9 May 2024

Mergers & Acquisitions Comparative Guide

MLT Aikins LLP


MLT Aikins LLP is a full-service law firm of more than 300 lawyers with a deep commitment to Western Canada and an understanding of this market’s unique legal and business landscapes.
Mergers & Acquisitions Comparative Guide for the jurisdiction of Canada, check out our comparative guides section to compare across multiple countries
Canada Corporate/Commercial Law
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1 Deal structure

1.1 How are private and public M&A transactions typically structured in your jurisdiction?

Private M&A deals in Canada are typically structured as:

  • share purchase transactions;
  • asset purchase transactions; and/or
  • a combination of the foregoing paired with a corporate reorganisation.

Canadian companies can be incorporated under either provincial or federal legislation, and the availability of certain transaction structures will depend on the type and jurisdiction of the companies involved and the laws applicable in such jurisdiction.

Public M&A transactions in Canada are typically structured as:

  • a plan of arrangement;
  • a takeover bid (either hostile or friendly); or
  • another corporate reorganisation.

1.2 What are the key differences and potential advantages and disadvantages of the various structures?

Share sale: In a share sale, the seller usually qualifies for preferential capital gains treatment on the disposition and is generally relieved of all liability involving the business following closing, barring contractual provisions to the contrary. However, the seller may receive a lower sale price and usually experiences higher transaction costs. The buyer may experience a benefit from the ease of continuing the business, preserving contractual relationships and licences and maintaining the target's tax pools; but it will inherit responsibility for the historic liabilities associated with the target.

Asset sale: In an asset sale, the seller may benefit from a higher selling price, but it retains the liabilities associated with the business. The buyer benefits from not assuming the liabilities, but the transaction is usually more complicated and the buyer cannot acquire the losses associated with the business. The transaction may also be subject to sales taxes where the transaction does not involve the disposition of all or substantially all of the assets of the business.

Takeover bids: These offer the buyer the ability to quickly gain control of a company. The bidder can directly deal with shareholders, resulting in greater flexibility and efficiency; however, the success of a takeover bid can be subject to market uncertainty and cost more than a negotiated transaction.

Plan of arrangement: This is a statutory merger supervised by the courts and detailed in a complex arrangement agreement. Plans are flexible but expensive tools that are typically utilised when a buyer wishes to use its shares as consideration for a transaction and/or deal with complicated tax or capitalisation issues. Plans of arrangement are also subject to court approval, which introduces an element of uncertainty, and transaction costs can be higher than other options as a result.

Amalgamations: These are also statutory mergers that result in each of the designated corporations continuing into a new amalgamated corporation that has the assets and liabilities of each of its predecessors. Terms of the amalgamation are usually detailed in an amalgamation agreement. Amalgamations are commonly used to aggregate revenue and expenses/losses since Canada does not have tax consolidation like some other jurisdictions.

1.3 What factors commonly influence the choice of sale process/transaction structure?

There are several factors that should influence the evaluation of whether a buyer should seek a share or asset transaction in respect of a target. Each case will be fact-specific and should be confirmed through diligence, but a non-exhaustive list is set out below.

Contractual relationships: Are the desirable contracts held by the target assignable to a buyer? If not, assuming that there are no prohibitive change of control provisions, a buyer may need to acquire the shares of the target to obtain the full benefit of those agreements.

Licences and approvals: Many government licences and approvals for regulated activities in Canada are entity and/or site specific. They may also not be property that are capable of being transferred to a buyer (resulting in the buyer needing to reapply for and obtain a new licence to conduct the target's business). Doing so may be prohibitive where the application time is significant or there are a limited number or fixed number of licences issued for the activity. In such case, a share transaction will be the only way to preserve the ongoing value of the licences. Note that some jurisdictions will not allow changes of control of licence holders without prior government approval or may automatically terminate a licence where a change of control occurs. It is important to consult Canadian counsel to confirm how this may apply to your deal as it can have a significant effect on the value of the continuing business if the licences are no longer in place following closing.

Tax implications: The Canadian tax framework is complicated and will have different impacts based on the structure of each transaction. Generally speaking, where the target has significant tax losses that can be utilised by the buyer in the go-forward business, a share transaction will be preferred as tax losses cannot be conveyed (outside of an amalgamation). Further, the transfer of securities is generally not a taxable supply in which sales taxes will be incurred and certain sellers can benefit from a lifetime capital gains exemption on disposition. Asset sales are often preferred where the target has significant liabilities the buyer does not want to assume. Where the transaction includes a sale of all or substantially all of a business, certain tax elections may be available to the parties to an asset sale to affect the transaction on a tax-deferred or tax-efficient basis. It is highly recommended to obtain tax advice for material transactions as choice of structure can impact the viability of a deal and the ultimate cost of the acquisition.

From a public M&A standpoint, the choice of structure should also take into account the following considerations:

  • Speed and control: A takeover bid may provide a quicker path to closing, while a plan of arrangement may offer a slower but less contentious pathway.
  • Cost and flexibility: A plan of arrangement offers more flexibility in terms of the consideration offered to shareholders, while a takeover bid usually involves a fixed price that needs to be attractive enough to entice the shareholders to tender their shares to the takeover bid.
  • Ownership structure: If the target has a large number of shareholders or institutional investors, a takeover bid may be the preferred option. Otherwise, a plan of arrangement may be more suitable.

2 Initial steps

2.1 What documents are typically entered into during the initial preparatory stage of an M&A transaction?

For both public and private M&A transactions in Canada, parties will often:

  • first enter into a non-disclosure agreement (NDA) or other confidentiality agreement, to facilitate discussions; and
  • then draft a letter of intent (LOI), term sheet or memorandum of understanding, to document the transaction terms once they have been negotiated.

The NDA is usually reciprocal but may unilaterally impose non-disclosure obligations on the buyer depending on the nature of the transaction. The NDA will generally capture commercial and financial information exchanged during negotiations and any due diligence process; however, it may also capture the existence of the negotiations and the parties involved.

In addition, each NDA should encompass customary confidentiality terms, including:

  • the scope of confidentiality (eg, whether it applies to materials not labelled confidential);
  • the term of confidentiality;
  • restrictions on use limited to a defined permitted purpose;
  • confirmation of ownership;
  • the scope of advisers with whom the information can be shared (eg, lenders or potential investors); and
  • customer and employee non-solicits (care should be taken with respect to reciprocal non-solicitation provisions which are now illegal in Canada, with some exceptions).

For transaction NDAs involving public companies, it is also important to add customary language prohibiting use of any information for trading purposes or to facilitate a takeover bid within a specified period.

The LOI documents the proposed deal terms negotiated by the parties that is used as the baseline for preparing the definitive transaction agreements. The sophistication of LOIs can vary greatly depending on transaction complexity and industry, and can range from two pages anywhere up to 20-plus. Time and effort should be spent on carefully considering the terms of the LOI, as it is supposed to represent the transaction terms and the intent of the parties.

