Canadian Securities Administrators are seeking comments on soliciting dealer arrangements

The Canadian Securities Administrators (the “CSA”) have issued CSA Staff Notice 61-303 and Request for Comment – Soliciting Dealer Arrangements (the “Notice”) on the use of soliciting dealer arrangements. “Soliciting dealer arrangements” generally refer to agreements entered into between issuers and investment dealers under which the issuer agrees to pay to the dealers a fee for each security successfully solicited to tender to a bid in the case of a take-over bid, or to vote in favour of a matter requiring securityholder approval. In many cases, the payment of any fee is contingent on “success” and/or only if votes are cast in a particular manner.

The recent use of soliciting dealer arrangements in the context of contested director elections has raised substantial controversy. For example, in a previous blog, we reported on the decision of the Alberta Securities Commission (the “ASC”) in PointNorth Capital Inc. where the ASC was called upon to consider the appropriateness of a soliciting dealer arrangement that had been entered into in the context of a proxy fight. Pursuant to this arrangement, the issuer agreed to pay the soliciting dealers a fee if the issuer’s slate of incumbent directors was elected. The ASC dismissed the application by the dissident shareholders and allowed the soliciting dealer arrangement to remain on the grounds that it was not “clearly abusive” of the capital markets in general.

In light of the issues raised by soliciting dealer arrangements, the staff of the CSA has published the Notice and is requesting comments to better understand these arrangements to aid the CSA in assessing whether additional guidance or rules in respect of these arrangements would be appropriate. To aid its assessment in this regard, the CSA has also posed a series of questions for market participants .

Comments must be submitted to the CSA by June 11, 2018.

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Enforcement of restrictive covenants in commercial transactions

Restrictive covenants are often a key mechanism by way of which the buyer of a business is able to protect the value of their purchase. Indeed, in a 2017 review of legal trends in Canadian private M&A, Thomson Reuters has reported that non-competition covenants were found in 52% of the closing conditions of share acquisition transactions.

While such covenants are common, their enforcement has remained an ongoing concern due to the strict reasonableness requirements imposed by the Supreme Court of Canada in JG Collins Insurance Agencies Ltd. v Elsley, [1978] 2 SCR 916 in order to balance the parties’ right to contract with the public interest in discouraging restraints on trade. In light of reliance on restrictive covenants and ongoing concerns with their enforcement, it is useful to provide an overview of the considerations that go into determining their lawfulness.

Restrictive covenants in the commercial versus employment contexts

The first major factor in the analysis of the validity of a restrictive covenant is the context in which it is negotiated. Specifically, the Supreme Court in JG Collins noted a distinction between restrictive covenants in an agreement for the sale of a business and ones contained in a contract of employment, as the former often requires the operation of a restrictive covenant in order for the business to remain a saleable commodity. Accordingly, as later confirmed by the Supreme Court in Guay inc. c Payette, 2013 SCC 45, the criteria for analyzing restrictive covenants in a commercial context will be less demanding than in the employment context, and the basis for finding such covenants to be reasonable will be much broader in the former as opposed to the latter.

In determining whether a restrictive covenant is linked to a commercial contract or to a contract of employment, courts will look to:

  1. the nature of the principal obligations under the contract; and
  2. why and for what purpose the accessory obligations of non-competition and/or non-solicitation were assumed.

Reasonableness of a restrictive covenant in a commercial context

Once it is established that a restrictive covenant resides in the commercial context, the covenant will be found to be lawful provided that it is limited to what is reasonably necessary for the protection of the legitimate interests of the party in whose favour it was granted.

To determine the reasonableness of a restrictive covenant in this context, courts may look to circumstances in which the contract containing it was entered into, including:

  • the sale price;
  • the nature of the business’ activities;
  • the parties’ experience and expertise;
  • the parties’ access to legal counsel and other professionals.

Having regard to the circumstances in which the contract was entered into, a court will then specifically consider the territorial and temporal scope for which the restrictions are prescribed.

