Foreign investment rule changes: narrowed scope but deeper reach

On March 25, 2015 the Canadian government published two long-awaited regulations amending the Investment Canada Act. One is intended to reduce the number of transactions that are subject to pre-closing review and approval, but will increase the amount of detailed information required in routine filings for transactions that are not reviewable. The second will lengthen the period for transactions undergoing a national security review by providing the government additional time to complete such reviews.

Thresholds for Review

Under the Investment Canada Act, the acquisition of control of a Canadian business by a non-Canadian is generally subject to pre-closing review and approval by the Minister of Industry where the book value of the assets of the Canadian business exceeds C$369 million. At the conclusion of the review, the Minister must be satisfied that the proposed transaction is likely to result in “net benefit” to Canada.

Lower thresholds exist for the acquisition of control of a business related to Canada’s national identity or cultural heritage, or where the buyer is not from a member of the World Trade Organization. Transactions that are not subject to pre-closing review are subject to a notification requirement that entails the completion of a relatively straightforward two page form within thirty days of the closing of the transaction. All investments in a Canadian business by a non-Canadian, regardless of the interest obtained or value of the interest, are also subject to review on national security grounds.

Beginning April 24, 2015, the threshold for the net benefit review will generally be based on the enterprise value of the Canadian business. The threshold will be C$600 million for two years, followed by two years at C$800 million, and then it will be C$1 billion for a year, after which it will be adjusted annually for inflation.

How enterprise value will be determined will depend on the nature of the transaction:

Publicly traded entity: acquisition of shares Market capitalization plus total liabilities (excluding operating liabilities), minus cash and cash equivalents
Not publicly traded entity: acquisition of shares Total acquisition value, plus total liabilities (excluding operating liabilities), minus cash and cash equivalents
Acquisition of assets Total acquisition value, plus assumed liabilities, minus cash and cash equivalents transferred to buyer

The enterprise value test will not apply to all transactions. The government is maintaining lower review thresholds for cultural industries, investors from non-WTO members, and for state owned enterprises. These investments will continue to be reviewable based on a book value of assets test using the current monetary thresholds. There will also be no change in the manner in which indirect acquisitions of control are treated. When control of a Canadian business is acquired due to the acquisition of control of its foreign parent company, and where the buyer is from a WTO-member nation, the transaction will not be subject to review unless the acquired business carries on a cultural business. In such a case, if the threshold is exceeded, the review could occur post-closing.

New Information Requirements

Under the new regulations, the amount of information that must be supplied in both an application for review and in a post-closing notification will increase, and will doubtless require additional time and resources to compile. This will have a significant impact on notifications, as they have traditionally been straightforward to complete and required little more than basic information about the parties and the transaction. Among the new information that must be provided are:

  • The legal names of the directors of the Investor as well as of the five highest paid officers of the Investor, together with a business and personal mailing address, telephone and fax number, email address, and date of birth for each person;
  • An indication of whether a foreign state has a direct or indirect ownership interest in the Investor, as well as information about any special rights or influence the foreign state may have over the business or the appointment of its officers;
  • The sources of funding for the Investment; and
  • Descriptions of the products of the Canadian business, including the associated NAICS codes.

Certain of these requirements are, according to the government, designed to provide them with the information they consider necessary to properly undertake a national security review.

Parties should ensure they provide themselves additional time to prepare notifications given these new requirements.

Longer National Security Reviews

The second regulation that was published on March 25 relates to the national security provisions of the Investment Canada Act. Any transaction that involves the acquisition of an interest in a Canadian business by a non-Canadian can by reviewed under and actions taken where the government believes the investment could be injurious to Canada’s national security. There is no monetary threshold. The amendments to the regulation, which took effect March 13, 2015, provide the government with additional time during certain phases of their national security review. As such, in cases where a review is commenced, the review can be expected to take longer than under the previous rules.