That said, under Canadian law, parties cannot generally 'agree to agree', and therefore most provisions – such as purchase consideration, closing date and confidentiality – are generally not binding in Canadian LOIs unless the parties agree otherwise.

There should be an express provision in each LOI specifying which terms are non-binding and which terms are binding, as often the parties will renegotiate the commercial terms as they proceed through diligence and will want to ensure that they are able to do so. Further, the parties will want to ensure that the provisions they do want to be binding – such as exclusivity, governing law and confidentiality – are enforceable if necessary. Offers set out in LOIs can be found to be binding if consideration is provided and there is no contemplation of the LOI being non-binding or subject to conditions.

2.2 Are break fees permitted in your jurisdiction (by a buyer and/or the target)? If so, under what conditions will they generally be payable? What restrictions and other considerations should be addressed in formulating break fees?

Break fees are permitted and common in Canadian transactions, especially in public M&A deals. They may be paid by either the buyer or the seller, with seller-side fees commonly referred to as 'reverse-break fees'. These fees serve to compensate the non-breaching party in case the transaction fails to close due to the other party's breach or failure to satisfy specific conditions.

In formulating break fees, parties should consider:

  • what circumstances will trigger the fee;
  • how it interacts with other provisions in the agreement; and
  • the amount of the fee.

The triggers for break fees can be narrow or broad, and commonly include:

  • breach of a no-shop provision;
  • the acceptance of a superior offer from a third party; and
  • withdrawal of the target board's recommendation.

Break fee clauses should be carefully drafted and thoroughly considered to provide predictability for the parties as they are commonly the subject of disputes.

Break fee values are heavily negotiated, but the majority of reported break fees typically range between 2% and 5% of transaction value. This range can vary based on:

  • the size and nature of the transaction; and
  • the industry in which the transaction parties operate.

A C$1.2 billion reverse-break fee is the largest that has been recorded in Canada, representing approximately 2.3% of transaction value. While cash is the most common form of payment, parties may also agree to receive shares or other consideration.

As transaction and financing expenses continue to grow, reliance on break fees is also expected to increase in order to provide some recovery to affected parties in the event that such transactions fail to close.

2.3 What are the most commonly used methods of financing transactions in your jurisdiction (debt/equity)?

Transactions in Canada are typically financed by:

  • cash;
  • debt (including seller financing);
  • equity; or
  • a mix of the foregoing.

Canadian lenders and investors generally tend to be more risk averse than those in other jurisdictions and this should be taken into consideration by buyers when evaluating potential financing sources for potential transactions.

Prior to the recent increase in interest rates, leveraged buyouts (LBOs) were a common structure utilised by private equity and other buyers to facilitate acquisitions. An LBO is the acquisition of a target using a significant amount of borrowed money (bonds or loans), collateralised using both the assets of the acquirer and the target. The use of LBOs in Canada is expected to decline in 2023 as the cost of both traditional and mezzanine debt becomes increasingly expensive and subject to more extensive lender diligence.

While the use of cheap debt to finance acquisitions grew over the past several years, rising interest rates and inflation have buyers looking to reduce the costs of acquisition by prioritising the use of cash and equity investment to fund their deals. The use of private equity and venture capital funds remains a popular source of capital for potential buyers, and there has been an increase in buyers seeking seller financing at below-market interest rates in certain industries such as food and agriculture. As a result, equity raises to fund acquisitions and joint bids have increased in popularity, especially on the private M&A side.

On the public side, raising capital through special purpose acquisition companies (SPACs) has significantly dropped since 2021. A SPAC is a 'blind pool' company listed on an exchange that raises capital from the public by way of an initial public offering. Every SPAC must complete its initial business combination transaction within a prescribed period, failing which it has to return the funds to investors. While there was a significant boom in SPAC activity in 2021, capital raising activities continue to decline as many SPACs are focused on completing their initial business combination transaction before their transaction window expires.

Ultimately, the choice of financing is dependent on a variety of factors, including:

  • the transaction structure;
  • the nature of the target;
  • the cost of debt; and
  • the buyer's preferences, collateral base and relationship with its lenders and investors.

2.4 Which advisers and stakeholders should be involved in the initial preparatory stage of a transaction?

From an adviser standpoint, both the seller and buyer should engage Canadian legal advisers at the outset of a transaction to assist with drafting the NDA and preparing the initial LOI. This helps to ensure that the NDA is sufficient to protect the parties involved and the LOI reflects the agreed deal terms while providing sufficient flexibility to renegotiate as diligence proceeds. Canadian law has a division of powers between the federal government and each province. It is important to obtain legal counsel qualified to practise in the Canadian jurisdictions relevant to the transaction.

Depending on the nature of the business and how material the transaction is to the parties, they should also consider whether it is appropriate to engage tax advisers, financial advisers, technical consultants and other experts as they proceed through diligence, structuring and preparation of the definitive documents. Specifically, the Canadian tax framework can have significantly different rules from other North American jurisdictions which can materially impact on the transaction structure.

The parties' key stakeholders, including their boards, should be involved in the initial stages of the transaction to ensure a consistent and practical approach and confirm the authority to transact. Dispositions of all or substantially all assets of a target will usually require shareholder approval (where a disposition of shares may only require board approval), and it is important that the transaction be communicated to such parties in an appropriate way at the appropriate time to ensure that it can move forward.

2.5 Can the target in a private M&A transaction pay adviser costs or is this limited by rules against financial assistance or similar?

Prohibitions on providing financial assistance used to be common in various Canadian corporate statutes and the prohibitions primarily focused on two situations – corporations providing financial assistance:

  • to categories of specified persons that have a connection with the corporation; and
  • to any person for the purchase of shares issued by the corporation or an affiliated corporation.

These prohibitions have been limited in recent years and replaced with provisions focusing more on transparency of payments to anyone in these categories. The prescribed timelines and scope vary by jurisdiction.

Assuming that the target's adviser is an arm's-length party and the payment would not render the target insolvent, there are generally few restrictions on a target in an M&A transaction paying its own adviser costs. Permissibility may vary based on the identity of the advisers and the jurisdiction; and it is important for the target to consult qualified counsel with the specifics of the proposed arrangement before agreeing to assume this liability, as directors and officers can incur personal liability in some circumstances. Newfoundland, New Brunswick, the Northwest Territories and Nunavut each restrict providing financial assistance to a buyer in relation to the purchase of shares issued or to be issued by the corporation or an affiliated corporation in certain circumstances, which may include payment of the buyer's adviser costs in certain circumstances.

3 Due diligence

3.1 Are there any jurisdiction-specific points relating to the following aspects of the target that a buyer should consider when conducting due diligence on the target? (a) Commercial/corporate, (b) Financial, (c) Litigation, (d) Tax, (e) Employment, (f) Intellectual property and IT, (g) Data protection, (h) Cybersecurity and (i) Real estate.