(i) Territorial Scope

The territorial scope of a restrictive covenant must be considered carefully because, as noted by the Supreme Court in Guay, “[a] non-competition clause that applies outside the territory in which the business operates is contrary to public order.” The reasonableness of a territorial scope may depend on how mobile, or dispersed, the business is that is being purchased.

(ii) Temporal Scope

The temporal scope of a restrictive covenant is similarly assessed on the basis of the specific circumstances, including the nature of the activities to which it applies. The scope will generally be found to be reasonable, however, when negotiated by well-informed parties who are represented by competent counsel.

The author would like to thank Alex Kokach, Articling Student, for his assistance in preparing this legal update.

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Are megadeals coming back?

The year of 2017 witnessed a worldwide slowdown in the number of megadeals[1]. According to a recent Mergermarket Report (the Report), the global total for the number of deals worth US$4 billion or more decreased from a peak of 158 in 2015 and 133 in 2016 to 129 in 2017.  In Canada, the number of deals valued CAD$500 million or more decreased from 74 in 2016 to 55 in 2017, as reported by Duff & Phelps. However, there have been recent hints suggesting that the spring for megadeals is just around the corner.

After polling the leading experts in the M&A field, the Report characterized the survey results (the Survey) in one phrase: “megadeals are coming back”. In fact, 25 M&A deals valued at US$4 billion or more have already taken place in January and February of 2018 globally, sounding a strong start to the year for megadeals more generally. Aside from deal numbers, the Report also reveals other expectations for megadeals in 2018, which will be discussed in below together with the Canadian dimension of these expectations.

The continuation of the cross-border trend

In the last five years, the percentage of megadeals that were cross-border has consistently stayed in the range of between 42% to 52%, according to the Report. In the Survey, 64% of the respondents expect the trend to continue in 2018, predicting that 40-60% of these deals will be international.

This expectation is popular among Canadian investors as well, as Geoff Barsky, head of Canadian and international M&A at BMO Nesbitt Burns Inc., commented in a recent Globe and Mail article. As pointed out by Peter Buzzi, co-head of M&A at RBC Dominion Securities Inc., firms that have made multibillion dollar deals in 2016 or earlier – namely, Enbridge Inc. and TransCanada Corp. – are still swallowing those acquisitions, which may have contributed to the slower pace of cross-border megadeals in 2017.  However, with the development of two to three year integration plans, some big players could now rejoin the negotiating table.

More Private-Equity (PE) backed megadeals

The Report suggested that one contributor to the expected return of megadeals was the revival of PE-backed transactions. In 2017 alone, 26 of the 129 deals valued at US$4 billion or more involved PE funds or PE-backed companies. According to the Survey, the respondents expect PE megadeals to happen more frequently in the next 12 months, with 75% of the respondents predicting an increase of 5-10 in the number of  PE-backed megadeals from that in 2017.

Another accelerator in the increase of PE-backed megadeals is the record fundraising level achieved in the PE industry in 2017, with US$453 billion raised globally according to the Report. As a result, some PE firms have huge pools of capital that needs to be deployed and they can complete megadeals rather easily, which has been observed in Canadian pension funds and PE firms as well.

Challenges for megadeals

Despite the expected increase in the number of megadeals, barriers that prevent megadeals from happening still need to be addressed in order to bring the expectation to fruition. According to the Survey, the two issues considered by the respondents to be the biggest challenges for megadeals are excessively high valuations demanded by the target and resistance from target shareholders, which are usually intertwined. Another threat to megadeals is from antitrust risk, as evidenced in the M&A between AT&T and Time Warner valued at US$105 billion. This deal was announced back in October 2016, and is still pending regulatory approval.

[1] Please note that different articles may have different thresholds for megadeals. The thresholds will be indicated when the specific article is mentioned.

