibility of the previous employers? Another important consideration is whether it is actually the intent of the purchaser to continue the terms of employment and engagement subject to a work permit after closing. If a closed work permit does transfer to the new ownership, based on the above outlined tests, a purchaser will need to know and understand the terms and conditions that are attached to the work permit to ensure compliance on an on-going basis.

As noted above, the purchaser will be held to the standards committed to in the LMIA or LMIA-exempt offer of employment. If the acquiring or merging company takes on responsibility of the foreign workers, they are also taking on the responsibility of the previous employers commitments. Requesting copies of the information submitted in the LMIA or LMIA-exempt offer of employment is critical for determining whether the responsibility is one the purchaser is willing to take on.

Canadian immigration options for the new ownership

Merging or acquiring a company in Canada can open the door to Canadian immigration pathways for the new ownership or employees currently working for outside of the Canada company. Some of the more expedited options include:

Business visitors: A business visitor is an individual who enters Canada for international business activities without directly entering the Canadian labour market. Individuals who enter as business visitors do not need a work permit to work in Canada. Business visitors include individuals who enter Canada to observe site visits or to meet people from companies who they are conducting business with. Business visitors can include entering for Short Term Work Permit Exemptions; After Sales Services and Warranties work and more.

International Mobility Program – LMIA-exempt work permits: International Mobility Program work permits can be obtained by foreign nationals without a Canadian employer having to establish that there are no Canadians or Canadian permanent residents willing and able to fill the position before it is offered to a foreign national. Generally, these types of work permits are less complicated, faster to obtain and require employer filing fees that are much cheaper than the required fees for an LMIA.

The following are some of the more widely used International Mobility Program work permits for IT workers: LMIA-exempt work permits are available for Emergency Repair or Repair for out of Warranty Equipment; permits based on Free Trade Agreements, Intra-company transfers and more.

LMIA Global Talent Stream: The Global Talent Stream is an immigration program that allows Canadian employers, specifically technology companies and employers of IT workers, to expedite the hiring of foreign workers to fill specialized IT occupations. Applications for the Global Talent Streams program are processed under the Temporary Foreign Worker Program (TWP) and LMIAs must be obtained. Unlike regular LMIAs, Global Talent Stream LMIAs are devoted to highly skilled workers in specialized occupations, prioritizing those with experience in engineering and technology-related fields.

Conclusions

There are a lot of considerations to make when evaluating an existing Canadian company as a potential target for a cross-border merger or acquisition. These include reviewing and understanding the existing operations, how it is staffed from an immigration perspective and how you want or expect the company to operate post-acquisition. Inheriting foreign workers connects the underlying responsibilities of a work permit to new ownership. Non-compliance with those underlying responsibilities can result in catastrophic penalties if not properly maintained.