The scope of diligence for each target will be jurisdiction-specific and will depend on the location of the target, its assets and employees. Canada is divided into 10 provinces and three territories, each with its own corporate statutes, employment legislation, courts registries, property registries and other similar databases. Further, Quebec has a system of civil law versus the common law adopted by the other provinces and territories.

In addition, there are matters that are federally regulated – such as banking, intellectual property, and insolvency – for which the federal government maintains the appropriate registries.

(a) Commercial/corporate

Buyers should, at minimum, review the target's minute book – including all constating documents, director and officer registers and securities registers – to determine:

  • who has authority to act on behalf of the target;
  • who the current shareholders are; and
  • whether the target remains eligible for any prospectus exemptions (which can inform the transaction structure).

Any shareholders' agreements should be reviewed to determine whether there are any approval thresholds or restrictions on the transfer of shares or assets, rights of first offer or first refusal or pre-emptive rights that may be triggered by the proposed transaction structure. If so, these need to be evaluated and incorporated into the transaction timeline.

It is also recommended to obtain the appropriate corporate searches in each jurisdiction in which the target does business to ensure that the corporate entities:

  • are still validly in existence;
  • have filed the necessary returns; and
  • are appropriately registered in each jurisdiction in which they carry on business.

These searches should be reconciled against the minute book to ensure consistency. If there are any discrepancies, additional inquires of the target are warranted.

(b) Financial

Financial due diligence of a target is conducted through:

  • a review its books and records, filings and financial statements; and
  • a review of public searches.

Each buyer should conduct a detailed review of the financial documents as part of its diligence investigation to satisfy itself of the accuracy of such records and the viability of the target. Audited financial statements are generally not required for private companies where the shareholders have waived the requirement, and buyers may wish to engage an adviser to assist with financial diligence where they do not have the internal capacity to do so. Significantly more information is available in respect of public targets, as they are required to disclose and publish audited financial documents as well as interim financial statements which can be easily accessed online through the System for Electronic Document Analysis and Retrieval. In order to make themselves a more attractive target, sellers are increasingly engaging sell-side transaction diligence teams to assist with cleaning up their financial records prior to soliciting interest from buyers in order to provide more predictability into the process and reduce the risk of price grinds due to unforeseen issues.

In addition to a review of the relevant target documentation, buyers should also conduct searches of the relevant personal and real property registries in each province or territory in which the target conducts business or has assets or land (including any relevant federal registries). These registries will disclose any registered interests against the applicable property by debt holders or persons with other registerable interests. Any registrations that are disclosed should be reconciled against the target's records in relation to its financial or debt obligations. If an asset sale is contemplated, the buyer will want to confirm any registrations against the equipment that need to be discharged in order to take clean title on closing; otherwise, the obligation may follow the asset and be assumed by the buyer.

Unsecured debt obligations do not need to be registered in Canada and can largely only be determined through a review of the relevant corporate records. Further, each jurisdiction has different rules relating to its respective registries and it is recommended that buyers rely on their counsel to assist with determining the appropriate scope and effect of such searches.

(c) Litigation

Litigation searches should be requested for each jurisdiction in which the target is registered, owns assets or conducts business. Such searches will include all ongoing and resolved litigation, including the parties involved, previous action and amounts claimed. If the parties are operating in regulated industries, searches may be necessary to uncover potential investigations and enforcement actions of relevance.

Depending on jurisdiction, litigation searches may need to be conducted by municipality, province and/or level of court. Certain jurisdictions that operate older systems are still dealing with delays caused by the COVID-19 pandemic and have a backlog of search requests. As a result, there can be significant delay in obtaining the search results once a request has been submitted, which should be incorporated into the transaction timeline.

(d) Tax

Tax diligence of a target in share transactions is extremely important:

  • to ensure that the target has remitted the appropriate income tax, sales tax and source deductions; and
  • to evaluate any previous structuring that may still be subject to assessment or reassessment by the applicable taxing authorities.

Further, where any pre-closing reorganisation is contemplated, the buyer should evaluate the effect on the post-closing entity that it will be responsible for.

Tax diligence in an asset sale scenario is usually less important other than to determine whether the transaction will be taxable. One notable exception to this is in the context of distressed M&A, where the buyer should confirm whether the Canada Revenue Agency may have any claim for a deemed trust over the assets it intends to acquire for unpaid tax amounts.

Tax records are generally not public in Canada outside of those relating to property tax or searches confirming the target's good standing in certain jurisdictions. As a result, tax due diligence is a significant undertaking involving a thorough review of the target's records, filings and returns, and should be untaken by qualified advisers if the buyer does not have the capability in-house. The tax filings of public targets can also be reconciled against their financial statements to confirm accuracy.

(e) Employment and labour

Canadian labour and employment matters can be federally or provincially regulated depending on location and industry, and employee entitlements can be significantly more generous than other jurisdictions in North America. As directors and officers are generally liable in most jurisdictions for unpaid wages (and certain other entitlements), it is especially important for buyers to conduct thorough employment and labour diligence of each target.

Buyers should consult with experienced counsel regarding any transactions involving a transfer or termination of employees or where a significant change in employment terms is contemplated following closing. Depending on the status of certain employees (eg, those on a protected leave), it may not be possible to terminate or transfer them as a result of a transaction.

A detailed review of any target's employment documents, including employment contracts, as well as pension and benefits plans, is highly recommended for every buyer, as the transaction may trigger obligations under such documents. For example, it is not uncommon for executive employment contracts to contain extensive severance entitlements beyond what is required by the legislation or provisions requiring substantial payments upon change of control or dismissal.

If any portion of the target's workforce is unionised, all union documents and collective agreements should also be reviewed for ongoing obligations and to determine any impact on the transaction.

Searches should be run with applicable employment standards authority, the workers' compensation board and other similar entities to determine whether there are ongoing or previous concerns regarding employee injury or death.

(f) Intellectual property and IT

Intellectual property is federally regulated in Canada and trademarks and patents (and some applications) can be searched and reviewed online. Patent applications typically are not public until 18 months following their initial submission and, as a result, it can be difficult to confirm whether a target that has applied for and not yet received a patent may have their application challenged by a third party.

It is highly recommended for buyers to engage counsel to review the material documents of a target's intellectual property, including:

  • to ensure that all trademarks are properly registered; and
  • to verify the quality of the target's patents and applications.

It is also prudent to conduct industry searches for applications to assist in determining the likelihood a dispute will arise in the future and seek disclosure from the target of any potential validity or infringement issues that they are aware of.

Licences for intellectual property and information technology should be reviewed as they may be impacted by transactions and can inform valuations and risk assessments.

(g) Data protection

Personal information in Canada is generally protected under the federal Personal Information Protection and Electronic Documents Act (Canada); and Alberta, British Columbia, Manitoba and Quebec have each passed their own legislation imposing additional handling requirements for various personal and/or health information. It is important to consult experienced counsel to understand which legislation applies to which targets, as the answers will vary based on the nature of the target's business and the jurisdictions in which it operates.