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The tech takeover: disruptive technology as a driver of M&A

A relentless parade of new technologies is unfolding on many fronts – one of which includes the M&A scene. While not every emerging technology will alter a business’ landscape, certain technologies have the potential to disrupt the status quo, alter the way companies operate and rearrange value pools. These “disruptive technologies” can quickly displace established systems and set new industry standards.

As an example, earlier this year, Toronto-Dominion Bank made headlines for its acquisition of “Layer 6 AI”, a start-up company which uses artificial intelligence to analyze various forms of data and anticipate an individual customer’s needs. This announcement came shortly after TD’s investment in the KAI Banking Chatbot. The Chatbot will be integrated into TD’s mobile banking app. Much like in the banking sector, as the pace of technologically-driven change continues to accelerate, companies across all industries will need to consider how to position themselves in response to the increasingly disruptive tech ecosystem. More often than not, the solution involves the acquisition of tech-driven or digital business models which can allow companies to close the innovation gap by obtaining certain capabilities or products.

According to a recent report published by PWC, such activity is expected to become part of a larger trend involving M&A in the tech sector. Specifically, tech-related M&A is expected to surge in 2018, with both deal volume and valuations rising over the next year. Similar to TD’s acquisition of Layer 6, it is predicted that non-tech companies will continue to seek out opportunities to purchase disruptive technology as a value creation strategy and/or a defensive tactic. Such deals can add value to a company’s platform in various ways, including:

  • access to highly skilled teams;
  • use of new technology or intellectual property;
  • entrance into new markets; and
  • increased cross-sell / up-sell opportunities.

The value drivers listed above can also be critical for companies striving to remain competitive against tech companies and other disruptive entrants. This is often a necessity in order to avoid being rendered obsolete by new market entrants that are causing profound shifts in value chains and customer behaviours. In addition, investment in disruptive tech can be a significant factor in a company’s ability to liquidate or consider exit strategies. As always, value is relative and will depend on the existing players in the market; however, where companies are generally unable to align themselves with technology, they will likely be unable to secure an optimal exit, or even worse, attract a buyer’s attention. Statistics show that one out of every five transactions has a clear link to some form of technology, and the value of these deals as a percentage of the overall market is even greater.

While it will be important to monitor this trend in the months to come, it will be interesting to see whether companies that are in pursuit of growth or simply looking to manage disruptive technologies also find themselves venturing into new markets and part of a new competitive race.

The author would like to thank Joseph Palmieri, Articling Student, for his assistance in preparing this legal update.

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Mining M&A forecast in 2018

While global economic growth has increased in the past few years, mining M&A activity has not seen a similar increase. However, a report published by KPMG on mining M&A activity during the second half of 2017 shows that business conditions appear to have improved for the mining sector. KPMG believes that mining companies’ focus on correcting their balance sheets and winning back investors have had a positive impact on their cash accounts and have given mining companies some flexibility to become more active in acquisitions. Comparing M&A activity from July to December 2017 to that of the first half of the year, mergers and acquisitions greatly expanded in North America and Asia, both in deal volume and value. Globally, however, deal volume has increased but average deal size continued to shrink, with only two transactions exceeding $1 billion. The focus on smaller value deals appears to be caused by mining companies pursuing strategic acquisitions and diversifying their portfolios by entering into earn-in agreements and step acquisitions of exploration companies.

EY predicts that 2018 will see an increase in mining M&A activity, with companies returning to an investment-led strategy. Activist investors are expected to continue to play a key role in 2018 by continuing to influence mining strategies and commodity portfolios of mining companies. Lithium, copper and cobalt deals are expected to be featured prominently in M&A activity in 2018 as media attention grows around the importance of critical minerals required in the production of batteries. In December 2017, President Trump signed an executive order calling for an end to US reliance on imports of minerals such as lithium and cobalt. This move is expected to increase domestic mining activity of critical minerals, which may fuel M&A as larger mining companies may seek to acquire critical mineral exploration companies.

The author would like to thank Olga Lenova, Articling Student, for her assistance in preparing this legal update.

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Regulatory reform signals potential spike in M&A activity involving US financial institutions

On March 14, 2018, the US Senate voted (67-31) to advance S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Bill). The Bill, which will only become law with approval from the House and Congress, marks an unprecedented, bipartisan compromise to ease banking rules enacted following the 2008-09 financial crisis. If enacted, there may soon be good reason to anticipate a spike in M&A activity among mid-sized US financial institutions, including a possible increase in cross-border M&A activity involving Canadian institutions.

Proposed changes: an overview

Under current law, financial institutions with $50 billion or more in assets are considered “systematically important financial institutions” (SIFIs). SIFIs are considered to be firms that would pose a serious risk to the economy in the event of their collapse and, as a result, are subject to stricter federal oversight. For example, SIFIs are required to maintain more cash on hand and submit to certain “stress tests” designed to gauge how they would fare in the event of a repeat financial crisis.

The Bill proposes to change the enhanced compliance requirements, which have dissuaded many financial institutions below the SIFI threshold from considering value-adding transactions.  If enacted, the Bill would, among other things, increase the threshold at which financial institutions will become subject to increased federal oversight. In particular, the Bill would raise the SIFI threshold, from $50 billion to $250 billion, in effect freeing up many regional financial institutions from increased regulatory scrutiny.


In rolling back US regulatory requirements, the Bill contributes to a shift occurring in the US banking regulatory environment. In the context of the wider regulatory environment, the proposed reforms suggest the possibility for an increase in M&A activity among mid-sized US financial institutions, which may include the possibility of cross-border M&A activity involving Canadian institutions.  Strictly speaking, economies of scale will continue to drive M&A activity among financial institutions. However, the Bill and accompanying regulatory reforms should provide financial institutions with an impetus to enter value-adding negotiations.

It remains to be seen how the Bill would be reconciled with an earlier and more expansive bill passed by the House, and in what form the Bill will be ultimately passed by Congress and signed by the US President.

The author would like to thank Blanchart Arun, Articling Student, for his assistance in preparing this legal update.

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Reviewing the ABA 2017 Private Target M&A Deal Points Study: new RWI takeaways

For the first time, the American Bar Association’s Private Target Mergers and Acquisitions Deal Points Study (the Study) includes data points on the use of representation and warranties insurance in transactions. The Study analyses publicly available purchase agreements for transactions for which purchase agreements were executed and/or completed in 2016 and the first half of 2017 that involved private targets being acquired by public companies in the US (the Agreements).

Representations and warranties insurance (RWI) is a tool increasingly used by buyers and sellers in the context of mergers and acquisitions. As previously discussed on this blog here and here, RWI offers parties the ability to successfully negotiate deals by reducing the parties’ exposure to losses attributable to breaches of the seller’s representations and warranties in the purchase agreement. From the buyer’s perspective, this tool offers a way to enhance its protection from breaches of representations and warranties, preserve relationships with sellers that remain involved with the target post-closing, either as key employees or otherwise, and to win competitive auctions with reduced seller indemnity and escrow obligations. From the seller’s perspective, the use of a policy facilitates a clean exit, expedites the sale process and protects passive sellers not involved with the day-to-day operations of the business.

Analysis of RWI usage in 2016 and 2017

RWI was contemplated in 29% of the Agreements and, not surprisingly, 93% of those policies were buy-side policies. Buy-side policies provide the buyer with insurance coverage for losses resulting from breaches of the seller’s representations and warranties and are more prevalent than sell-side policies which provide the seller with insurance coverage for losses payable by the seller to the buyer for breaches of its representations and warranties. Underwriting sell-side policies presents greater challenges for underwriters and their advisors to get comfortable with the seller’s representations and warranties given the lack of legal and financial due diligence reports which are typically provided by the buyer’s professional advisors in the context of underwriting buy-side policies. Although buy-side policies are more prevalent, the buyer and target shared the cost of the policy in 43% of Agreements that included reference to RWI, while the buyer paid for the policy in 45% of the Agreements and the target paid for the policy in 8% of the Agreements.