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Successor liability in asset acquisitions

It is a well-established principle in Canada that where two corporations amalgamate, the new, continuing corporation assumes all of the liabilities and obligations of each of the constituent corporations. In order to avoid this consequence, businesses seeking to make acquisitions may decide to structure their transactions in a way that allows them to choose which liabilities to assume. In theory, this type of transaction, an asset acquisition, can be structured such that the liabilities, if any, which are assumed by the purchaser are specifically identified in the agreement and accounted for in the purchase price.

The ability to limit liability by way of an asset purchase agreement is subject to a number of exceptions. Many of these exceptions are statutory, such as those found in employment standards, labour relations, bulk sales, personal property security, and environmental legislation. The fact that these exceptions are legislated allows the parties to an asset purchase transaction to properly account for them and to structure and price the agreement accordingly.

Less clear, and therefore much more difficult to take into account when structuring an agreement, is successor liability at common law. For example, where a latent product defect becomes evident after the sale of the related assets, is liability limited to the vendor as the former manufacturer or can the purchaser also be held liable in tort?

As explained by John H. Matheson in his article on successor liability in the United States, there have traditionally been four exceptions to successor non-liability under US common law:

  1. The transaction is a fraudulent effort to avoid liability;
  2. The successor, either expressly or impliedly, assumes the obligations of the predecessor;
  3. The asset sale amounts to a de facto merger; and
  4. The asset purchase takes place in the context of reorganization where the purchasing corporation is effectively the same as the vendor corporation.

Matheson adds that these traditional exceptions have now been expanded in some jurisdictions in the United States to include instances where there is a continuation of the vendor’s business operations or product-line by the purchaser.

In imposing successor liability in this expanded context, the courts have pointed to the following factors:

  1. A continuity of management, personnel, assets, and operations;
  2. The assumption by the purchaser of the liabilities necessary to continue the business;
  3. The purchaser holding itself out to the public as being the successor to the vendor; and
  4. The vendor dissolving or ceasing operations shortly after the transaction closes.

With the exception of some older cases, Canadian courts have only addressed the question of successor liability in the context of preliminary motions. These more recent decisions suggest that there may be a willingness to adopt some or all of the US exceptions in Canada and that, as such, the doctrine of successor liability remains unsettled in Canada. As suggested by William D. Black et al, in their article summarizing the Canadian case law, the law of successor liability will likely remain unsettled in Canada unless and until the issue is addressed in the context of a full trial. Even then, it may take years before there is a Canada-wide consensus or determinative dicta from the Supreme Court of Canada on the issue.

Until then, parties to an asset purchase agreement should be aware of the unsettled state of the law in Canada and do their best to account for this in the terms of their agreement. Given that one of the central policy concerns underlying the doctrine of successor liability is the concern that a plaintiff will be left without a remedy, making some provision for third party claims, such as an escrow fund, may be advisable.

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Limiting vendor liability in private M&A transactions

In a perfect world, all issues as between a purchaser and a vendor of a business (whether assets or shares) are settled at the time of closing. Unfortunately, this is not how the real world operates, notwithstanding the level of due diligence conducted by a purchaser and its professional advisors. To protect against go-forward liability, vendors, who covet keeping as much purchase price as possible, build protections into their acquisition agreement to limit their potential liability. These protections range from incorporating knowledge and materiality qualifiers into their agreement, making representations on a several (versus joint and several) basis, limiting the survival period of their warranties and so on. This blog post discusses two additional limitation of liability concepts that are popular among vendors of a business and their professional advisors: indemnification baskets and liability caps.

Indemnification baskets

One very common limitation on liability is known as an indemnification basket. In this case, a vendor is not liable to indemnify the purchaser until the aggregate amount of losses suffered by the purchaser exceeds a certain dollar threshold. The purpose of such a provision is to avoid vendor liability for claims considered to be minor in nature relative to the size of the transaction. However, once the threshold is met, depending on the clause, the vendor may only be liable for the amount of the loss in excess of the threshold (known as a deductible basket) or may be liable for the entire amount of the loss (known as a first dollar basket).