The target's privacy policies and other data protection policies should be reviewed to ensure compliance with the relevant legislation, especially with regard to personal and health information. A buyer should also seek confirmation of:

  • whether the target is aware of any actual or potential unauthorised disclosures or data breaches; and
  • whether such disclosures or breaches have been reported appropriately.

Failure to do so can result in significant penalties and should be factored into the liability allocation provisions of the definitive agreement or addressed with a representations and warranties insurance (RWI) policy.

(h) Cybersecurity

There are no jurisdiction-specific considerations with regard to cybersecurity due diligence in Canada. Diligence is typically conducted by way of a review of a target's policies and seeking confirmation of whether the target is aware of any actual or attempted attacks or breaches. A buyer should also seek confirmation of:

  • whether the target is aware of any actual or potential unauthorised disclosures or data breaches; and
  • whether such disclosures or breaches have been reported appropriately.

Any disclosures should be factored into the liability allocation provisions of the definitive agreement or addressed with an RWI policy.

(i) Real estate

Real estate is governed at the provincial level in Canada and the various provinces each use some form of the Torrens, modified Torrens, English and cadastral land titles systems. The different provinces utilise varying levels of technology in their respective registries, and this can have a direct impact on how long filing and registration of transfers and encumbrances can take, which in turn should be built into the transaction timeline. For those jurisdictions that can take months to effect a registration, title insurance is often obtained to protect buyers against unforeseen deficiencies.

Additionally, depending on the nature of the real property assets being sold and the provincial jurisdiction, foreign ownership rules may apply. For example, in Alberta, there are restrictions on foreign ownership of certain agricultural land under the Agricultural and Recreational Land Ownership Act (Alberta). Manitoba, Saskatchewan, and Quebec each have similar restrictions.

It is important to consult experienced local counsel regarding the necessary diligence regarding ownership, transfer and encumbrances that may affect the target property.

3.2 What public searches are commonly conducted as part of due diligence in your jurisdiction?

The scope of recommended searches will vary based on the nature and scope of the target's business; but at minimum, searches should generally be conducted in each province and territory where an entity operates, has employees or holds assets. A non-exhaustive list of common diligence searches includes:

  • corporate searches, which provide the incorporation details, information on share capital, shareholders, officers and registered office;
  • property registration searches (personal, real and intellectual) to determine ownership and whether any third parties (eg, lenders or lienholders) hold interests in the property and assets of an entity;
  • litigation searches, to determine whether an entity is subject to ongoing or past claims;
  • environmental searches, to determine whether an entity has been or is subject to environmental penalties or actions;
  • workers' compensation board searches, to determine whether an entity has been or is subject to penalties or actions related to employee injuries or fatalities; and
  • insolvency searches, to determine whether an entity is subject to insolvency proceedings or is in the process of voluntarily or involuntarily winding up.

3.3 Is pre-sale vendor legal due diligence common in your jurisdiction? If so, do the relevant forms typically give reliance and with what liability cap?

M&A activity is typically driven by the buyer in Canada. However, seller-run sales processes utilising investment banks or business brokers to conduct a competitive process have become more common, and are in fact the norm in distressed and insolvency transactions. As in other jurisdictions, conducting sell-side due diligence can speed up transaction timelines and can assist with correcting issues prior to a transaction to avoid future price grinds.

Seller due diligence is usually provided on a non-reliance basis, and is generally provided only after a non-reliance letter has been signed. Canadian law firms are not permitted to limit or cap their liability, and therefore are generally unwilling to provide reliance to third parties outside of their own clients. However, seller due diligence may still be effective in evaluating and assessing the risks of a target business, as well as for obtaining an RWI policy.

4 Regulatory framework

4.1 What kinds of (sector-specific and non-sector specific) regulatory approvals must be obtained before a transaction can close in your jurisdiction?

The Federal Competition Act (Canada) is the general antitrust statute in Canada. The Competition Act requires that transaction parties must provide pre-merger notification to the Competition Bureau of a transaction where certain thresholds are met. For 2023, these thresholds are as follows:

  • Size of transaction: Either the value of the target's Canadian assets or the target's gross revenues from sales in or from Canada generated by its assets in Canada exceed C$93 million; and
  • Size of parties: Either the value of the Canadian assets of the transaction parties (and their affiliates) or the gross revenues from sales in, from or into Canada of the parties (and their affiliates) exceed C$400 million.

Where the thresholds are met or exceeded, the transaction parties must:

  • provide pre-closing notification;
  • observe statutory waiting periods; and
  • pay a significant filing fee.

In choosing whether to object to a transaction, the Competition Bureau will consider factors such as:

  • the level of economic concentration in the relevant industry;
  • the market shares of the merging parties;
  • the conditions of entry and barriers to entry; and
  • the anti-competitive effects of the proposed transaction.

The Investment Canada Act (ICA) is the general foreign investment review statute in Canada. Under the ICA, if an applicable transaction meets or exceeds the relevant threshold, the minister of innovation, science and industry must review the investment and determine whether it is likely to be of 'net benefit' to Canada. The relevant thresholds for 2023 for the applicable categories are set out below:

  • For direct acquisitions of Canadian businesses by private sector investors from:
    • countries with free trade agreements with Canada, the threshold is C$1.931 billion; and
    • other World Trade Organization countries, the threshold is C$1.287 billion.
  • For direct acquisitions by state-owned enterprises of a non-cultural Canadian business, the threshold is C$512 million.
  • For direct acquisitions involving cultural businesses (eg, those involving the production, publication, distribution, sale or exhibition of books, magazines, film, video and music recordings), the threshold is C$5 million in book value of the target's assets. Indirect acquisitions of cultural businesses are subject to a C$50 million threshold subject to certain conditions.

Even if an investment in one of the categories above does not meet the threshold, the minister must be notified of the investment within 30 days of closing. An investment may also be subject to a national security review even when it does not constitute a controlling interest in the target. When the government is not notified of such an investment, it has discretion to conduct a national security review up to five years after the deal closes. A new voluntary notification regime allows foreign investors to trigger a 45-day timeline for the federal government to determine whether a national security review is needed. Otherwise, the government will typically determine whether a review is needed within 45 days of being notified of a deal closing.

In addition to the general antitrust and foreign investment legislation applicable to all transactions, a variety of approvals may be required, depending on the industry and business of the target as well as the licences, authorisations and approvals it holds. Furthermore, if Indigenous land interests or rights are involved, the transaction may involve consultation with the affected Indigenous communities. Other regulatory approvals may also be required depending on the nature of the transaction.

There are also a variety of Canadian industries that require a minimum level of control to be maintained by Canadians. These include airlines, telecommunications, broadcasting, banking, insurance and other industries in various jurisdictions. Buyers should consult with experienced legal counsel at the LOI stage when evaluating regulated businesses to ensure that they are eligible to acquire control and operate the target.

