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• Introduction

• Public M&A

• Private M&A

• Other Considerations

1. Introduction

This Chapter is intended to provide a high-level introduction to the key legal considerations in acquiring a Canadian business. These will vary depending on whether the transaction is an acquisition of a public company (a public M&A transaction) or an acquisition of a privately held company or a subsidiary or division of a public company (a private M&A transaction). This Chapter provides a brief overview of (i) public M&A considerations, (ii) private M&A considerations, and (iii) additional considerations applicable to both public and private M&A transactions. 

2. Public M&A

The principal alternative structures for acquiring a Canadian public company are a process referred to as an arrangement and a take-over bid.¹ The vast majority of friendly public M&A transactions in Canada proceed by way of arrangement under the corporate statute under which the target company is incorporated, typically the federal Canada Business Corporations Act (CBCA) or a provincial corporate statute. Take-over bids, in contrast, are usually made only in the context of hostile transactions. These two alternative acquisition structures are further discussed below, followed by a short discussion of the typical process and key transaction terms for a public company acquisition.

2.1 - Arrangements

Canadian corporate statutes provide a procedure whereby a corporation may apply to the court for an order approving an arrangement in respect of the corporation. “Arrangement” is a broad, inclusionary term under Canadian corporate statutes, and in the CBCA, for example, is defined to include:

1. an exchange of securities of a corporation for property, money or other securities of the corporation or property, money or securities of another body corporate; and
2. an amalgamation of a corporation with a body corporate that results in an amalgamated corporation subject to the CBCA.

The list of transactions that constitute an arrangement under corporate statutes is extensive and non-exhaustive, with the result that a wide range of pre-closing reorganization and similar transactions can be effected in connection with an acquisition completed by way of arrangement.

2.1.1 - Acquiring a Business by Way of Arrangement 

The definitive agreement governing an acquisition by way of arrangement is usually referred to as an arrangement agreement. The arrangement agreement sets out the terms of the transaction, including the consideration to be received by the target security holders, the conditions of closing, the obligations of each party with respect to satisfying such conditions, and other covenants of the parties during the interim period between signing of the arrangement agreement and closing. It is the execution of the arrangement agreement that customarily gives rise to public announcement of the transaction, although in some circumstances a proposed transaction will be publicly announced before the arrangement agreement is signed. ²

Under corporate law, an arrangement requires the approval of the court, as well as approval of the target company’s shareholders (generally 66-2/3% of the votes cast at a shareholders meeting to approve the transaction). ³ Shortly following the execution of an arrangement agreement, the target company makes an application to the court for an interim order approving the process for calling and holding the shareholders meeting to approve the arrangement. A proxy circular is then sent to the target’s shareholders (typically 30 to 60 days following signing of the arrangement agreement). The proxy circular is required to include sufficient information to allow those entitled to vote on the arrangement to form a reasoned judgment as to whether to vote for or against the arrangement resolution, as well as certain prescribed information. Canadian proxy circulars are not subject to pre-mailing review by securities regulators, although both the court and the Director under the CBCA may provide limited comments on the draft circular before it is mailed to shareholders. ⁴ 

Where the consideration consists of securities of the purchaser, the proxy circular must contain prospectus-level disclosure regarding the purchaser’s business and financial performance and condition, as well as pro forma financial statements giving effect to the completion of the arrangement. For companies in the resource sector, technical reports on the purchaser’s properties or oil and gas resources may be required. Issuing securities as consideration will result in the purchaser being a “reporting issuer” under Canadian securities laws, subjecting the purchaser to certain ongoing disclosure requirements.

The target shareholders meeting is typically held approximately 30 days following mailing of the proxy circular, and provided the required approval is obtained, final court approval is sought and obtained within a few days thereafter. As a result, unless any applicable regulatory approvals require a longer timeframe, an acquisition of 100% of the shares of the target by way of arrangement can typically be completed approximately 90 days following signing and announcement.

2.2 - Take-Over Bids

A take-over bid is defined by Canadian securities laws as an offer to acquire ⁵ outstanding voting securities or equity securities of a class made to one or more persons, any of whom is in the local jurisdiction or whose last address as shown on the books of the target is in Canada, where the securities subject to the offer to acquire, together with the offeror’s securities of the target ⁶, constitute in the aggregate 20% or more of the outstanding securities of that class of securities at the date of the offer to acquire. ⁷ The take-over bid regulatory framework imposes extensive substantive, procedural and disclosure requirements on any party making an offer to acquire securities that constitutes a take-over bid.   

