Canada: Global M&A: What's The Deal In Canada?

Last Updated: January 27 2016
Article by John F. Clifford

Merger and acquisition deal practice is similar in many countries, particularly the United States and Canada. For many U.S. and other non-Canadian deal lawyers experienced on Canadian cross-border transactions, Canada likely feels quite familiar to their home jurisdiction. All provinces except Quebec have the English tradition of the common law (Quebec's legal regime is based on the civil law system) and, for the most part, the form of agreement typically used to acquire the assets or shares of a Canadian company looks and feels like a U.S. form of agreement.

But, if you get involved in a Canadian or cross-border deal, you'll discover that some things are done a bit differently in Canada. This article highlights some of the differences in Canadian deal practice and the legal environment that you should know if you have a deal in Canada, and some current developments and trends.

Regulation of M&A Activity

M&A activity in Canada is regulated under provincial and federal corporate laws, provincial securities laws (in each of the 10 provinces and three territories) and stock exchange rules. The two principal stock exchanges in Canada are the Toronto Stock Exchange (TSX) (senior market) and the TSX Venture Exchange (junior market). These exchanges regulate selected aspects of M&A activity.

The provincial and territorial securities regulatory authorities coordinate their activities through the Canadian Securities Administrators (CSA), a forum for developing a harmonized approach to securities regulation across the country. The CSA has developed a system of mutual reliance pursuant to which one securities regulatory authority acts as the lead authority for reviewing regulatory filings of "reporting issuers" (e.g., Canadian public companies). The Ontario Securities Commission (OSC) is generally regarded as the lead securities regulatory authority in Canada.

Forms of Public Company Acquisition

The three principal methods to acquire a public company in Canada are take-over bids (the Canadian version of a tender offer), "plans of arrangement" and amalgamations (similar to a Delaware merger).

A take-over bid results when the securities subject to a bid combined with the securities owned by the bidder and parties acting jointly with the bidder constitute 20% or more of the outstanding securities of any class. Take-over bids must be left open for at least 35 days, and have the advantage of bypassing management of the target. Take-over bids cannot be conditioned upon the bidder arranging financing.

Most mergers and acquisitions involving public companies in Canada are completed by way of a statutory plan of arrangement under the corporate law of the target's jurisdiction. Plans of arrangement are typically completed pursuant to arrangement agreements negotiated between the bidder and the target. Plans of arrangement are subject to the approval of the target's board and shareholders as well as court approval. Unlike a take-over bid, an arrangement can have a financing condition.

A merger of two or more companies may be completed as an amalgamation. This method is rarely used, but it may be useful in straightforward consensual mergers because it avoids the necessity of court proceedings.

Proposed Changes to the Take-Over Bid Regime

The CSA has proposed that take-over bids must remain open for at least 120 days (rather than 35 days as currently required) and that they be subject to a 50% minimum tender condition. In essence, these proposed changes would incorporate into law shareholder-friendly elements of "poison pill" shareholder rights plans (but would provide for 120 days rather than 60 days typically provided for in Canadian shareholder rights plans). The comment period for these proposed changes closed on June 29, 2015, and new rules could take effect as early as 2016.

Proposed Changes to Early Warning Regime Abandoned

In October 2014, the CSA announced they had abandoned a proposal to lower the "early warning" stock ownership reporting threshold from 10% to 5%. If the proposal had been implemented, it would have made the Canadian regime stricter than the U.S. regime. The decision not to lower the reporting threshold in Canada is favorable to shareholder activists, who can continue to acquire up to 10% of an issuer's stock without reporting their holdings.

Recent Changes to Investment Review Regime

The Investment Canada Act requires that any non-Canadian that acquires control of a Canadian business (whether or not that business is controlled by Canadians prior to the acquisition) must file either a notification or an application for review. For the purposes of the Act, a non-Canadian includes any entity that is not ultimately controlled or beneficially owned by Canadians.

If an investment meets the financial thresholds for review, a review application must be filed and a determination made by a Minister of the Federal government whether the transaction is of "net benefit to Canada". The review thresholds are complex, and the thresholds for review recently were increased materially. Generally, a direct investment (i.e., the acquisition of the shares or assets of a Canadian corporation) by a WTO Investor (i.e., controlled by persons from countries that are members of the WTO) is reviewable if the target has an enterprise value of C$600 million at the time the transaction is completed. Indirect investments by WTO Investors are not reviewable, except as noted below.

Special rules and significantly lower thresholds apply in respect of direct and indirect acquisitions of so-called "cultural" businesses (e.g., broadcasting, film, video, audio, books, magazines). Special rules also permit a national security review, without regard to the value of the target's assets.

An investment that is not reviewable must be notified. Notification is made by completing a simple two-page form which can be filed any time prior to or within 30 days of the closing.

Key Deal Terms May Differ

When negotiating a purchase and sale agreement involving Canadian parties, U.S. deal lawyers will confront many of the same issues arising on a U.S. transaction, whether the negotiations relate to the scope of the representations and warranties and the use of materiality and knowledge qualifiers, the conditions precedent to closing or the procedures for dealing with post-closing adjustments to the purchase price and delivery of closing financial statements.

Where you are likely to see differences, however, are in the following areas:

  • Indemnity caps are typically higher in Canada than in the U.S. It's not uncommon for Canadian purchasers to insist on a cap in excess of 50% of the purchase price and in many cases up to 100% of the purchase price.
  • Holdbacks in support of indemnity claims are not as common in Canadian deals as in the U.S.
  • Exceptions to the foregoing often involve Canadian private equity investors, who, like their U.S. counterparts, understand the need for low indemnity caps (perhaps 10-15% of the purchase price), supported by holdbacks deposited in escrow, thereby permitting a private equity vendor to disburse sales proceeds to its limited partners immediately following closing with little or no risk of a clawback.
  • General survival periods for representations and warranties are longer in Canada (often 18-24 months) and it is not uncommon to have three to five year survival periods for specific matters such as pensions and environmental claims and even longer periods for claims relating to title.
  • Earnouts are used much less frequently in Canadian deals than in the U.S.
  • Transaction legal opinions, once a standard closing condition in Canadian M&A transactions and often the subject of heated negotiation between legal counsel, are becoming less and less common in Canada.

These and other trends are detailed in the ABA M&A Committee's 2014 Canadian Private Target M&A Deal Points Study.

This bulletin was co-authored by Daniel Dex, a former partner of McMillan who is now the Director of Corporate and Commercial Law at Avigilon Corporation.

The text of the bulletin was originally published in American Lawyer Magazine (December 2015)

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2016

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
John F. Clifford
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions