Webinar – M&A in 2015: Data protection due diligence

The vast amount of data that is a part of everyday business and its value are far-reaching. In an M&A transaction, the focus is on identifying limitations associated with the data and the buyer’s ability to leverage it after the acquisition.

On Thursday, April 30, 2015, Norton Rose Fulbright Partners David Navetta and Boris Segalis gave a web seminar on data protection due diligence, discussing where companies should focus in conducting M&A data protection due diligence, and what the risks are when this due diligence is short-changed.

Check out the video below:

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A guide to change-in-control arrangements

Conducting thorough due diligence with respect to a target company’s compensation plans, employment agreements, employee benefit plans and employee policies is an integral component in evaluating a potential merger or acquisition. For an acquiror, another significant piece of the overall picture with respect to compensation, however, is the impact of a merger or acquisition on executive compensation and the payments and benefits to be provided to executives upon a change-in-control. Below is a brief summary of what constitutes a change-in-control event and some of the benefits that executives typically receive upon a change-in-control.

Change-in-control (CIC) arrangements

According to Meridian Compensation Partners, the primary purpose of CIC provisions (also known as golden parachutes) is to keep executives focused on pursuing all corporate transactions that are in the best interests of shareholders, regardless of whether those transactions may result in executives’ job loss. Most CIC arrangements define change in control to include mergers, acquisitions (hostile takeovers via share acquisition or board takeover), and liquidation. Companies can have either a single trigger, double trigger or modified single trigger for CIC arrangements. If there is a single trigger, benefits will be provided to executives upon the occurrence of a CIC. For a double trigger, executives will only receive CIC benefits upon a qualified termination (terminations for cause are typically excluded) within a specified period following the CIC (typically 12-24 months). A modified single trigger is a hybrid of the single and double trigger approaches and allows executives to voluntarily leave during a specified period following a CIC (typically the 13th month) and still receive CIC benefits. The Canadian Coalition for Good Governance, in its Executive Compensation Principles, takes the view that CIC provisions should have a double trigger.

If the target company is a US company, additional considerations with respect to CIC arrangements include: (i) whether the target company needs to conduct a shareholder advisory vote to approve the golden parachute compensation arrangements for its executives (also known as say on parachute votes) in order to comply with SEC rules, (ii) whether deferred compensation payments to executives upon a CIC will be non-compliant with Section 409A of the Internal Revenue Code (the Code), and (iii) whether parachute payments to executives are or will be in excess of allowed payments under Section 280G of the Code. Contravention of Sections 280G and 409A of the Code can result in substantial taxes being assessed upon executives.

Benefits upon a CIC

  1. Severance: Severance for executives upon a CIC is typically expressed as a multiple of their pay, with pay including salary and target bonus. A multiple of 2-3x pay is common for the highest tier of executives, including the CEO. Institutional Shareholder Services, in its Canadian Proxy Voting Guidelines for TSX-Listed Companies, states that severance payments more than 2x cash pay (defined as salary and bonus) are excessive and will not be viewed favourably.
  2. Equity incentives: A CIC will often result in accelerated vesting of time-vested equity incentives such as stock options, prorated payout of performance-based share or cash incentives, and the release of any restrictions on restricted shares held by executives.
  3. Retirement plans: If the target company has a retirement plan in place for its executives, upon a CIC the target company may award additional retirement credits or make contributions to executives’ retirement plans, or less frequently may credit executives with service up to retirement age, even if the executives are not near retirement age.
  4. Other benefits: Many CIC arrangements continue to provide health benefits to executives for a period of time following termination (typically 1-2 years). Less likely, but seen from time to time, is the continuation of perquisites for a certain period of time following termination.

Based on the foregoing, it is evident that CIC arrangements can take a variety of different forms depending on the amount and type of benefits that are included in a parachute package. Excessive packages are widely criticized by both shareholders and regulators alike. As such, a balanced approach is essential in designing CIC arrangements that will keep all parties satisfied.