According to the 2014 Canadian Private Target Mergers and Acquisitions Deal Points Study (2014 ABA Study), which was published last year by the American Bar Association with the help of two partners in the Toronto office of Norton Rose Fulbright, 50% of relevant transactions included a first dollar basket, 36% included a deductible basket, 6% included a combination of the two and 8% included no indemnification basket. With respect to the amount of the threshold as a percentage of transaction value, in 42% of the relevant transactions the threshold was 0.5% or less and in 30% of the relevant transactions the threshold was between 0.5% and 1%.

Liability caps

Another common limitation on liability is a cap which acts as a ceiling on the vendor’s liability for losses suffered by the purchaser. Where an acquisition agreement contains a cap, a vendor will only be liable for losses up to a certain dollar amount. For example, if a cap is set at $10 million, the vendor will only be liable to indemnify the purchaser for up to $10 million, even if the losses suffered are much greater (subject to the exceptions noted below). According to the 2014 ABA Study, 60% of the relevant transactions included a general cap which was less than the purchase price, 19% included a cap which was equal to the purchase price, 11% included a cap which was not determinable and 10% did not include a cap.

Both indemnification baskets and caps often carve-out certain types of losses from their application. For example, according to the 2014 ABA Study, the most common carve-outs from the indemnification limitations related to losses in respect of fraud (included in 48% of relevant transactions), due authority (32%), due organization (30%) and taxes (30%). Likewise, the most common carve-outs for caps related to losses in respect of fraud (77%), taxes (24%), due authority (24%), due organization (22%), title to/sufficiency of assets (22%) and intentional breach of sellers representations (22%).

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Tips for M&A success

The success rate of M&A deals has somewhat improved in the new millennium, increasing from an average of 35% to 55%. That still leaves almost half of all deals floundering, begging the question, “What are they doing wrong?”

Based on interviews with “hundreds” of dealmakers, Prof. Scott Moeller, director and founder of the M&A Research Centre at London’s Cass Business School, expounded on the best tips for M&A success in a Raconteur op-ed piece. He boiled these down to two main objectives: focus on strategy and retain existing customers. These may seem trite at first glance, but Moeller points out that a surprising number of organizations neglect to follow through with these tips, causing their deals to suffer.

Focusing on strategy entails flexibility. One has to be adaptable to changes in circumstances beyond one’s control. If the main target becomes unavailable or prohibitively expensive to pursue, be ready to jump on alternative options as soon as possible.  In the same vein, “bigger is not always better”. Sure, the thought of accomplishing some megalith of a deal is enticing, but one has to be that much more in control of the numerous intricacies that go along with it to avoid an equally monumental failure. Your entire strategy—“clear and clearly communicated”—has to be aligned throughout your corporation. Yes, the executive will still be leading the strategy from the top, but the entire team has to be one cohesive unit.

Another unduly neglected area of strategic focus is the post-deal integration phase. This is when long-term value-creation begins, hence getting it right is imperative. It is therefore critical that organizations prepare for this stage far in advance of closing. Focus on revenues and staffing in both organizations and ensure that pricing reflects the full costs of integrating the target. Perhaps most importantly, the executive team should avoid the temptation to jump onto the next deal and remain focused on seeing the latest deals through to their ends. Integration, after all, takes years to complete:

[T]he amount of time to be spent on the deal in planning, execution and then implementation can be considerable and should usually be considerably more than often allotted. This time-consuming process will distract large parts of the company who may be focused on getting the deal done, but who should instead have maintained focus on the ongoing existing businesses as well.

And finally, a simple yet sound piece of advice: retain your existing customers because “they pay the bills”. This ties into Moeller’s first tip about staying focused on the deal post-closing. Even in a hostile takeover, an organization can retain most of its clientele so long as it makes the effort to reach out and listen to their concerns.