4.2 Which bodies are responsible for supervising M&A activity in your jurisdiction? What powers do they have?

The Competition Bureau's objective is to ensure that Canadian businesses and consumers operate in a competitive and innovative marketplace. The bureau has powers to investigate any merger and enforce the Competition Act. Litigation may result when the bureau cannot resolve a case consensually and it has traditionally been quite active in enforcing its jurisdiction. The bureau considers elements such as:

  • the level of economic concentration in the relevant industry;
  • the market shares of the merging parties;
  • the conditions of entry and barriers to entry; and
  • the likely anti-competitive effects of a proposed transaction.

If there are concerns about a merger, the bureau can negotiate remedies or apply to the Competition Tribunal to challenge the merger.

The minister of innovation, science and industry also reviews matters under the ICA summarised in question 4.1.

Provincial securities regulators also oversee their jurisdictions' securities laws, which may apply to an M&A transaction. Their primary goals are to protect investors and ensure market integrity and fairness and compliance with securities law. While their powers vary between jurisdictions, in general securities regulators:

  • review and approve certain prescribed types of M&A transactions;
  • implement and enforce rules;
  • impose disclosure requirements; and
  • take action against those that contravene securities laws.

Other regulators may also have jurisdiction over a transaction depending on the nature of the business of the target and the jurisdictions in which it operates. It is not unusual for a change of control of a licence holder to trigger a requirement to obtain the prior approval of the applicable regulator or result in an automatic termination. As a result, it is especially important to consult with experienced local counsel to understand what approvals are required and the timing for obtaining such approvals (which may be extended due to the effects of the COVID-19 pandemic).

4.3 What transfer taxes apply and who typically bears them?

There are generally no specific transfer taxes imposed for transfers of shares or personal property in an M&A transaction other than sales tax (where the transaction is not exempt or the transfer does not occur on a tax-deferred basis). However, certain taxes and fees may apply depending on the nature of the transaction and the province or territory in which it occurs.

Some provinces, such as Ontario, have a land transfer tax that applies to the sale of real property, which could be triggered by an M&A transaction. The amount of tax varies per province and is typically calculated based on the property value. The buyer typically bears the cost of the land transfer taxes; however, this can be negotiated between the transaction parties.

Share sales are typically preferred by sellers, which benefit from lighter taxation on capital gains and, where the seller is an individual, from a lifetime capital gains exemption. Asset sales on the other hand may result in tax recapture of capital cost allowances and additional taxation upon removing funds from a corporate seller, often making them a less attractive option.

Conversely, buyers often prefer to acquire assets, which for tax purposes are assessed at fair market value following the acquisition, increasing the tax shield available to the buyer.

5 Treatment of seller liability

5.1 What are customary representations and warranties? What are the consequences of breaching them?

Representations and warranties in a transaction agreement are typically broken down into fundamental representations and transaction-specific representations. The scope of fundamental representations and warranties may be negotiated; however, they typically include, at minimum:

  • corporate status;
  • authorisation to enter into the transaction and perform obligations under the transaction documents;
  • no conflict with the constating documents;
  • organisation and capitalisation of the target;
  • title to the shares or assets subject to purchase; and
  • compliance with anti-corruption legislation.

The specific representations and warranties will depend on the nature and types of the target's business or assets. The number and scope of these may vary significantly depending on the sophistication of the parties and the extent of the due diligence process, and may be conditioned by materiality, knowledge and provision of disclosure schedules.

A non-exhaustive list of customary transaction-specific representations and warranties include those relating to:

  • the status of contracts and any known or anticipated breaches;
  • the status of any claims or outstanding litigation against the business;
  • the provision of known encumbrances;
  • confirmation of tax filings and remittances;
  • employment terms and benefits (and any related claims or unionisation efforts);
  • the accuracy of information provided in diligence process and confirmation of full disclosure;
  • confirmation of compliance with applicable law and regulations;
  • notification of any information disclosures or cyber breaches;
  • the status of intellectual property;
  • the status of owned or leased real property; and
  • the condition of assets.

The representations and warranties will typically be backstopped by an indemnity. Fundamental representations and warranties are usually excluded from the liability cap; whereas the seller will typically seek to negotiate an indemnification cap on liability for non-fundamental representations and warranties. Depending on transaction size, it is not unusual for the cap to be between 10% and 20% of the purchase price; however, this is always a highly negotiated term and commonly excludes tax liabilities or pre-closing litigation liabilities that may be incurred by the buyer following closing. Usually, a seller will seek to have the aggregate liability capped at the purchase price for all matters not subject to an indemnification cap.

Sellers should also consider whether they should ask for tipping baskets (usually around 1% of the purchase price) or include a materiality scrape when negotiating the indemnification provisions. These will be transaction specific but may be required where a representations and warranties insurance (RWI) policy is sought.

5.2 Limitations to liabilities under transaction documents (including for representations, warranties and specific indemnities) which typically apply to M&A transactions in your jurisdiction?

As noted in question 5.1, it is common for the purchase agreement to include a limitation of liability, with such limits having accepted parameters that are ultimately up for negotiation by the parties in each individual deal. There are no statutory restrictions on negotiating caps of liability resulting from a commercial agreement, provided that liability for fraud cannot typically be limited by a contractual provision. That said, the parties should also consider whether wilful misconduct, gross negligence or dishonesty not amounting to fraud should also be excluded from the limitation of liability.

5.3 What are the trends observed in respect of buyers seeking to obtain warranty and indemnity insurance in your jurisdiction?

RWI is a useful risk allocation tool that is becoming increasingly popular in Canadian M&A deals as a way to facilitate complex transactions. It can be obtained by either the buyer or the seller and customised to the applicable transaction.

In recent years, major RWI brokers have grown their presence in Canada, increasing the availability, efficiency and affordability of RWI for both international and domestic transactions. The costs generally associated with obtaining a RWI policy are the underwriting fee, the premium and the retention amount; although there may be additional costs, such as premium taxes and an insurance broker fee.

The underwriting fee charged by the insurer will typically fall in the range of C$30,000 to C$50,000; however, this may vary depending on the transaction. The underwriting fee covers the costs of the insurer and its outside counsel engaged to review the due diligence process conducted by the parties to the transaction and/or conduct further due diligence.

The premium charged by insurers is typically a one-time fee that is paid upfront (at the time the policy is issued) and generally falls between 2% and 4% of the coverage limit, although it has been suggested that premiums for RWI policies have been decreasing in recent years on account of increased competition in the RWI underwriting market.

The cost of the RWI policy will also include a retention amount, which requires a specific amount of losses before the insurer's obligation to pay out insurance proceeds is triggered. The retention amount is typically a minimum of 1% of the transaction value, often landing somewhere between 1% and 3% of the transaction value.

Most insurers will charge a minimum premium of between C$100,000 and C$150,000, regardless of the coverage limit. As a result, the use of RWI is generally viewed as less suitable for transactions that carry an indemnity cap of less than C$3 million.

5.4 What is the usual approach taken in your jurisdiction to ensure that a seller has sufficient substance to meet any claims by a buyer?

