On January 14, 2016, the American Bar Association (ABA) published its 2015 Canadian Public Target M&A Deal Points Study. The study draws from 88 deals announced in 2013 and 2014 that targeted companies listed on Canadian exchanges. Since 2006, this publication and its companion piece on private target M&A have been released annually by the ABA's Market Trends Subcommittee. (We wrote extensively about the ABA's 2014 Canadian Private Target M&A Deal Points Study here and here.) Using strictly quantitative analysis, the study tracks variations in the common terms and conditions found across these transactions, which offers a unique look at M&A acquisition agreements 'by the numbers'.
All the deals considered by the study had a transaction value of over $50 million, with the majority (55%) falling in the $100 million to $500 million range. Predictably, the main target industries were mining and natural resources (29%) and oil and gas (25%). Most of the buyers (66%) were also Canadian, and the vast majority (92%) were strategic buyers (with private equity deals carving out an 8% niche).
This two-part post will outline the report's key takeaways in the areas of (1) the target's representations and warranties, (2) conditions to closing, (3) deal protection, and (4) remedies.
1) Target's representations and warranties
- Compliance with law: In the majority of deals surveyed, the representation regarding the target's compliance with law continues to incorporate buyer-friendly language. The vast majority of deals include a representation regarding the target's compliance with all laws (with a majority of those representations including language to the effect that the target has not received any notice of violation). Of the agreements with a compliance representation, 69% place no time qualifier ("...is, and at all times has been, in compliance...") on the target's compliance with law representation, while 21% put date restrictions on the target's compliance, and only 10% confine the representation to "current" compliance with law. Given this trend, any deviation from a broadly stated and inclusive representation about compliance would undoubtedly raise red flags in the mind of the buyer.
- GAAP and presentation of financial statements: When the target represents that its financial statements "fairly present" the financial position of the company, only 23% of the acquisition agreements bolster this representation with an assurance that the financial results have all been prepared "in accordance with GAAP." Of the 77% of deals that do not certify GAAP compliance in their "fairly presents" representation, 79% of this subset include the further qualification that the financial statements fairly present the state of the company "in all material respects." The majority of acquisition agreements skew target-friendly on the question of the accuracy of the target's financial statements. However, 93% of the acquisition agreements include a buyer-friendly representation by the target that it has accrued no hidden liabilities.
2) Conditions to closing
- Accuracy of representations: When must the target's representations be accurate? All of the deals surveyed had a "bring down" requirement whereby all of the target's representations and warranties had to be accurate at closing. A further 35% of deals had the added condition that the target's representations and warranties had to be true as of signing the agreement (and continuing to closing). How accurate do the target's representations have to be? The majority of acquisition agreements include the target-friendly caveat that inaccuracies in the representations and warranties shall not affect closing unless they (either alone or in the aggregate) constitute a material adverse effect (MAE). Most MAE clauses feature a "double-materiality" carve-out that nullifies any individual MAE qualifications in individual representations. Generally, provisions regarding the timing and accuracy of the representations give the target far more leeway than the buyer.
- The "walk right": The "walk right" gives the buyer the ability to walk away from the transaction if there is an MAE in the business, financial condition or financial results of the target in between signing and closing. All of the agreements surveyed had such a walk right, and a further 28% of the deals included a walk right if the "prospects" of the company suffered an MAE
- MAE carve-outs: The definition of MAE used for the aforementioned closing conditions usually features certain carve-outs (i.e., effects caused by certain events do not constitute an MAE and would not trigger, for example, a buyer's walk right). 97% of the deals included a carve-out for changes affecting the general Canadian economy (with 91% including language about "disproportionate effects" on the target company). Similar figures (and similar "disproportionate effects" language) were found with respect to changes in the general industry in which the target operates. Other popular carve-outs include the announcement of the transaction, a change in law or accounting principles, and an act of war or terrorism.
Stay tuned for the second post in this series which we will publish next week, canvassing the ABA's key findings regarding deal protection and remedies. A copy of the ABA study is available to ABA members on the Mergers and Acquisitions Market Trends Subcommittee webpage.
The author would like to thank Markus Liik, articling student, for his assistance in preparing this legal update.
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