Bottom line: take the extra time to fine-tune your strategy; perfect your leadership; and show your customers a little love.

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

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Know what you’re buying: do your due diligence

Identifying potential targets can be an exciting, yet overwhelming, process for corporate executives and boards of directors. Whether motivated by financial growth, economies of scale, global expansion, or product diversification, a knowledgeable, informed, and wise acquisition requires a committed due diligence effort.

According to a report entitled M&A 2015 Outlook (the Report) released by Raconteur, due diligence is a critical step and primary factor in the overall success of mergers and acquisitions. Due diligence involves an analysis of the information and documentation that an acquirer wishes to see prior to signing a deal. Typically, a buyer will request to review the financial statements and projections, constating documents, contractual agreements, and other company specific details of the seller. Due diligence should be both a backward-looking and forward-looking process whereby the buyer analyzes the historical performance and the future prospects of a target.

In order to capture synergistic gains from a transaction and evaluate strategic benefits, the latest trend is to engage not only financial and legal professionals in the due diligence process, but also extend involvement to operational management including information technology, human resources, manufacturing, marketing, and sales personnel. For the broad array of individuals engaged in the process, due diligence can be seen as the most tedious and drawn out component of the transaction; sometimes lasting over two months.

A 2013 research study conducted by the Cass Business School found a correlation between lengthier due diligence processes and higher long-term shareholder value. This finding explains why due diligence is far more than a legal formality. Rather than discovering a deteriorating customer relationship or a significant pensions hole when it’s too late, an upfront awareness of the facts can help facilitate strategic decision-making.

Selling a company can be an emotional process for a founder who has invested time, money, and energy into the growth and development of a company. However, it is important not to let these emotions strain the relationship between the buyer and the seller. The due diligence process is often accompanied by time pressures and demands from either party but this should not be allowed to compromise a solid working relationship. Fostering and maintaining a strong working relationship between the buyer and seller can be an asset post-acquisition as parties are often required to continue working together.

An article, Knowledge is Power, featured in the Report states that “love it or hate it the process is an opportunity for a buyer to look under the bonnet of the target company and verify any assumptions that may have been made earlier”. It is only after a thorough analysis of a target company that one is able to truly evaluate the strengths and weaknesses of a potential acquisition and make a smart and duly informed business decision.

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

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Preliminary data points to a promising year ahead for Canadian M&A, despite sluggish start

Bureau van Dijk (BvD), a private business intelligence advisory company, recently released its Zephyr North American monthly M&A reports for the months of January 2015 and February 2015. The January and February monthly reports detail the value and number of M&A deals targeting Canadian and U.S. companies.

These numbers should be of particular interest to M&A analysts and practitioners, since many were apprehensive as to what the new year would hold for M&A, given volatility in global commodity prices, the collapse of oil and general macroeconomic uncertainty. BvD’s data provides a first look at how 2015 is shaping up and offers some insight into what the remainder of 2015 might hold.

In general, M&A deals were off to a sluggish start during the first month of 2015, with the notable exception of Canadian private equity deals. After a relaxed January, however, Canadian M&A proved itself robust in February, recovering to levels comparable to February 2014.

The numbers from February are encouraging signs that despite economic headwinds and heightened economic uncertainty, there might still be a promising year ahead for deal makers.

January 2015: easing into the New Year

In January 2015, Canadian deal volume fell almost 36% month-on-month, from 365 deals in December 2014 to 235 deals in January 2015, and almost 23% when compared to January 2014, which counted 304 deals.

Canadian deal value fell almost 77% month-on-month, coming off a particularly buoyant December; compared to January 2014, deal value was down just over 40%. Similarly, U.S. deal flow and value were down both on a month-to-month and year-on-year basis.