Data collected in the Study on the size of the retention was scarce given that 88% of the Agreements were silent on this point. 10% of the Agreements provided for a retention that was larger than the basket, 3% provided for a retention that was equal to the basket and no Agreements provided for a retention that was less than the basket.

The Study revealed the following with respect to timing of coverage and closing conditions/covenants:

  • 48% of polices were expressly bound at signing
  • 50% of the Agreements included RWI as a closing condition
  • 58% of the Agreements included pre-closing covenants related to RWI

The Study further revealed the following with respect to indemnity baskets and caps:

  • Baskets (as a percentage of transaction value) tended to be smaller in Agreements that included reference to RWI:
    • Of the 45% of Agreements that provided for a basket equal to 0.5% or less of the transaction value, 38% included reference to RWI
    • Of the 50% of Agreements that provided for a basket of >0.5% to 1% of the transaction value, only 16% included reference to RWI
    • The mean deductible was 0.94% in Agreements with reference to RWI and 0.64% in Agreements without reference to RWI
    • The mean basket for “at first dollar” tipping baskets was 0.36% in Agreements with reference to RWI and 1.02% in Agreements without reference to RWI
    • The mean for all basket types (other than combination baskets with both a deductible and at first dollar tipping threshold) was 0.77% in Agreements with reference to RWI and 0.84% in Agreements without reference to RWI
  • Caps (as a percentage of transaction value) tended to be smaller in Agreements that included reference to RWI as well:
    • The mean indemnity cap was 5.77% in Agreements that did include reference to RWI and 14.70% in Agreements that did not include reference to RWI

While the Study is limited to public company acquisitions of private targets in the US and does not distinguish between transactions for which RWI was obtained and transactions for which RWI was not obtained where the purchase agreements were silent with respect to RWI, these findings demonstrate how RWI may be used to expedite negotiations between buyers and sellers and to distinguish a buyer’s bid in a competitive auction.

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The risks of sealing the deal with a personal guarantee

The purchase and sale of a business can involve a plethora of financial risks – one of which is often mitigated by requiring a personal guarantee. In the private M&A context, personal guarantees can have important implications for the buyer, who is signing the guarantee, and the seller, who requires the guarantee. These implications become further complicated when the transaction spans multiple jurisdictions and will require careful legal analysis.


Typically, the sale of a business will require financing. The person or entity financing the purchase may be the seller (in which case, the seller also becomes the lender) or a third party. In any event, the seller/lender may require the personal guarantee of one or more individuals associated with the purchaser. This guarantee is essentially a promise by the guarantor that the buyer will fulfill its obligations to the seller/lender. If the principal defaults, the lender will have a contractual right to seek repayment from the personal assets of the guarantor. By taking this approach, the lender can be satisfied that the borrower has sufficient personal interest at stake in the business, and as a result, will be proactive in making sure that payments are made to the lender until the loan is paid in full. While assuming this liability may be burdensome, it is often necessary in order to reach a deal.

Risks to consider

Acting as a guarantor for a commercial loan can create a significant burden for the gurantor and their families. While it is advisable to require indemnification from the company which the guarantor is signing on behalf of, in the event that the guarantor is required to make payment on a defaulted loan, the guarantor may still experience difficulties. For example, the factors which contributed to the default (i.e., poor business performance, financial trouble, etc.) will likely cause repayment to be delayed or in some scenarios, may render the company unable to reimburse the guarantor at all. There is also the added risk that the personal guarantor may pass away, in which case the lender’s interest will be placed in priority to the children and spouse of the deceased guarantor when distributing assets from the guarantor’s estate.