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Due diligence of a sophisticated seller

Paper and filesThe due diligence process can be an arduous and expensive undertaking, as previously noted by Sara Josselyn on this blog. While there is no specific approach to due diligence, it is no longer perceived solely as a buyer’s burden. More sellers are conducting what is referred to as “‘sell-side” or “internal due diligence” to attract sophisticated buyers, improve negotiations and potentially enhance the value of the transaction. This approach is gaining momentum, and coupled with today’s low interest rates, may lead to an increase in M&A deals in Canada.

Tell and tailor the business story

Sell-side due diligence is best commissioned by a seller before a potential buyer has been identified. Sellers are in the best position to conduct internal due diligence and tell their story. This allows a seller to take control and rectify potential issues within the business and take corrective measures early, as opposed to having such points used as negotiation tools by the buyer later on. In addition, sell-side diligence allows sellers to tailor their story, increase transparency and promote their credibility and good will.

Increase valuation

Often the objective when selling a business is to capture the highest valuation possible. While a number of factors drive deal valuation, a company’s prospects, competitive landscape, economic conditions and deal structure, among many others, can have a dramatic impact on deal value. Incomplete or inaccurate information, particularly financial data, may have a direct, negative impact on sale price. Conversely, sell-side due diligence and reducing uncertainties about the accuracy and reliability of information being provided may make a potential buyer more willing to pay full consideration – or even a premium.

Due diligence… on the buyer

Being proactive and conducting internal due diligence early in the sales process may then provide a seller time to conduct due diligence on a prospective buyer. When selling a specialized business, such as a franchise or technology company, a seller may want to examine the expertise of the acquirer’s management team and its experience in a particular industry.

The seller will also want to ensure the buyer’s ability to pay the purchase price – this is especially true when the buyer is making deferred payments. The seller will want to ensure a large down payment and evaluate the buyer’s collateral. Although the purchased business or assets are generally used as collateral for the remaining installment payments, other assets could also be considered as possible sources. Where there’s an earn out, the seller may want to ensure the adequacy of working capital to operate the business immediately after purchase and ensure that the buyer has a plan to successfully run the business.


M&A deals are, and have always been, challenging to close. Buyers are less likely to spend time on transactions that will not ultimately proceed to closing, allowing them to focus their attention on only the most attractive opportunities. A proactive seller can increase the chances of an acquisition, expedite closing, maintain control and increase its valuation. Sellers should never underestimate the value of understanding their buyer and the power of introspection. They may want to roll up their sleeves and engage in some heavy lifting early, or better yet, they can get their lawyers to do it.

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Potential pitfalls for sellers in M&A transactions

Light BulbIn private M&A transactions, many complex issues can arise. Keeping track of the various issues that need to be addressed is often onerous, leading to mistakes that may disadvantage a seller during the transaction, or even prevent the deal from closing. We’ve compiled few of those potential pitfalls below.

Failing to retain the proper professionals

A successful transaction begins before the deal. Once a seller decides to sell a company, the seller will need to ensure that the deal is structured for success from the get go. One of the first things that a seller should attend to is ensuring that the appropriate professionals are engaged to assist with the transaction. M&A deals are time-consuming and require an in-depth knowledge of the complex issues that can arise during a transaction. As such, a seller should seek out legal counsel that has extensive experience in M&A. Similarly, retaining experienced tax and financial advisers and investment bankers can be crucial in enabling a seller to take full advantage of all of the financial opportunities that may become available during the course of the transaction.

Not taking adequate precautions to protect confidential information

Once a seller has retained experienced counsel and advisers, a seller should also be alert to the potential for data breaches. Drafting a thorough non-disclosure agreement (NDA) will be essential to ensuring that a seller’s confidential and proprietary information is kept safe throughout the deal process. Without an appropriate NDA, vital company information may be disclosed to bidders who may well be the seller’s competitors. Having a well-drafted NDA will alleviate these concerns even before the deal is underway.

