A recent article by PWC which appeared in Lexpert Magazine draws attention to a
phenomenon that is pervasive in the United States and is becoming
much more common in Canada: post-deal litigation.
What is it?
Increasingly, shareholders are filing lawsuits to challenge
M&A transactions. The litigation often takes the form of a
class action, with plaintiff's counsel alleging a breach of
fiduciary duty on the part of the target's board of directors
resulting in a failure to maximize shareholder value. The specifics
of the complaint are typically related to the process followed, the
price agreed to, or insufficiency of disclosure.
In the U.S., post-deal litigation has become the rule, with
roughly 96% of transactions post-2008 being accompanied by
litigation, up from 53% pre-2008. Though this type of litigation is
not nearly as common in Canada, it still occurs and is likely to
increase in regularity, especially in tough markets.
How can dealmakers mitigate the risk of its occurrence?
Unfortunately, no matter how precisely crafted the agreements,
the simple fact of having closed a large transaction will in some
cases be enough to attract litigious shareholders (and counsel).
Other times, however, it is the valuation process or the wording of
the contracts which creates shareholder tension manifesting as
post-closing litigation. Notwithstanding, some general areas for
the proper definition of key terms, rather than defining a term
by reference to another standard (such as GAAP, for example);
inserting explicit formulas and mechanisms into the agreements
for valuation and adjustments; and
testing valuation and adjustment mechanisms alongside an expert
to ensure they operate as intended.
Most importantly, when drafting a provision or creating a
process or choosing a mechanism, consider how it could be
challenged. If you had to defend it, could you? In the PWC article,
Steve Tenai, a litigator here at Norton Rose Fulbright Canada
LLP, put it well when he said, "That doesn't mean
perfection... but it does mean... you need to give some regard to
what will happen if someone comes along later and challenges this
The author would like to thank Jad Debs, articling student,
for his assistance in preparing this legal update.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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