Canadian private equity continues to be a bright spot

One bright spot this January was Canadian private equity deals, which increased both month-on-month and in comparison to January 2014, closing January 2015 with a total deal value of US$1.1 billion, compared to US$852 million in the preceding month and US$508 million January 2014. This is a 29% increase month-on-month and a doubling year-on-year. In fact, Canadian private equity deal value in January 2015 was higher than private equity deal value for any month in 2014.

Canadian gains in private equity were in marked contrast to U.S. private equity performance, which, on a month-to-month basis, fell over 30% in terms of number of deals and over 80% in terms of deal value. Compared to January 2014, the number of deals in January 2015 fell 21% and total deal value fell by half.

February 2015: encouraging signs for the balance of 2015

After a languid first month, the Canadian M&A space proved itself more robust in February 2015, more than doubling month-on-month from US$5.17 billion to US$13.89 billion, while the number of deals declined about 14%, from 294 to 252. These numbers are just slightly off from February 2014 and may signal improved prospects for Canadian M&A activity during the months ahead.

On a percentage basis, Canadian M&A deal growth significantly outpaced U.S. numbers. In the U.S, M&A deal flow and value for February continued to slide from January. On a month-to-month basis, U.S. deal flow fell by almost 28%, while deal value moved slightly higher, gaining about 4%.

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Oilpatch volatility may generate deal-making opportunities

According to some commentators, ongoing volatility in oil prices may result in increased M&A activity in the Canadian oilpatch. As recently reported in the Financial Post, John Chambers, CEO of Calgary-based investment boutique FirstEnergy Capital Corp., believes a revaluation of assets in the oil and gas sector may attract cross-border M&A activity from oil majors who may use the “once in a very long time opportunity” to make acquisitions.  If this view is correct, then the recent acquisition of Talisman Energy Inc. by Spain’s Repsol SA for $8.3 billion may be a sign of things to come.

Mr. Chambers isn’t alone in thinking that 2015 could be a banner year for M&A activity in Canada’s oilpatch. As recently discussed in the Financial Post, 2014 was a record year for M&A activity in the Canadian oilpatch and continuing low commodity prices may further encourage acquisitions of attractive assets by companies with strong balance sheets. As well and as discussed in our recent blog post titled Positive outlook for Canadian M&A despite market volatility, a recent study commissioned by Citi has also concluded a positive outlook for Canadian M&A in 2015, particularly in the energy and consumer sectors.

The upshot is that, in the struggle to adapt to continuing volatility, companies and market players may find greater opportunities for transformative dealmaking that were previously unavailable.

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Global trends in insurance M&A

As reported in KPMG’s 2015 report on trends driving the insurance M&A landscape, strong balance sheets and continued confidence resulted in a steady flow of targeted mergers and acquisitions over the past year. Another active year for insurance industry M&A is expected. The report predicts four broad drivers of M&A activity in the global insurance landscape in 2015:

High growth markets

Insurance M&A may get a boost from Africa, where long-term population growth, forecasted GDP growth and the potential for financial services growth through mobile technology presents opportunities.

As well, reverse deal flow (involving acquirers from high growth markets investing in mature markets) is a trend that is expected to continue, particularly as it relates to the investments of large Asian insurers. High growth markets, such as Asia and Latin America, are also expected to attract insurance M&A attention.

Regulatory impact

Regulatory changes are cited as the most important factor driving insurance M&A. Potential regulatory changes in India will allow for increased foreign investment in local insurers which in turn may act as a driver of growth in the country’s insurance industry.

The insurance M&A landscape in China will also be affected by regulatory changes. With “relaxing foreign ownership restrictions and changes to local ownership requirements… China is poised to see an increased level of attention, particularly in the health insurance and pension markets.”

The Solvency II Directive, which is meant to codify and harmonize EU insurance regulations, is set to come into effect on January 1, 2016 and is expected to have an effect on insurance M&A as capital requirements become clearer.