Not having your house in order

M&A deals involve a large amount of due diligence. If a seller doesn’t have accurate and complete records, this part of the process will be much more time-consuming and expensive than it otherwise ought to be. Having to search for missing records midway through a deal can be especially onerous and will often slow down the transaction, particularly if relevant personnel have since left the company. A prudent seller will make sure that it has easy access to all relevant records and books, and that those records are as complete as possible even before the due diligence process begins.

Letting the business go

Keeping an eye exclusively on the various issues that arise during a deal may mean that a seller inadvertently neglects the day-to-day running of the business. The savvy seller knows that allowing a company’s day-to-day operations to suffer can impact its financials, which can, in turn, negatively affect the deal that the seller is working so hard to craft. Ensuring that the business remains on target is also important in the event that the purchaser opts to walk away from the deal or the transaction otherwise fails to close. A seller who remains focused on the successful running of its company and ensures that the day-to-day operations of its business are suitably maintained will not only be well positioned for a successful outcome of a transaction, but will also be prepared to rebound in the event that the deal does not go as planned.

Failing to have a clear vision for the M&A process

At all times, sellers should make sure they have a clear goal for the M&A deal process. A seller who goes into a transaction without a clear vision of what it wants to achieve can easily lose control of the deal. This begins at the outset of the process, with the drafting of a letter of intent that clearly sets out the key terms of the deal going forward. Sellers should also be mindful of the market environment in which the deal will take place. How is the sector in which the company carries on business faring? Are the any regulatory or political issues which could bear on the outcome of the deal? Are there multiple potential bidders? What value is the seller seeking for the company? Is it likely that any transition services will need to be provided following deal close? Maintaining a clear picture of the company’s goals and long-term strategy is essential to the successful conclusion of a transaction.

The author would like to thank Dina Peat, articling student, for her assistance in preparing this legal update.

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Strong outlook for chemical M&A in 2015

Refinery-680x2202014 was a robust year for global chemical M&A. As in many other industries, low interest rates and plentiful credit boosted global chemical M&A activity, resulting in strong performance in terms of deal flow and deal value compared to 2013. Most notably, in 2014, there were at least 13 acquisitions over US$1 billion in value, which totalled over US$52 billion in value, compared to just 8 such deals in 2013, which totalled just US$13.6 billion.

The strength of global chemical M&A over the last year has industry watchers wondering if 2015 will bring more of the same. Deloitte’s 2015 Global Chemical Industry Mergers and Acquisition Outlook (the Report) identifies important trends for global chemical M&A and predicts that as the year unfolds, global chemical M&A will continue to build on the momentum seen in 2014. Some of the Report’s key findings are summarized below.

Increased cross-border activity

Since 2009, the value of cross-border chemical M&A has generally been on an upward trend. Deloitte predicts that cross-border chemical M&A activity will remain healthy through 2015, as chemical companies move to match the increasingly global footprint of many of their customers and are buoyed by stabilizing macroeconomic conditions. Chemical companies based in regions where economic growth has been stagnant or limited may look to M&A opportunities in foreign markets to drive growth. However, with greater cross-border consolidation, chemical companies may encounter issues such as additional regulatory scrutiny and foreign currency exposure.

Shareholder activism

Shareholder activism has been on the rise across many sectors, and the global chemical industry is no different. The Report notes that chemical companies have attracted avid interest from activist investors, who now hold stakes in at least 12 chemical companies. The influence of activist investors is most noticeable in the United States, but it is likely that activist investors have European chemical companies in their sights as well. Activist investors are often a catalyst for change, and their presence in the chemical industry may influence M&A activity. For example, activist investors may push businesses to divest themselves of underperforming or non-core assets.

Breakdown by segment

The chemical commodities segment has long dominated overall chemical M&A activity, but will likely only experience modest growth in 2015 as the segment matures. The Report anticipates that fertilizer and agricultural chemicals segment will see the highest growth in M&A activity in 2015 compared to other segments, as global population growth and food scarcity necessitate greater agricultural output. As fertilizer and agricultural companies seek greater economies of scale and wider distribution for their products to meet increased demand, they may turn to M&A to achieve these goals.

