Key considerations when acquiring a Canadian business

In the current global economy, cross-border M&A or investment transactions are increasingly common place, as they present attractive opportunities to grow businesses internationally. However, cross-border transactions can also present complex challenges. This article is intended to provide an overview of certain challenges and issues that might arise in the context of cross-border M&A or investment transactions involving Canadian businesses.

Tax considerations related to cross-border M&A deals will be covered in a future edition of Growing your Canadian Business.

Securities laws

Unlike in the United States, in Canada there is no overarching federal securities legislation. Each of the provinces and territories has jurisdiction over securities regulation within its own borders. While a foreign investor must be familiar with the laws of each applicable jurisdiction, the securities laws of most jurisdictions in Canada are fortunately very similar. In addition, the securities regulatory authorities of each of the provinces and territories of Canada have adopted a set of National Instruments and Multilateral Instruments which provide for a uniform approach to governing certain aspects of securities law (such as prospectus requirements, prospectus exemptions, resale restrictions and take-over bids, among others).

In Canada, a distribution of securities may only be made if a prospectus has been filed with and receipted by the securities regulatory authority in the jurisdiction in which the securities will be distributed, or if there is an applicable exemption from the prospectus filing requirement. Securities acquired pursuant to a prospectus exemption are generally subject to a four-month hold period, depending on the exemption used.

Reporting issuers (i.e. corporations that have filed a prospectus) are subject to a number of obligations, including the obligation to timely disclose any material changes in the business and to prepare and distribute an information circular in respect of shareholder meetings (including disclosure of executive compensation and corporate governance practices). Corporations whose securities are publicly traded on a Canadian stock exchange will also be subject to the rules and policies of that particular stock exchange.

Where a Canadian target corporation is not a reporting issuer, it will more likely have been issuing securities under a prospectus exemption. Commonly used exemptions include issuances to accredited investors or to family, close personal friends or close business associates, under the private issuer exemption. In addition, where an investment is being made by a foreign investor, the Canadian target corporation must be careful to comply not only with the local securities laws applicable to it, but also the foreign securities laws, which may be applicable when it issues shares into that foreign jurisdiction.

Investment Canada Act

Where non-Canadians seek to establish a new Canadian business or to acquire control of an existing Canadian business, they will be subject to notification requirements, or to review and approval, under the Investment Canada Act (the “ICA”), subject to limited exemptions. A “Canadian business” is broadly defined under the ICA and includes any business carried on in Canada that has a place of business in Canada or assets in Canada used in carrying on the business, even if already owned by non-Canadians. If the transaction falls below prescribed thresholds, notification must still be filed prior to or within 30 days following closing.

Certain transactions will be subject to review, as opposed to simple notification, in which case the investor must submit an application for review and the transaction must be approved before it can be completed. The applicable Minister will have up to 75 days to make a determination, and approval will generally be granted if the Minister is satisfied that the investment is likely to provide a net benefit to Canada. Whether a transaction is reviewable or not depends on a number of factors, such as the parties involved, the value of the investment and the type of Canadian business.

The prescribed thresholds are adjusted annually and are related to the enterprise value or the book value of the assets of the Canadian business. The prescribed thresholds for 2021 can be found here. The thresholds themselves will vary based on whether the acquisition is direct or indirect, whether the investor is from a country that is a member of the World Trade Organization, a country that has a trade agreement with Canada, or otherwise, whether the investor is a state owned enterprise, and whether the Canadian business qualifies as a “cultural business”. Review may also be required where there are national security concerns.