A party wishing to acquire a significant minority stake of outstanding securities of a public company will typically seek to avoid triggering the extensive take-over bid requirements by ensuring its ownership interest remains below the 20% threshold, or ensuring it acquires any larger stake pursuant to one of the statutory exemptions from such requirements that are available in certain circumstances. A party wishing to acquire 100% of the shares of a public company, however, may do so, including in circumstances where the target company board is not supportive of the proposed transaction, by making a takeover bid for all of the company’s shares in accordance with such takeover bid requirements. 

2.2.1 - Acquiring a Business by Way of Take-Over Bid

Takeover bids are highly regulated in a regime that attempts to achieve the following public policy objectives:

1. equal treatment of all shareholders of the target;
2. sufficient disclosure to target shareholders to permit them to make an informed assessment of the offer;
3. adequate time in which the target shareholders can make an informed decision;
4. in the context of a hostile bid, an appropriate amount of time to permit the target board to adopt value maximization strategies, including soliciting a better offer; and
5. limitations on acquisition conduct before, during and after a take-over bid.

A party wishing to acquire a Canadian public company by way of take-over bid does so by making a formal offer to the target company’s shareholders pursuant to a take-over bid circular, which is a detailed disclosure document mailed to the target company’s shareholders by the offeror. The circular must set out prescribed information about the offer and the parties, including shareholdings and past dealings by the bidder and related parties in shares of the target. If the target company has Quebec shareholders, which will often be the case, then unless a de minimis exemption applies, the circular must also be prepared in the French language for the purposes of mailings to such Quebec holders. The circular must be delivered to the target company and filed with the securities commissions and applicable stock exchange but is not subject to any pre-clearance review. The offeror is generally free to determine the price at which it chooses to bid, and the consideration may be either cash or securities (or a combination of cash and securities).

Where the purchase price consists of securities of the offeror, the take-over bid circular must contain prospectus-level disclosure regarding the offeror’s business and financial performance and condition, as well as pro forma financial statements giving effect to the completion of the offer. For companies in the resource sector, technical reports on the offeror’s properties or oil and gas resources may be required. Issuing securities will result in the offeror being a “reporting issuer” under Canadian securities laws, subjecting the offeror to certain ongoing disclosure requirements.

Securities rules generally require that an offer remain outstanding for a minimum period of 105 days, during which period the offeror is not permitted to acquire any securities under the offer. With the consent of the target company’s board, that minimum deposit period may be reduced to as short a period as 35 days. For so long as a target company is not supportive of an unsolicited bid and has not surfaced an alternative offer, the minimum deposit period will remain at 105 days. During that time, the target’s board will seek to dissuade shareholders from tendering to the bid and to identify a superior offer or other alternatives they consider superior to the bid. In doing so, the target board must comply with policies of Canadian securities regulators that are designed to ensure that shareholders ultimately have the ability to decide whether to accept a bid and that a target’s board does not take measures that have the effect of denying shareholders of that ability and frustrating an open take-over bid process. If a target company subsequently waives the minimum 105-day deposit period for another bid or announces that it intends to effect an alternative change of control or similar transaction, then the bidder may reduce the deposit period for the original offer to end on the date that is the later of 35 days after the date of the original offer and 10 days following the date the bidder mails to target shareholders a notice reducing the minimum deposit period for the offer. 

Upon the expiry of the minimum deposit period, the offeror will be permitted to acquire all shares deposited under the offer, provided that more than 50% of the target company shares not beneficially owned, controlled or directed by the offeror and those acting jointly or in concert with the offeror have been deposited under the offer and not withdrawn. Following such initial take up of shares under the offer, the offeror will be required to extend the offer for a period of at least 10 days, during which time shareholders who had not previously tendered will be permitted to deposit shares under the offer. 

2.2.2 - Compulsory Acquisitions and Second Step Squeeze-Out Transactions

Provided that an offeror acquires sufficient shares under a take-over bid such that it owns more than 66-2/3% of the target company’s shares, it will generally then be able to effect a compulsory acquisition under corporate law or another second-step transaction that will enable it to acquire the remaining shares which it did not acquire under the bid and ultimately own 100% of the target company. The method and time involved in acquiring the remaining shares of the target will vary depending on the percentage of shares acquired under the bid, but the shares not tendered to the offer can be acquired in any event within approximately 45 days following completion of the bid. To ensure that it will have the ability to acquire 100% of the target company’s shares, a bidder will often include in its offer a condition to its obligation to take up shares under the offer that sufficient shares must have been tendered under the offer to provide the bidder with ownership of more than 66-2/3% of the target company’s shares following take up.