Impact of cheaper oil

The chemical industry relies on oil and natural gas as feedstock. While chemical companies will certainly welcome lower input costs, the impact of cheaper oil on global chemical M&A is uncertain, as is the correlation between lower oil prices and lower chemical prices may take some time to manifest itself.

Assuming that lower oil prices persist over the medium to long-term, the Report forecasts delays in consummating petrochemical deals, as sellers enjoy the upside of lower input costs before chemical pricing aligns with feedstock costs, and buyers reluctantly adjust their financial models to account for the impact of cheaper oil on the chemical company valuation.

In other respects, lower oil prices may spur chemical M&A activity. For example, oil producers may pursue vertical integration strategies to protect themselves against falling oil prices. Moreover, if lower oil prices do indeed boost the profitability and share price of chemical companies, shares may become the currency of choice in an increasing number of acquisitions.

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M&A in Canada’s clean tech and energy innovation sector

The decrease in the price of oil and resulting available capital may create a surge of investment in cleantech, renewable energy and electricity in Ontario, and Queen’s Park appears to be doing all that it can to aid this East-bound capital flight.

The Liberal government’s much publicized plan to liberalize the electricity sector and privatize 10% – 15% of Ontario Hydro, the Province’s transmission giant, is an attempt to both finance long-term infrastructure projects and take advantage of US investors looking to capitalize on an undervalued asset. The depreciated price for a non-controlling interest in a multi-billion dollar asset will be attractive to Canadian and foreign investors alike looking to maximize return on investment. The Province looks to be trying to emulate the action in the electricity industry in Alberta, which has been attractive to foreign investors. For example, last year, Berkshire Hathaway Energy bought AltaLink, L.P., the province’s largest electrical transmission company.

In addition to the front page policy moves, the Province has also been attempting to stimulate investment in renewable energy and cleantech at the grassroots level. Sustainable Development Technology Canada (SDTC) and MaRS Discovery District have recently announced a new partnership to strengthen efforts to grow Canada’s clean technology and energy innovation sector. The new partnership will collaborate to grow globally-competitive clean technology companies.

These policies and initiatives are a welcomed sign to an industry that has been lagging behind its life sciences and information and communications technology counterparts. Investment in cleantech and renewable energy continue to fall relative to other industries, as its $132 million of venture capital investment last year amounted to only 7% of all investment by venture capital firms in Canada, and the $16 million invested in Q1 2015 amounting to only 5%.

Investors, consumers and tax payers will wait to see if the attempts to stimulate investment in the industry will produce similar results to the FIT programs introduced in 2009.

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2015 is the year of technology M&A

In recent years past, global technology M&A experienced slow first quarters. But not this year – the first quarter of 2015 set new post-dotcom-bubble records for quarterly value and volume according to EY’s report on Global technology M&A. Overall, there were 981 technology deals with an aggregate value of US $77.1 billion – a higher value than any quarter since Y2K.

The driving force behind the technology M&A boom

A main contributor to the “Year of Technology M&A” is the fact that corporate technology buyers are back in business after taking break during the fourth quarter of 2014. This contributed to 15 deals above the $1 billion mark.

There was also significant cross-border activity. Cross-border technology deals had a $32.2 billion aggregate value, with seven deals over $1 billion and one deal over $10 billion. US and Europe were net sellers, while Japan and Canada were net buyers.

Unexpectedly, non-technology buyers were also major players in the first quarter of 2015. Non-technology buyers are typically slow to the game at the beginning of the year, but this year they contributed $19.5 billion in the first quarter, a six-fold increase compared to the first quarter of 2014. This is a clear sign that firms other than corporate technology buyers are recognizing the advantages of technology transformation and the need to add cybersecurity to a wide range of products and services. Non-technology firms are expected to maintain this activity throughout 2015.

