Canada: Privacy And Cybersecurity Issues In Canadian M&A Transactions*

Last Updated: April 5 2016
Article by Lyndsay A. Wasser

Privacy and cybersecurity have become areas of significant potential liability in Canada and elsewhere. Organizations that misuse personal information or fall victim to a data breach face reputational damage, regulatory scrutiny and possible class action lawsuits. In addition, businesses that fail to comply with "Canada's Anti-Spam Law"2 ("CASL") can be subject to significant fines.

In the context of M&A transactions, it is important for organizations to understand applicable statutory requirements and take steps to reduce and mitigate risks. This will involve consideration of privacy and cybersecurity issues in the due diligence process and negotiation of the purchase agreement, as well as attention to restrictions upon transfer and use of personal information on and after closing.

Due Diligence

In order to determine the amount and extent of privacy and cybersecurity due diligence that will need to be performed in a transaction, it is important to initially consider the nature of the target's business. Some businesses, like traditional manufacturing companies, may process minimal sensitive or personal information. Therefore, it may be unreasonable to expect that such organizations would have detailed and comprehensive privacy compliance infrastructures, and risks related to privacy and cybersecurity may be limited. In such cases, the scope of due diligence with respect to privacy and cybersecurity matters could be fairly narrow.

However, in this "information age" the core function of many businesses revolves around data. When organizations seek to purchase these types of businesses, it is important to thoroughly canvas the target's history and current practices and procedures, to identify any potentially significant liabilities. Poor information handling practices or outdated technological controls may require a significant investment to bring the business into compliance with all applicable laws, or in a worst case scenario could expose the business to costly litigation.

In each case, the documents and information requested in the due diligence process will vary depending upon the circumstances. In particular, pursuant to changes made to Canada's Federal privacy law - the Personal Information Protection and Electronic Documents Act ("PIPEDA") - in 2015, personal information3 can only be disclosed in the context of a prospective business transaction without the knowledge and consent of affected individuals, if: "...the personal information is necessary to determine whether to proceed with the transaction, and if the determination is made to proceed with the transaction, to complete it."4 Similar restrictions exist under substantially similar legislation in the provinces of Alberta and British Columbia.5 Therefore, broad and indiscriminate requests for personal information in the due diligence process are not permitted under PIPEDA. Rather, the parties should exchange only the minimum amount of personal information that is required in the circumstances. For example, if aggregate statistics would provide sufficient information to the purchaser, information about identifiable individuals should not be disclosed.

Although an individualized approach is necessary, some examples of information and documents that may be requested in connection with privacy and cybersecurity due diligence include:

  • Copies of privacy, data security and CASL policies and procedures, including but not limited to breach response plans as well as cybersecurity governance and risk procedures;
  • Information about privacy and cybersecurity audits, including how often they are conducted and copies of recent reports;
  • Information about the target's process for obtaining, recording and giving effect to withdrawal of consent (i.e., CASL consents as well as consents under PIPEDA and substantially similar provincial legislation), including copies of standard consent forms;
  • Information respecting training of employees on privacy and cybersecurity compliance, as well as copies of any agreements with employees related to such matters;
  • Information on any significant or recent breaches, including privacy, data security, cybersecurity and CASL breaches, as well as any actual or threatened claims, complaints, litigation or regulatory action related to such breaches;
  • Information respecting the vendor/service provider selection and management process, including selection policies and procedures, copies of vendor privacy and data security questionnaires, and copies of all contracts governing privacy commitments, data protection and CASL compliance (e.g., data sharing agreements or relevant provisions in service agreements); and
  • Copies of any cybersecurity insurance policies.

Overall, through the due diligence process, the goal is to gain an understanding of the target company's process for collecting, using, storing, protecting and disclosing personal and other sensitive information. This will allow the purchaser to evaluate legal compliance and identify risks. In addition, in some cases it may be necessary for the purchaser to engage information technology experts (internal or external) in the due diligence process to evaluate the target's cybersecurity controls.

The Purchase Agreement

PIPEDA and substantially similar legislation in Alberta and British Columbia contain specific requirements for the agreement between the parties when personal information will be disclosed in the due diligence process or upon closing of a transaction. For example, under PIPEDA6, 7:

7.2(1) ...[O]rganizations that are parties to a prospective business transaction may use and disclose personal information without the knowledge or consent of the individual if the organizations have entered into an agreement that requires the organization that receives the personal information (i) to use and disclose that information solely for purposes related to the transaction, (ii) to protect that information by security safeguards appropriate to the sensitivity of the information, and (iii) if the transaction does not proceed, to return that information to the organization that disclosed it, or destroy it, within a reasonable time.

7.2(2) ...[O]rganizations that are parties to the transaction may use and disclose personal information, which was disclosed under subsection (1), without the knowledge or consent of the individual if the organizations have entered into an agreement that requires each of them (i) to use and disclose the personal information under its control solely for the purposes for which the personal information was collected, permitted to be used or disclosed before the transaction was completed, (ii) to protect that information by security safeguards appropriate to the sensitivity of the information, and (iii) to give effect to any withdrawal of consent made under clause 4.3.8 of Schedule 1.