Part of the diligence process is identifying the creditworthiness of the transaction counterparty, as the outcome informs the options for recovery in the event of an indemnity claim. In addition to the RWI policies discussed in question 5.3, there are a few other tools that can be utilised to help provide buyers with comfort that they will be able to recover in the event of an indemnity claim.

One option is having the seller's obligations backstopped by a parent or other party with satisfactory financial resources. This is typically implemented using a guarantee, which may also be secured against the assets of the guarantor. This option does not require any additional capital to be expended or amounts held back, which can be more amenable to a seller, provided that it forces the buyer to litigate in the event that the guarantor refuses to pay out when the guarantee has been triggered.

Another option is having a portion of the purchase price either held back by the buyer or held by an escrow agent. This provides the most security to buyers as there are funds readily available to respond to claims. However, sellers typically do not want the purchase price tied up for significant periods and may insist on a staggered release of funds, a reduced claims window in the transaction agreement and/or seek interest on the amounts withheld in the event no claims arise.

These provisions are usually heavily negotiated and there are a variety of other mechanisms that may be used, in combination with the foregoing, including letters of credit and other financial security instruments, all subject on deal size and structure.

5.5 Do sellers in your jurisdiction often give restrictive covenants in sale and purchase agreements? What timeframes are generally thought to be enforceable?

It is common for buyers to require and sellers to enter into restrictive covenant agreements as part of a Canadian M&A transaction. These covenants are intended to protect the buyer's investment and usually include a combination of non-compete provisions, non-solicitation provisions and/or confidentiality provisions. Courts generally recognise the parties' rights to freely contract and mutually agree upon limitations regarding business activities. The rationale is that in commercial agreements, parties are on 'equal footing' to have equal bargaining power. This presumption stems from the understanding that parties with comparable expertise, resources and bargaining power are best positioned to determine what is reasonable between them.

To establish that a restrictive covenant is reasonable, the party seeking to enforce it must demonstrate it is reasonable in:

  • the geographical scope of the restrictions;
  • the temporal scope of the restrictions; and
  • the scope of the restricted activity.

There is no rigid rule on what will be considered appropriate. Courts will consider whether the restrictive covenant is vague, overly broad or unreasonable in the circumstances, but will usually accept it in transactions where it may be more narrowly interpreted; however, restrictive covenants may be outright prohibited in employment (again, care should be taken with respect to reciprocal non-solicitation provisions which are now illegal in Canada, with some exceptions) or other contexts.

The geographical scope should be limited to the area in which the business operated and a reasonable perimeter. For a temporal restriction to be enforceable, it must have a clearly defined and specific limit. There is no rule regarding the precise duration of an enforceable timeline, but it is common for the scope of agreements in Canadian M&A transactions to be between two and five years.

5.6 Where there is a gap between signing and closing, is it common to have conditions to closing, such as no material adverse change (MAC) and bring-down of warranties?

It is common to have conditions to closing for transactions involving an interim period. Common conditions include, but are not limited to, the following:

  • all closing deliverables having been provided;
  • bring-downs of the representations and warranties of the party (attention should be paid to the date of bring-down and whether there is a materiality qualifier);
  • no MAC having occurred;
  • all regulatory approvals having been obtained;
  • all third-party contractual consents having been obtained;
  • no law preventing closing of the transaction; and
  • no litigation or claim being advanced that would prevent closing of the transaction.

The transaction agreement will generally require the parties to cooperate in obtaining regulatory approvals, with no obligation to close if a fundamental approval cannot be obtained. The seller will usually have the primary obligation to obtain consents to assign material contracts, although it is common for the buyer to be required to provide necessary information to the counterparty to obtain the consent.

It is also common to include a provision requiring that the seller operate in the ordinary course of business during the interim period; this may include restrictions on activities that may be undertaken without consent from the buyer, such as:

  • taking on debt;
  • issuing additional shares;
  • liquidating inventory; or
  • engaging in capital projects.

MAC clauses are generally heavily negotiated and subject to a high materiality standard and significant exclusions. A MAC clause will often be limited to business-specific risks of the target entity, with the buyer expected to absorb broader risks, such as impacts to the industry or the broader economy. Customary carve-outs include:

  • industry-wide fluctuations or risks;
  • changes to general economic and political conditions;
  • changes to applicable laws; and
  • force majeure, such as war, natural disasters and pandemics.

A MAC clause does not negate the need for due diligence, as a buyer must prove a MAC would be unforeseeable despite customary due diligence.

6 Deal process in a public M&A transaction

6.1 What is the typical timetable for an offer? What are the key milestones in this timetable?

Canadian takeover bids must be open for acceptance for a minimum of 105 days – a period known as the deposit period. The deposit period can be reduced to a minimum of 35 where a target issues a deposit period news release in respect of a proposed or commenced takeover bid (eg, in the circumstances of a negotiated or recommended takeover bid). The deposit period may be open for longer and may be extended by the buyer in certain circumstances.

Takeover bids are generally also subject to a mandatory minimum tender condition of over 50% of the outstanding shares of the class that are subject to the bid, not held by the buyer or its joint actors. Once the mandatory minimum condition and all other bid conditions are met:

  • the deposit period must be extended by 10 days; and
  • the offeror must promptly issue a news release announcing, among other things:
    • the satisfaction of the minimum tender requirement;
    • the number of securities deposited and not withdrawn as at the expiry of the initial deposit period; and
    • the extension of the period during which securities may be deposited under the bid for the mandatory 10-day period.

In the case of an amalgamation, plan of arrangement or other transaction requiring approval at a shareholders' meeting, a period not less than 21 days and up to 50 days is generally required to comply with applicable statutory notice periods for shareholder meetings.

6.2 Can a buyer build up a stake in the target before and/or during the transaction process? What disclosure obligations apply in this regard?

Buyers may purchase up to 19.99% of a target without triggering a takeover bid process which would then be subject to certain disclosure requirements, including the requirement to send a takeover bid circular to shareholders. However, early warning disclosures rules, which are harmonised across Canada, require that a buyer acquiring 10% or more shares of a public target:

  • issue a press release disclosing the extent of their holdings, their identity and their intention in acquiring the shares; and
  • file a prescribed form of early warning report on the System for Electronic Document Analysis and Retrieval within two days.

A buyer that has acquired more than 10% of a public company must then make further disclosures:

  • for each 2% increase or decrease of target holdings it acquires or sells; or
  • if there is a change in any material fact made in the original disclosure.

Generally, acquisitions of less than 10% of a target need not be disclosed. Purchases of stock by parties that already hold 10% or more of a target are considered insider bids and carry even more stringent requirements, including the need for an independent evaluation.

6.3 Are there provisions for the squeeze-out of any remaining minority shareholders (and the ability for minority shareholders to 'sell out')? What kind of minority shareholders rights are typical in your jurisdiction?

Canadian corporate statutes generally allow for minority shareholders to be 'squeezed out' once a takeover bid has been accepted by 90% or more of the outstanding shares of the class, subject to rights of dissent and appraisal.