A “cultural business” is a Canadian business that engages in (a) the publication, distribution, sale or ‎exhibition of books, ‎magazines, periodicals or newspapers (in print or machine readable form), film or ‎video recordings, audio or video music ‎recordings, or music (in print or machine readable form), or (b) ‎radio communication in which the transmission are intended for ‎direct reception by the general public, ‎any radio, television and cable television broadcasting undertakings, and any satellite ‎programming and ‎broadcast networking services.‎

On April 18, 2020, the Canadian government issued the Policy Statement on Foreign Investment Review ‎and COVID-19. This policy is intended to address opportunistic investment behaviour that ‎might occur as a result of sudden declines in the valuations of Canadian businesses. Foreign direct investments ‎of any value, controlling or non-controlling, in Canadian businesses that are related to public health or ‎involved in the supply of critical goods and services to Canadians or to the government, will be placed ‎under increased scrutiny under the ICA. In addition, all foreign investments by state owned enterprises, ‎regardless of their value, or private investors assessed as being closely tied to or subject to direction ‎from foreign governments, will also be reviewed under enhanced scrutiny. Requirements have also been ‎put in place for investments subject to the net benefit review. The policy will be in ‎place until the economy recovers from the effect of the COVID-19 pandemic.‎

Competition Act

The Competition Act is Canada’s federal legislation relating to competition (or antitrust) law. It establishes a framework that includes notification requirements and a substantive merger review. All mergers, that is, the acquisition or establishment, direct or indirect, by one or more persons, whether by purchase or lease of shares or assets, by amalgamation or by combination or otherwise, of control over or significant interest in the whole or a part of a business of a competitor, supplier, customer or other person, may be subject to substantive review. If, on application by the Competition Commissioner, the Competition Tribunal (the “Tribunal”) finds that a merger or a proposed merger prevents or lessens, or is likely to prevent or lessen, competition substantially, the Tribunal may order the parties to dissolve or not to proceed with all or part of the merger. The Tribunal will not issue such order if it believes that the merger is likely to bring about gains in efficiency that are greater than the effects of any anti-competitive effects.

Subject to limited exemptions, the parties to a proposed transaction must file a notification with the Canadian Competition Bureau, together with the prescribed information and filing fee, prior to the completion of the transaction if both of the following thresholds are exceeded:

• first, the parties to the transaction, together with their affiliates, in the aggregate have assets in Canada or annual gross revenues from sales, from or into Canada, in excess of the prescribed threshold (as of 2021, CAD$400 million); and
• second, the aggregate value of the assets being acquired or gross revenue from sales in or from Canada generated from those assets exceeds the second prescribed threshold (as of 2021, $93 million). In addition, certain ownership thresholds must be met.

Filing the prescribed information triggers a 30-day statutory waiting period before the proposed transaction can be completed. The parties can apply for an advance ruling certificate, which if issued by the Commission of Competition, precludes a challenge to the transaction, or a “no-action” letter and statutory waiver of the obligation to file a notification and supply the prescribed information. However, such transactions could still be challenged for up to one year following completion.

A merger may be reviewed and challenged by the Commissioner of Competition, even if the above thresholds are not exceeded, under the substantive merger review provisions of the Competition Act, within one-year following substantial completion, on the grounds that the merger prevents or lessens, or is likely to prevent or lessen, competition substantially. The term “merger” is broadly defined in the Competition Act as “the acquisition or establishment, direct or indirect, by one or more persons, whether by purchase or lease of shares or assets, by amalgamation or by combination or otherwise, of control over or significant interest in the whole or a part of a business of a competitor, supplier, customer or other person.”

Labour and employment

A number of employment issues need to be considered and addressed when acquiring the shares or assets of a Canadian company, however, these issues will differ between share purchases and asset purchases.

First, however, it is important for foreign purchasers of Canadian businesses to understand a few basic principals of Canadian employment law. Canadian jurisdictions do not recognize the concept of “at-will” employment. While, employment relationships can be terminated with or without just cause, in the case of termination of employment without just cause (which is narrowly defined in the employment legislation and common law), the employer must provide reasonable notice or payment in lieu of notice if the termination is to be immediate. The employment legislation of each province and territory establishes the minimum notice requirements, which generally range from one to eight weeks depending on the employee’s length of service, which entitlements cannot be contractually waived. However, where there is no written employment agreement, there are no provisions in a written employment agreement regarding termination of employment, or the terms regarding termination of employment are not enforceable. For example, if they provide for notice that is less than the minimum statutory entitlements, employees will be entitled to reasonable notice under common law. Such common law notice generally exceeds the minimum statutory entitlements, and is often far greater than such required minimum.