Efficiency and focus

Efficiencies are expected to occur in the insurance industry through the sale or restructuring of non-core operations and through better client interaction with the increased use of technology.


Excess capital in the reinsurance market, linking alternative capital with underwriting capability and continuing strain in the Russian market are all reported by KPMG as potential drivers for industry consolidation.

A.M. Best recently echoed KPMG’s prediction, stating that “[w]ith current market conditions of double-digit price declines, increasing commissions and lower premiums, as well as the increased competition, the need for M&A [in the reinsurance market] is becoming clearer.”

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Positive outlook for Canadian M&A despite market volatility

The past year witnessed the highest volume of deal activity in Canada in the last five years. However, recent challenges may result in some uncertainty in the dealmaking environment of 2015.

The predictions of 50 leading Canadian executives were gathered in interviews commissioned by Citi and conducted by Mergermarket. This study, entitled “Charting the course: the future of Canadian M&A in volatile markets”, reveals an insightful picture into some of the challenges, drivers, and other factors impacting Canadian M&A over the upcoming year.

The study reveals that 68% of the respondents expect that the overall volume of Canadian deal activity will either stay the same or increase in 2015. The majority of the respondents view inorganic growth as the primary driver of dealmaking in 2015, while other commonly-cited drivers include the sale of non-performing assets by companies and the strong valuations of companies.

Challenges of market volatility

Volatility of global commodity prices was perceived by the most respondents as the greatest challenge to Canadian M&A in 2015. As a result of fluctuating prices, a valuation gap is often created between buyers and sellers. Companies who are faced with lower valuations of their businesses are unwilling to sell their company at these depressed prices, whereas buyers are expecting such prices due to the market conditions. As a result, deal volume may be reduced as parties find it harder to reach a compromise in negotiations.

In addition to contributing to the spread of this valuation gap, the study explains that the recent drops in oil prices may also cause companies to focus more particularly on deal value, rather than deal volume, as conducting deals becomes increasingly difficult.  Secondly, companies most affected by the falling prices may be faced with the choice of either functioning under heavy debt, or selling their business.

Deal activity in energy and consumer sectors

The study finds that respondents are most bullish about the energy and consumer sectors. Oil prices will cause some smaller energy companies to be forced to sell their business, while lower valuations will cause energy companies to become attractive targets for inbound M&A. On the other hand, the consumer sector will see increased spending by businesses as lower oil prices result in cheaper gasoline and heating costs.

The author would like to thank Matthew Lau, articling student, for his assistance preparing this legal update.

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Webinar – M&A in 2015: Reps and warranties insurance

Join us on Thursday, March 26, 2015 for a web seminar on representations and warranties insurance: what is it, why do you want it, and how do you negotiate it?

Register now

Buyers and sellers are using M&A representations and warranties insurance more often in transactions as a tool to enhance bids in competitive auction processes and to minimize exposure to post-closing indemnification obligations. This type of insurance is beneficial to both buyers and sellers in M&A transactions by providing access to the insurance industry’s capital and allowing the transfer of certain transaction-related risks in M&A deals to the insurance markets.

Topics will include:

  • The specifics about what is covered and not covered in a typical M&A representations and warranties insurance policy.
  • How parties can use this type of insurance to mitigate deal risk and close transactions.
  • Issues to consider in structuring and negotiating coverage and exclusions under the policy.
  • Current trends in insurance regarding premium costs, coverage amounts, and deductibles.
  • Claims and the claims process under these types of policies.


  • Glen J. Hettinger – Partner, Norton Rose Fulbright US LLP
  • Scarlet McNellie – Partner, Norton Rose Fulbright US LLP
  • Jay Rittberg – Americas Head of M&A Insurance, AIG


10:00 am – 11:00 am PDT
11:00 am – 12:00 pm MDT
12:00 pm – 1:00 pm CDT
1:00 pm – 2:00 pm EDT
5:00 pm – 6:00 pm GMT


Please click here to register.

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