Once a buyer has acquired at least 90% of the outstanding shares, it may send notice to the remaining shareholders (under the federal corporate statute, within 60 days following the termination of the takeover bid and in any event within 180 days after the date of the takeover bid) exercising its rights to acquire the remaining shares at the same price. Each shareholder has a right to dissent and apply to the court to establish the fair market value of the shares. If a dissenting offeree does not notify the offeror in accordance with the process set forth in the legislation, it is deemed to have elected to transfer the shares to the offeror on the same terms that the offeror acquired the shares from the offerees that accepted the takeover bid.

The dissent process does not interfere with the acquisition of the shares, as the court process to determine fair market value of the shares is completed following the acquisition. The buyer is bound by the price determined by the court, which may be higher or lower than the initial bid price. The fair market value process may be settled by the parties prior to the conclusion of the court process.

If a buyer is unable to reach 90% of the outstanding shares but has acquired two-thirds (or 75%, depending on the province) of the target's shares, the target may be able to propose an amalgamation, arrangement or similar transaction to acquire the remaining shares, with the buyer's holdings carrying the required shareholder vote.

6.4 How does a bidder demonstrate that it has committed financing for the transaction?

A cash takeover bid cannot generally be conditioned on the bidder obtaining financing, subject to limited exceptions. For a takeover bid that is to be paid in whole or in part in cash, the offeror must make 'adequate arrangements' prior to the bid to ensure that funds are available to make full payment for all the securities the offeror has offered to acquire. This is generally satisfied by a binding commitment letter from its financing source containing only limited customary conditions, such as the completion of a definitive credit agreement. Discretionary conditions such as due diligence will usually be unacceptable in this context.

6.5 What threshold/level of acceptances is required to delist a company?

In order to voluntarily delist a company from the Toronto Stock Exchange (TSX), the TSX requires the issuer to obtain approval from a majority of the corporation's shareholders, unless other conditions are met. These conditions include situations where:

  • there is a near-term liquidity event, such as a take-private transaction; or
  • there is an alternative market available for the delisted securities.

Similarly, in order to voluntarily delist a company from the TSX Venture Exchange (TSX-V), the TSX-V will require majority of the minority shareholder approval for the delisting application, unless the TSX-V is satisfied that alternative markets exist for the listed securities. Typically, a class of listed securities will be delisted from the TSX-V when the issuer has redeemed its shares or a successful takeover bid for the shares have been completed.

Additionally, a company can only apply to cease being a reporting issuer if there are:

  • fewer than 51 shareholders of the company; and
  • not more than 15 shareholders in any one Canadian jurisdiction.

Take-private transactions may be executed using different structures, such as an amalgamation, a takeover bid or a plan of arrangement. While the general rules that apply to public M&A deals also govern take-private transactions, some jurisdictions – such as Ontario and Alberta – have put in place extra regulations to protect minority shareholders from potentially abusive or unfair practices. These regulations provide minority shareholders with the right to:

  • formal valuation;
  • minority shareholder approval;
  • additional disclosures; and
  • the establishment of a special committee to oversee the transaction.

Delisting is not uncommon, with as many as 70 companies delisting from the TSX per year. Commonly cited reasons for delisting include:

  • the high regulatory burden imposed by the exchange;
  • a failure to meet the TSX's listing requirements; and
  • acquisition by private equity or foreign companies.

6.6 Is 'bumpitrage' a common feature in public takeovers in your jurisdiction?

"Bumpitrage" is the practice of an activist investor acquiring shares in target subject to a takeover bid and facilitating opposition to the existing bid terms in an effort to have it renegotiated. It is becoming more common in Canada as several aspects of Canadian securities laws protecting shareholders rights incentivize the strategy, including the length of the minimum bid period. Buyers looking to acquire a target by way of takeover bid should be aware of this and other similar strategies, especially as the Canadian markets continue to see strong interest from sophisticated U.S. investors.

6.7 Is there any minimum level of consideration that a buyer must pay on a takeover bid (eg, by reference to shares acquired in the market or to a volume-weighted average over a period of time)?

Under Canadian securities law, all takeover bids must include a mandatory minimum tender condition of over 50% of outstanding shares, excluding those held by the bidder or its joint actors. This condition is aimed at preventing a situation where a bidder acquires control or a controlling interest in the target without sufficient support from independent shareholders. If the bidder satisfies this 50% threshold and has met or waived all other terms and conditions of the bid, the bid period will be subject to a mandatory 10-day extension. This extension allows shareholders that were holding out from a bid to tender their shares once the majority of the shares have been tendered.

A formal bid must have a consideration that is at least equal to the highest price paid under pre-bid purchases within the preceding 90 days, including those made in the market or through private agreements, but does not include normal course purchases on a published market or purchases directly from the issuer.

6.8 In public takeovers, to what extent are bidders permitted to invoke MAC conditions (whether target or market-related)?

In public takeover transactions in Canada, securities regulators closely scrutinise the use of MAC conditions and impose various requirements and limitations. The purpose of these requirements is to ensure that MAC conditions are used appropriately and not as a means of avoiding contractual obligations.

A high threshold must be met to successfully invoke a MAC clause as a condition to closing. This high threshold requires that the adverse change be significant both in its duration and impact. The party looking to invoke a MAC clause must provide detailed disclosure regarding the nature and scope of the condition, which must be included in the takeover bid circular or other public disclosure documents filed with the regulator. Furthermore, the party seeking to rely on the MAC clause must demonstrate the MAC disproportionately affects the target and is not a general market condition. This may involve preparing comparisons of the target against other companies in the industry or the market in general to show that the impact is contrary to expected trends in the industry.

Convincing evidence is required before a buyer can walk away from a deal based on a MAC event, including evidence that the decline of the target business was unforeseen by the buyer. Additionally, regulators may require the bidder to provide ongoing updates on the occurrence of any MAC events or an expert opinion on the impact of the MAC event on the company's value.

6.9 Are shareholder irrevocable undertakings (to accept the takeover offer) customary in your jurisdiction?

Irrevocable undertakings are commonly used in Canada. An offeror may seek irrevocable undertakings through 'lock-up agreements' before or after making an offer. 'Hard' lock-up agreements are those where the target shareholder irrevocably agrees to tender its shares to the takeover bid that is to be launched by the bidder, provided that the bid price is not lower than the price specified in the lock-up agreement. 'Soft' lock-up agreements contain a conditional commitment by the shareholder to tender to the bid but allow a shareholder to tender to a higher competing bid should one materialise. 'Semi-hard' lock-up agreements are those that allow a shareholder to tender to a higher competing bid where the higher offer exceeds the existing offer by a specified amount.

In order to avoid being considered a joint actor of the offeror, 'locked-up' shareholders cannot have received any different consideration, collateral benefit or other consideration greater than the entitlement of the other securities holders or participate in the bid strategy.

7 Hostile bids

7.1 Are hostile bids permitted in your jurisdiction in public M&A transactions? If so, how are they typically implemented?