2.3 - Pros and Cons of Arrangements vs. Take-Over Bids

Compared to a take-over bid, an arrangement has several benefits as a means of acquiring a target company, including that (i) it enables the purchaser to acquire 100% of the shares of the target in one step at a single closing, rather than requiring the purchaser to effect a subsequent compulsory acquisition or squeeze-out transaction as is required under a take-over bid; (ii) it provides structuring flexibility to deal, for example, with target company equity incentive plans and effect pre-closing reorganizations; (iii) in transactions in which the purchaser’s securities form part or all of the consideration, it results in an exemption being available from the registration requirements of U.S. securities laws (due to the transaction being court-approved); (iv) it provides comfort that a court has considered and approved the terms of the transaction as fair; and (v) it does not require French translation of the circulars mailed to Quebec residents.    

Compared to an arrangement, the key benefit of a take-over bid is that it does not require the support and cooperation of the target board. Given that in a friendly transaction the target will be contractually obligated to provide its support and cooperation, this benefit is of practical significance only in the context of hostile transactions, which are almost invariably completed by way of take-over bid. Conversely, over 90% of friendly public M&A transactions in Canada proceed by way of arrangement.

2.4 - Transaction Process and Typical Transaction Terms 

There is no “one size fits all” process that leads to announcement of a negotiated public M&A transaction in Canada. In some cases, the target company commences the process, possibly by contacting a small number of potentially interested parties, or by running a more formal “auction” process in which more parties are provided with information regarding the target company and are asked to adhere to a specified timeline for the process leading to an announced transaction. In other cases, the purchaser commences the process by approaching the target company’s board with an expression of interest on an unsolicited basis that the target company’s board finds compelling and wishes to pursue, either by entering into bilateral discussions with that party alone, or by commencing a process in which other potential purchasers are also contacted.  

Discussions and exchanges of information during the due diligence and negotiation phase typically take place pursuant to a confidentiality and standstill agreement between the parties. This is followed by execution of a definitive agreement between the purchaser and the target company. In the absence of a leak or other unusual circumstances giving rise to an earlier announcement, the first public announcement of a transaction is customarily made upon entering into such definitive agreement. It is also common for the purchaser to concurrently enter into support agreements with the target’s directors and, in some cases, one or more significant shareholders, under which such parties agree to vote in favour of the transaction (or to tender their shares to the offer, in the unusual case of a friendly take-over bid).

Deal terms in the public M&A context are driven largely by well-established market practice. It is customary for the target company’s board of directors to have a “fiduciary out” in the definitive agreement, which permits the target company to terminate the agreement if it wishes to accept a superior proposal received from a third party on an unsolicited basis. The purchaser, in turn, customarily has the benefit of certain “deal protection” mechanisms, such as a non-solicitation covenant from the target, a right to match any topping bid received by the target before the target may terminate the agreement, and the right to receive a break fee upon such termination. The definitive agreement will also contain covenants governing the parties’ conduct in the period prior to closing, conditions of closing (which are limited), and representations and warranties of the parties, which do not survive closing and therefore do not give rise to any post-closing indemnification rights for a purchaser.

3. Private M&A

The threshold question in an acquisition of a privately held business is whether to purchase shares or assets. This will be dictated by a variety of factors, including tax considerations and ease of implementation. The key features of share and asset acquisitions are outlined below, followed by a short discussion of typical transaction terms for private acquisitions.

3.1 - Share Acquisitions

Most acquisitions of a privately held Canadian business are structured as share purchase transactions. A share purchase is generally simpler and easier to complete than an asset purchase, as it avoids the practical problems associated with the transfer of multiple individual assets and agreements, and requires fewer third-party consents (i.e., only those required upon a change of control of the business, rather than the more commonly required consents for assignment of an agreement). A share purchase may also have tax advantages from the vendor’s perspective, as it generally permits the vendor to obtain capital gains treatment with respect to any gain on the sale of the shares, thereby reducing overall tax liability.

In a typical share sale, all assets of the target company become indirectly owned by the purchaser, subject to applicable consent requirements being satisfied in connection with a change of control, and the purchaser inherits indirectly all the target’s liabilities (subject to negotiated carve-outs and indemnities).