Reducing the risks

There are various ways to reduce these risks associated with providing a personal guarantee, some of which include:

  • Key person life insurance: One way to reduce risk is to have the business purchase key person life insurance for those signing a personal guarantee on the company’s behalf. If an insured guarantor passes away, the insurance plan will, among its other benefits, ease the lender’s concerns about the company’s financial health and ensure that surviving co-guarantors and/or their families will not be left with the debt of the business. Key person life insurance also benefits the lender as it provides a source of funds to ensure debts are paid if the guarantor is unable to continue working.
  • Forms of liability: Where there are multiple guarantors, it may be advisable to avoid joint and several liability as a guarantor. This term will allow the lender to seek repayment from one or all of the personal guarantors, as opposed to having any amounts owed shared equally amongst co-guarantors.
  • Termination date: In some cases, it may be possible to negotiate a termination date with the lender, upon which the personal guarantee will expire. This provides the guarantor with certainty that the lender will only be able to demand repayment from the business itself after a certain point in time.

Multi-jurisdictional transactions

Finally, in a scenario where the transaction involves various jurisdictions, there are additional issues to consider when a personal guarantee is being provided. For example, if a personal guarantee is signed by an individual resident in Alberta, the Guarantees Acknowledgement Act (Alberta) (the Act) will come into play which could have a dire impact on the seller/lender. To be more specific, under the Act, an individual signing a personal guarantee must appear before an active member of the Law Society of Alberta and acknowledge giving the guarantee. Once the lawyer is satisfied that the individual signing the guarantee is aware of the contents of the guarantee and understands its significance, he or she must sign a certificate to that effect and attach the certificate to the guarantee. Only then will the guarantee be enforceable. By failing to comply with such formalities which are imposed by the Act, the guarantee could be rendered unenforceable. Case law has demonstrated that courts will not have jurisdiction to waive non-compliance or to apply the rules of equity, even where the result may seem absurd.

Needless to say, purchasing a company can involve significant risks when a personal guarantee is required. However, with proper planning and careful consideration, the risks associated with personal guarantees can be mitigated for the betterment of the seller and buyer alike.

The author would like to thank Joseph Palmieri, Articling Student, for his assistance in preparing this legal update.

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U.S. banking M&A on the rise and may extend to Canadian financial market

According to a recent article published by Pitchbook, this year has already shown a positive momentum for deal-making in the U.S. banking industry – a trend worth monitoring as it is expected to surge further as the year progresses and U.S. banks (especially those that already have a Canadian presence) may be looking to acquire financial assets and operations north of the border.

Most recently, Citizens Business Bank announced that it would acquire Community Bank, pursuant to which Citizens’ total assets will increase from U.S. $878 million to U.S. $12 billion. This acquisition represents one of 19 M&A transactions that have already been announced within the first three months of 2018. Thus far, the trend appears to be acting as a catalyst for other lenders to harness the financial opportunities available by joining forces. In doing so, commercial lenders can increase synergies and strengthen competitiveness for talent retention, customer acquisition and geographic reach.

To provide further context, this year’s M&A activity among U.S.-based commercial banks puts 2018 in the race for decade highs in terms of both deal count and deal value. While the activity may not reach the levels of investment in 2016 (222 investments, worth U.S. $39 billion in deal value), there are many drivers at play which suggest that a comeback is on the rise in terms of increased M&A activity, including acquisitions of Canadian financial assets by U.S.-based banks. Catalyzing (or inhibiting) factors for the expected increase in possible M&A activity in the banking sector could include the following:

  • Rising interest rates. On March 21, the U.S. Federal Reserve announced an increase to interest rates, which almost always means banks can increase their margins and profitability. It is expected that further interest rate hikes from the Feds will occur later on in the year to help slow a booming U.S. economy.
  • Legislative reform. The U.S. Senate passed a new bill which will implement significant amendments to the Dodd-Frank Act, easing regulatory requirements. For instance, banks with less than $10 billion in assets will no longer be prohibited from proprietary trading or engaging with hedge funds and private equity funds, and liquidity requirements will be less stringent.
  • U.S. tax reform. With recent tax reforms, banks will have more capital available. U.S. banks will also be positioned as more attractive to foreign-owned institutions looking to offset slow in-country growth and enter U.S. markets.
  • Fintech evolution. With innovations in fintech, including artificial intelligence and robotics to automate administrative tasks, banks can make changes on the back end and leverage new technologies to expedite post-deal integration and maximize value realization. They can also dispose of costly real estate by closing branches in favour of increased online banking.