Hostile bids (or unsolicited bids) are permitted across Canada. In a hostile takeover bid, an offeror makes a takeover bid offer directly to the target's shareholders, thereby bypassing the target's management and board of directors. Amalgamations and plans of arrangement are not available in hostile bids as they require the cooperation of the target.

A potential buyer may result to a hostile offer in circumstances where:

  • the target has refused to negotiate or engage with a potential buyer; or
  • the potential buyer identifies possible strategic rationale for this approach (eg, when a share price has decreased significantly and shareholders may be agreeable to a liquidity event).

When making a hostile offer, the potential buyer will not have the benefit of being able to conduct due diligence on the target's undisclosed information and will need to rely on the target's continuous disclosure filings on the System for Electronic Document Analysis and Retrieval (SEDAR) and the potential buyer's own market research and public due diligence.

In hostile takeover bids, a bidder must prepare and deliver a takeover bid circular to target shareholders. The takeover bid circular should be carefully drafted, as it is the offering document that is delivered to shareholders. The takeover bid circular must include certain information prescribed by securities law, including:

  • a formal offer to purchase the securities subject to the takeover bid on the terms and conditions set out in the circular;
  • prescribed information regarding the offeror, the target and the takeover bid; and
  • additional information the potential buyer wishes to communicate to shareholders, such as:
    • background information on the offer;
    • how they can accept the offer; and
    • why this offer provides good value to shareholders

The takeover bid circular must be filed on SEDAR and delivered to the target's shareholders whenever a buyer acquires 20% or more of a public company, unless certain exemptions apply.

7.2 Must hostile bids be publicised?

Hostile bids must be publicised under Canadian law. A bidder that wishes to acquire control of a publicly traded company must make a formal public takeover bid, which must be sent directly to the shareholders of the target and filed on SEDAR, regardless of whether the bid is hostile or friendly. Each province has its own securities laws and regulatory bodies, which may result in variations of specific requirements across jurisdictions.

In response to hostile bids, target boards generally release a 'stop, look and listen' press release, telling shareholders to not take action prior to receiving the recommendation of the board. Such recommendation is included in the directors' circular, which must be prepared and filed on SEDAR within 15 days of the commencement of a takeover bid.

7.3 What defences are available to a target board against a hostile bid?

The Canadian Securities Administrators (CSA) recognises that takeover bids play an important role in the economy by acting as a form of discipline on corporate management and as a means of reallocating economic resources to their best uses. As such, Canadian securities regulators have adopted a policy that the decision whether to tender shares to a takeover bid is for shareholders to make, and the target board must not pre-empt or frustrate that right. The policy is detailed in National Policy 62-202 Take-Over Bids - Defensive Tactics.

In responding to a hostile bid, the target board must at all times exercise a duty of care and act honestly and in good faith, with a view to the best interests of the corporation. Regulators will examine a target board's actions to determine whether the board is abusing securityholders' rights.

Securities legislation in Canada expressly authorises management of a target to take one or more of the following actions in response to a bid that it opposes:

  • Attempt to persuade shareholders to reject the bid;
  • Take action to maximise the return to shareholders including soliciting a higher bid from a third party; and
  • Take other defensive measures to defeat the bid.

However, the CSA has advised capital markets participants that it is prepared to examine the target's tactics in specific cases to determine whether they are abusive of shareholder rights. Defensive tactics that may come under scrutiny if undertaken during the course of a bid, or immediately before a bid, or if the target board has reason to believe that a bid might be imminent, include:

  • the issuance, or the granting of an option on, or the purchase of, securities representing a significant percentage of the outstanding securities of the target;
  • the sale or acquisition, or granting of an option on, or agreeing to sell or acquire, material assets; and
  • the conclusion of a contract other than in the normal course of business or corporate action taken other than in the normal course of business.

If a target board obtains shareholder approval prior to the implementation of such defensive tactics, it will generally allay such concerns.

8 Trends and predictions

8.1 How would you describe the current M&A landscape and prevailing trends in your jurisdiction? What significant deals took place in the last 12 months?

M&A activity over the last 12 months has been in line with historic norms, although down from the high points seen in 2021. Due to global economic and geopolitical uncertainties, including the increased cost of debt and higher interest rates, solvent M&A activity has slowed in recent months while distressed M&A has increased.

The past few years have seen an increase in private equity activity in Canada, and we expect to continue to see strong interest in the Canadian market. Shareholder activism has also increased significantly over the past couple of years in Canada, and we expect to see the trend continue in some respect.

8.2 Are any new developments anticipated in the next 12 months, including any proposed legislative reforms? In particular, are you anticipating greater levels of foreign direct investment scrutiny?

The federal government has proposed changes to the Competition Act that are likely to alter the landscape for merger reviews by:

  • expanding the rights and powers of the commissioner of competition;
  • introducing new or amended tests and thresholds; and
  • expanding private enforcement.

These amendments will significantly impact how companies do business in Canada, making the process and timing of possible amendments to the Competition Act critical.

In addition, significant amendments have been made to the Investment Canada Act (ICA) over the past decade and the focus on national security review of foreign investment is likely to continue. Further proposed amendments to the ICA will have a considerable impact on how foreign investors discharge their obligations under the ICA and in the national security review process. The proposed amendments include mandatory pre-closing filings in prescribed business sectors, new penalties for non-compliance with filing obligations and new provisions on the protection of sensitive information.

While Canada is implementing increased scrutiny on foreign investment, proposed amendments do not eliminate opportunities for foreign investors. Many foreign investors already make pre-closing filings to decrease the likelihood of a regulatory challenge, and therefore many investments are likely to remain unaffected (if not delayed). Despite the ongoing changes and potential volatility in the Canadian regulatory environment, the country's stable business environment and attractive assets are likely to continue to appeal to a wide range of investors. To assess filing requirements and risks, foreign investors and Canadian businesses should continue to engage experienced counsel early in the transaction-planning process.

9 Tips and traps

9.1 What are your top tips for smooth closing of M&A transactions and what potential sticking points would you highlight?

In proceeding with a Canadian M&A transaction, we recommend the following:

  • Engage Canadian legal counsel early in the M&A process to assist with:
    • identifying and coordinating all necessary regulatory approvals;
    • structuring and planning the transaction for optimal taxation, regulatory and other factors; and
    • conducting comprehensive legal, regulatory and tax due diligence, including allowing adequate time to follow up on any outstanding issues.
  • Enter into non-disclosure agreements and exclusivity agreements, as appropriate.
  • Coordinate with advisers and other stakeholders to develop a reasonable timeline, taking into account time required to obtain regulatory approvals and reach other milestones.
  • Agree on the material commercial terms of the transaction, as evidenced by a letter of intent.
  • Involve advisers as required (including legal counsel) at all stages of negotiation and draft definitive transaction agreements.
  • Make use of closing technology, including electronic signatures and document tracking applications for closing checklists and closing document organisation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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