Industries to watch

Health care IT was the main driver for the first quarter of 2015 due to a single deal worth more than $10 billion. The internet of things (IoT) was also a significant driver. This is not surprising given that IoT adds network-enabled digital sensors to everyday products, which is a high-valued technology in any industry.

Other industries which experienced a growth in the first quarter of 2015 were security, big data, payment and financial technologies, smart mobility and cloud/SaaS.


The “Year of Technology M&A” presents multiple opportunities for buyers and sellers alike. Technology firms looking to sell may wish to develop new technologies with digital sensors, processing, connectivity and security to increase the value of target value. Buyers can use this trend to push for more comprehensive technology solutions. Overall, we can expect to see continued growth in global technology M&A throughout 2015 and beyond.

The author would like to thank Chelsea Nimmo, articling student, for her assistance in preparing this legal update.

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M&A and bulk sales in Ontario

The Province of Ontario has been first for a number of things. It was one of Canada’s first provinces. It was the first province to pass a law which required drivers and passengers to wear seat belts. It was the first province to pass human rights legislation. Yet Ontario is the last province to repeal bulk sales legislation. Ontario’s Bulk Sales Act (the Act) continues to be in effect and continues to surprise purchasers.

The Act is intended to protect creditors from a vendor selling its assets without first paying the debts owed to creditors. The Act protects creditors by imposing certain duties on the purchaser of the assets. If the purchaser fails to comply with the Act, the sale to the purchaser is voidable. The vendor’s creditors (or its trustee in bankruptcy) may apply to set aside the transaction. Where this has occurred and the purchaser has taken possession of the assets, the purchaser is personally liable to the creditors for all money or other property realized from the sale or other disposition of the assets.

The Act applies to every “sale in bulk”, which includes a sale of stock in bulk made outside the vendor’s usual course of business. The definition is broad enough to catch real estate. With such a broad definition, the simple sale of a business may inadvertently trigger the compliance requirements with the Act.

Compliance with the Act may occur in one of three ways: (1) the vendor may apply to a judge for an order exempting the sale from the application of the Act, (2) the purchaser may require the vendor to provide a statement giving the particulars of all amounts owed by the vendor to its secured and unsecured trade creditors, or (3) the purchaser may pay the proceeds of the sale to a trustee appointed in accordance with the provisions of the Act. Each of the above can add unexpected delays and cost to a transaction.

As matter of practice, if a transaction posses little risk of the vendor not satisfying its debts, the parties to the transaction may waive compliance with the provisions of the Act. In such instances, the purchaser usually obtains an indemnity from the vendor for any potential loss or damage that it may suffer as a result of non-compliance with the Act.

I recently had to explain Ontario’s Bulk Sales Act to a client. They were mystified about the application of the Act and how it places an onus on a purchaser to ensure that a vendor has paid its creditors. Since creditors are generally protected under bankruptcy, insolvency or assignment and preference legislation, it is a common view that the Act has outlived its use. I can make carbonated drinks at home with a SodaStream machine or surf the internet on my mobile phone because we now live in an age of convenience. Buyers and sellers expect this convenience to continue from their everyday lives to the transactions they participate in. What they do not expect is the possible cost and inconvenience of legislation whose intended goal is dealt with by other legislation.

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Future of private equity leveraged buyout financing optimistic

Recently, RR Donnelley sought the assistance of Mergermarket Group to interview professionals in the US, Europe, and Asia-Pacific about leveraged buyout financing. Mergermarket Group published its survey results on the environment of leveraged buyout financing in its April 2015 edition of the Venue Market Spotlight.

Availability of buyout financing

A majority of survey respondents indicates that the availability of buyout financing will increase in the next 12 months. Specifically, 52% of respondents state that buyout financing will somewhat increase, while 8% of respondents believe that buyout financing will increase significantly. However, 32% of respondents expect buyout financing to decrease in the next 12 months, primarily because banking regulators have provided guidance that limits how much leverage financial institutions can extend.