In addition to these specific statutory requirements, there are a number of privacy and cybersecurity issues that may need to be addressed in a purchase agreement. Again, in each case the specific circumstances and nature of the target's business will need to be taken into account to assess what provisions are appropriate. However, from the purchaser's perspective, it will often be necessary to include representations and warranties addressing the following:

  • Compliance with applicable laws and the seller's own privacy, data security, cybersecurity and CASL policies and procedures (and that the target's policies, procedures, and practices meet or exceed industry standards);
  • Compliance with all privacy, data protection and CASL requirements under contracts with customers and other third parties (and that the target is not aware of any non-compliance with contractual obligations of its own service providers);
  • Training of employees on privacy, data security, reporting and responding to data breaches, and CASL compliance (and in some cases that employees are subject to appropriate contractual obligations);
  • Sufficiency of data security and cybersecurity controls, including that the organizational, technological and physical security measures are reasonable in relation to the sensitivity of the information collected and held by the organization; and
  • Disclosure of any material or recent privacy, data security, cybersecurity and CASL breaches, or confirmation that the seller is not aware of any such breaches.

From the seller's perspective, it may be necessary to limit or qualify some of the representations and warranties described above, by including materiality thresholds or adding knowledge qualifiers that take into account the size and structure of the organization. Most information technology and cybersecurity experts agree that many organizations are not aware of data breaches until months (or years) after they occur. Therefore, the seller will need to carefully consider what representations and warranties can realistically be provided, without risking exposure to potentially significant liability if a pre-closing breach is discovered after completion of the transaction. Also, before giving representations respecting compliance with applicable laws, sellers will need to make sure that they are, in fact, familiar with relevant legal requirements.

Other issues that may need to be considered in connection with the purchase agreement include:

  1. Purchase price adjustments and holdbacks – If due diligence identifies significant risks or vulnerabilities that may impact the value of the target, and if: (a) substantial resources will be required to bring the company into compliance with applicable laws or fix weaknesses in systems that are outdated or have been compromised; or (b) the target has experienced a privacy or cybersecurity breach that has not yet resulted in litigation or other liability, but applicable limitation periods have not yet expired.
  2. Indemnities – Although often covered by general indemnities, specific privacy and cybersecurity indemnities may be warranted in some cases. For example, stand-alone indemnities may be necessary if specific concerns are identified in the due diligence process, or if: (a) the duration of general indemnities is not long enough to take into account the typical delay in identifying data breaches; (b) the cap on general indemnities is too low to adequately cover the risk of a major cyber breach; or (c) the general indemnities do not protect all relevant parties, such as directors who may be held liable in their personal capacities.

If holdbacks or indemnities are included in the purchase agreement, it is prudent for the parties to include specific mechanisms for the purchaser to claim them, including provisions addressing how damages will be calculated and by whom. Such mechanisms can decrease the chances of future disputes.

Closing and Beyond

After the transaction is completed, the purchaser will, of course, want to benefit from the personal information that was collected by the business pre-closing. However, statutory requirements must be taken into account. For example, under PIPEDA, the parties can only use and disclose personal information that was disclosed in connection with the transaction without obtaining consent from affected individuals, if:8

  • The personal information is necessary for carrying on the business or activity that was the object of the transaction; and
  • One of the parties notifies individuals, within a reasonable time after the transaction is completed, that the transaction has been completed and that their personal information has been disclosed.

The purchaser must also be careful not to use personal information obtained by the target prior to the transaction for purposes other than those encompassed by the consent obtained at the time of collection. In addition, as outlined previously, PIPEDA requires that the agreement between the parties specifically provide that they will give effect to any withdrawal of consent after individuals are notified that their personal information has been disclosed.

Conclusion

Privacy, data protection and cybersecurity have been the focus of a lot of attention in recent years. The legal framework is complex, and the common law is rapidly developing. Although this is an evolving area, it is clear that privacy and cybersecurity breaches can give rise to significant potential liabilities. Therefore, parties to a prospective business transaction would be well advised to consider and address these issues before, on and after closing.

Footnotes

* This article will focus on private sector laws. Most jurisdictions in Canada also have public sector privacy laws, as well as specific legislation applicable to collection, use, protection and disclosure of personal health information.

2An Act to promote the efficiency and adaptability of the Canadian economy by regulating certain activities that discourage reliance on electronic means of carrying out commercial activities, and to amend the Canadian Radio-television and Telecommunications Commission Act, the Competition Act, the Personal Information Protection and Electronic Documents Act and the Telecommunications Act, S.C. 2010, c. 23.

3 Personal information is information about an identifiable individual. It does not include other types of information that may be confidential or proprietary.

4 PIPEDA s. 7.2(1).

5 Quebec privacy legislation still technically requires consent for any disclosure of personal information.

6 PIPEDA s. 7.2(1) and 7.2(2).

7It is important to note that: PIPEDA 7.2(1) and (2) do not apply to a business transaction of which the primary purpose or result is the purchase, sale or other acquisition or disposition, or lease, of personal information.

8PIPEDA s. 7.2(2).

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
Lyndsay A. Wasser
Similar Articles
Relevancy Powered by MondaqAI
Miller Thomson LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Miller Thomson LLP
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