In addition, while the employment laws of each of the provinces and territories are based on the same general principals, there are some key differences that potential purchasers should be aware of, such as hours or work and overtime entitlement, benefits, vacation accrual and pay, and pregnancy and parental leave. In particular, the laws of the Province of Quebec differ significantly from those of other Canadian jurisdictions.

In the case of an acquisition of shares or an amalgamation, the identity of the employer remains unchanged. The acquired or surviving corporation continues to be the employer under any employment agreements, despite the change in ownership. As a result, the purchaser or surviving corporation inherits all of the existing employment agreements and employment-related liabilities, including all of the past service of the employees and corresponding termination obligations. In the case of a unionized workforce, the collective agreement remains in place and continues to govern all of the terms and conditions of employment of the acquired corporation’s employees.

In the case of an asset purchase, there would be a change in the identity of the employer, however, the employment legislation may deem the employees’ service to be uninterrupted in a total business acquisition. An asset purchase provides the purchaser with greater flexibility to decide how many and which employees it wishes to take on and on what terms. However, unilateral adverse changes to significant terms and conditions of employment following closing can constitute constructive dismissal.

When evaluating a Canadian business, a potential purchaser should carefully review all employment agreements and consider any outstanding employment-related liabilities, including outstanding wrongful dismissal claims and recent employee terminations, complaints under human rights legislation, and workers’ compensation and occupational health and safety claims. Purchasers who propose to have employees enter into new employment agreements must provide sufficient new consideration for the corresponding change in the terms of the employee’s employment, regardless of whether proceeding by way of share purchase or asset purchase.

Governing law and forum provisions

While choice of law and forum provisions are common in purchase agreements, some matters cannot be contracted out of or overridden by the intention of the parties. For example, certain consumer protection laws and employment standards legislation contain rights, requirements or entitlements that cannot be contracted out of or waived. Similarly, choice of forum provisions that purport to remove the jurisdiction of a local court that is mandated by statute as a court of competent jurisdiction or appropriate forum may be considered contrary to public policy. In addition, courts may decline to enforce a choice of forum provision that creates undue hardship for a party to enforce its rights under the agreement.

Corporate law is often engaged through a business acquisition process as well, whether considering statutory mechanisms such as amalgamations, or simply corporate and securities governance in the sale and transfer of shares. Generally, choosing the law of the target company’s incorporating jurisdiction, or primary place of business (in the case of an asset sale), is the most efficient solution.

Currency conversion

It is not uncommon in a cross-border investment or M&A transaction to use currency other than Canadian dollars. However, as foreign exchange rates are subject to market fluctuations, parties to a proposed transaction should take this into account. To the extent the purchase agreement stipulates a payment to be made at a future date (such as an adjustment to the purchase price or earn-outs), the value of those payments may ‎change relatively over time, unless a singular currency is used for all purposes. Such fluctuations may make a transaction more or less expensive.‎ Currency issues may arise in a number of circumstances, such as when multiple investors may be paying in different currencies, or when future payments in one currency are tied to revenue performance in a different currency. Parties should consider whether it is appropriate to lock in an exchange rate at the time the purchase agreement is entered into, or to otherwise provide for a unified foreign exchange provision.

Conclusion

The foregoing provides a brief, high level summary of certain common issues that can be of key significance in the acquisition of a Canadian business, but is by no means exhaustive. Specialized legal advice should be sought in each case to assess the risks and opportunities that are being explored and to minimize liabilities to the greatest extent possible under applicable laws.

For more information you may contact the authors or any member of our Canadian Corporate group.