Sector with greatest and least availability of buyout financing

26% of the respondents think that the Technology, Media and Telecommunications sector will see the greatest availability of buyout financing in the next 12 months because of the continuous innovations in this sector. In contrast, the financial services and energy sectors are the ones where most respondents, at 26% and 24% respectively, believe there will be least buyout financing.

Private equity firms – buyers or sellers?

The survey results indicate that private equity firms will do more buying than selling over the next 12 months, although the numbers are close. 40% of respondents say that private equity firms will do more buying, 32% say that private equity firms will do more selling, and 28% say that private equity firms will do an equal number of both.

Regions with greatest and least availability of buyout financing

Slightly over one-third of respondents believe that Latin America will have the greatest availability of buyout financing in the next 12 months. Rounding out the top three in this category are Asia-Pacific and North America. On the other hand, a significant majority of respondents (68%) believe that Europe will have the least availability of buyout financing over the same time frame.

Drivers and dampers of leveraged buyout financing

According to the respondents, the three biggest drivers of leveraged buyout financing over the next 12 months are access to cheap debt, a strengthening economy, and the availability of high-quality companies to purchase. One Europe-based vice president of finance believes that the access to low-interest rate debt is the biggest driver for buyout financing because it allows private equity firms to help companies improve performance while earning them high returns. Conversely, the respondents believe that the biggest hindrance to leveraged buyout financing is regulations that limit banks’ participation in buyout deals. In 2013, US banking regulators released guidance on leveraged lending that placed an acceptable leverage level at 6x total debt-to-earnings before interest, taxes, depreciation, and amortization. The regulators will more heavily scrutinize loans that exceed this level, which has caused financial institutions to stay away. Since banks are the most convenient source of funding, their restricted participation in leveraged buyout deals reduces leveraged buyout activity.


Overall, the future for private equity leveraged buyout financing is promising, as the majority of respondents expect the availability of this type of financing to increase.

The author would like to thank Bobby Leung, articling student, for his assistance in preparing this legal update.

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M&A expectations on the rise

SkyscrapersEY has recently released the 12th edition of its annual Global Capital Confidence Barometer, a biannual survey of more than 1,600 executives of companies in 54 countries, assessing various metrics in global mergers and acquisitions. Although 2014 marked the single largest increase in M&A since the financial crisis of 2008, for the first time in five years, more than half of the respondents of the survey indicated that they are planning acquisitions in the next year, signalling recovered earnings and cash positions, or at the very least, increased optimism regarding the trajectory of markets. The survey points out that there are three concrete factors that have together resulted in this global change: (1) an increase in the number of market players, including start-ups; (2) an increase in cross-border transactions that have been encouraged by fluctuations in currency and oil prices; and (3) “disruptive” innovation.

Along similar lines, EY reports that 83% of executives view the global economy as improving, after what has been a shaky half-decade—this is up from 60% from last year. Forty per cent of respondents indicated that they are embracing an “acquisition strategy” as their overall corporate strategy, which will serve to hasten the “interdependence” of national economies as trade, investment and systems further converge. Roughly one-third of executives are planning larger deals and many are contemplating bolt-on deals and complementary deals. In total, respondents indicated that 2,695 deals are currently being considered, representing a 19% year-over-year increase. In support of this, an overwhelming majority of executives expect that the valuation gap and the price of assets will remain stable, which will create respectable conditions for M&A activity.

Currently, 77% of companies are planning deals valued under $250 million, with 21% planning deals between $250 million and $1 billion. The three industries in which companies intend to create M&A activity are technology (67% of all deals), automotive (59%) and consumer products and retail (58%). Over half of the deals are planned to take place between countries in the same region, which is “driven by the ease of acquiring in common economic trading areas,” such as the European Economic Area and NAFTA region. The top investment destinations are expected to be the United Kingdom, China, the United States, Germany and Australia, while the top investor countries are the United States, South Korea, the United Kingdom, France, Germany and Japan.

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