3.2 - Asset Acquisitions

An asset acquisition will generally be less favourable for the vendor from a tax perspective because of potential income inclusions in certain areas, such as the recapture of depreciation on the assets being sold. From the purchaser’s perspective, asset acquisitions may have some advantages, particularly where the purchaser wishes to exclude certain parts of the business or its liabilities from the transaction, or to step up the tax cost of depreciable assets. However, an asset deal is typically more complex in terms of implementation and post-closing integration, so a purchaser may prefer to proceed by way of share purchase for this reason. In an asset purchase, there may be a heightened risk that certain assets required for the business are not appropriately included in the transaction, although purchasers seek to mitigate this risk through due diligence and “sufficiency of assets” representations and warranties. An asset purchase is the only way to acquire a line of business that is maintained with other lines of business in a single corporate structure, absent a pre-closing reorganization that results in that business line being held in a separate corporation.

3.3 - Typical Transaction Terms

Compared to market practice in public company transactions, private company purchase and sale agreements more frequently involve a greater number of closing conditions, which may include, for example, receipt of certain third-party consents (rather than only required regulatory approvals) or performance-related conditions not seen in public M&A transactions. In addition, agreements may include purchase price protections such as escrows, holdbacks, earn-outs and working capital, debt and other adjustments that are not practicable in a public M&A transaction. Also, in contrast to public M&A transactions, purchase and sale agreements typically include representations and warranties that survive closing, as well as post-closing indemnities. Increasingly, purchasers in private M&A transactions purchase representation and warranty insurance, which is less common in public M&A transactions. 

In Canada, completion accounts adjustments (also known as “working capital adjustments”) are commonly used to determine the final purchase price, in contrast to the locked-box price mechanism typically used in Europe and certain other jurisdictions. As a result, in a Canadian purchase agreement employing working capital adjustments, economic risk does not shift to the buyer until closing. This contrasts with the locked-box approach, whereby the parties agree to a final purchase price that is not subject to any post-closing adjustments (resulting in a shift of economic risk to the buyer at signing). 

4. Other Considerations

4.1 - Competition and Foreign Investment Requirements

In the case of large acquisitions, pre-clearance under the Competition Act is required. See Section IV.1.4, “Merger regulation” for further discussion of competition laws that may apply. 

The other key regulatory requirements applicable to non-Canadian purchasers are those under the Investment Canada Act, which apply to the purchase by a non-Canadian of “all or substantially all of the assets used in carrying on [a] Canadian business.” These are discussed under Section IV.2, “General Rules on Foreign Investments”.

4.2 - Tax Consequences

There are no stamp duties or similar taxes payable in Canada upon an acquisition of shares. The shares’ vendor may be subject to payment of capital gains tax. To ensure that non-residents of Canada pay any taxes owing in respect of a sale of “taxable Canadian property,” which can include some shares (e.g., if the shares derive their value principally from Canadian real property), the Income Tax Act requires the purchaser of taxable Canadian property to undertake a “reasonable inquiry” and satisfy itself as to the vendor’s Canadian resident status (normally through representations in the purchase agreement).

If the vendor is a non-resident, it might need to provide the purchaser with a certificate issued by the tax authorities, which will be granted when appropriate arrangements are made to ensure payment of any tax liability. If the certificate is not provided, the purchaser might need to withhold and remit to the tax authorities 25% of the purchase price, whether or not any tax would be payable by the vendor on the sale. Shares of a public company listed on a “recognized stock exchange” can be “taxable Canadian property” in certain circumstances. However, it is not necessary in a public M&A transaction to obtain a certificate with respect to the sale of such shares.

4.3 - Purchaser Obligations to Third-Party Creditors  

Canadian law provides protection for creditors of a business that may affect an acquisition of the business. To begin with, creditors who have a security interest over real or personal property will continue to have priority with respect to the relevant assets against the purchaser. There are security registration statutes in Canada, and searches can be conducted to determine the existence of such security interests. Unless the purchaser is to acquire the assets subject to existing security interests, which might be the case with respect to real property and major items of financed personal property, the vendor’s obligations should be paid and the security interests discharged at the time of the purchase. If any applicable financing arrangements are to remain in place after closing, diligence should be completed on the commercial and legal terms thereof, including in respect of any consents that may be required concerning a change of control as a condition precedent to the acquisition.

4.4 - Employment Matters

The employment of officers and other employees of the target may be terminated, subject to compliance with applicable Canadian law and the terms of any employment contracts or collective agreements. Unless an employee’s employment contract sets out their entitlements upon termination of employment, at common law and under the Quebec’s civil code, when the employee’s employment is terminated without cause, the employee is entitled to reasonable notice of termination or pay in lieu of notice. Depending on the employee’s length of service, position, compensation and age, and the availability of similar employment, the required notice of termination (or pay in lieu thereof) could range between one month and 24 months, or even more in exceptional circumstances. See Section VIII, “Employment & Labour Law,” which discusses employees’ rights in general.