Going forward, it will be up to financial institutions to take the necessary steps to put banking M&A into high gear, with ample fuel available to ramp up.

The author would like to thank Joseph Palmieri, Articling Student, for his assistance in preparing this legal update.

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Offer of continued employment with buyer does not absolve seller from liability in M&A transactions

A recent decision of the Ontario Superior Court of Justice, Dussault v Imperial Oil Limited, 2018 ONSC 1168 (Dussault), provides a cautionary tale to selling parties in an M&A transaction who intend to limit liability for wrongful dismissal by negotiating for its employees’ continued employment with the buyer. The Dussault decision illustrates that even when continued employment is offered, the seller may still be liable if the employees are reasonable in failing to mitigate their damages by not accepting employment with the buyer.


As part of an asset purchase agreement between Imperial Oil Limited (Imperial) and Alimentation Couche-Tard (Mac’s) wherein Imperial was selling its retail business that included multiple retail sites under the Esso brand, the parties negotiated a provision that would see particular employees being offered a position with Mac’s with the view of limiting Imperial’s employment-related liabilities.

The negotiated provision addressed, inter alia, two particular employees in managerial positions, with an average of 37 years of service between them (the Plaintiffs). The conditions of the continuing employment offers as they pertained to the Plaintiffs were as follows:

  • The Plaintiffs would continue in positions similar to those they held with Imperial;
  • The Plaintiffs would receive the same rate of pay for 18 months, after which they were not advised as to what their salary would be;
  • The Plaintiffs’ years of service would not be recognized;
  • Imperial would provide the Plaintiffs with a lump-sum payment, the amount of which was not disclosed to them, to make up for the reduction in value of the Plaintiffs’ benefit plans; and
  • The Plaintiffs would have to sign a release, renouncing their right to bring any future action against Imperial.

The Plaintiffs rejected the offer of continued employment with Mac’s and brought an action for wrongful dismissal against Imperial.

Accepting offer with Buyer as part of mitigation obligation

The central question decided in this case was whether Mac’s and Imperial structured the deal such that the Plaintiffs would be considered to have failed to mitigate their sustained damages by not accepting the offer of employment from Mac’s. The Court answered this question in the negative, listing the following as reasons why it was not reasonable for the Plaintiffs to be required to mitigate their damages by accepting the Mac’s offer:

  • Offer made before employment was terminated: In Farwell v Citair, Inc. (General Coach Canada), 2014 ONCA 177, the Court of Appeal confirmed that it is fatal to an employer’s argument that an employee failed to mitigate his damages by working for his old employer where the offer of alternative employment was made before the termination. Neither Mac’s nor Imperial reiterated the offers post-termination, which is when the mitigation requirements arise.
  • Mandatory release: In Filmore v Hercules SLR Inc., 2017 ONCA 280, the Ontario Court of Appeal affirmed that there is no obligation for an employee to sign a release under the guise of mitigation efforts. The Court in Dussault found that the requirement that the Plaintiffs give up any right to sue Imperial is fatal, especially in light of the fact that the Plaintiffs were not told of the specifics of the lump-sum amount, nor what their salary would be at Mac’s.
  • Lack of recognition of years of service: the courts have established that in circumstances where a new employer has purchased a business as a going concern, there is an implied term that the employees’ years of service will be recognized. When there is a term to the contrary, the employee has the choice to accept the offer of employment with the purchaser or sue the seller for wrongful dismissal and damages in lieu of notice.
  • Potentially hostile atmosphere: the Court took into consideration the fact that the Plaintiffs’ salary would be substantially greater than employees in similar, and even higher, positions at Mac’s, which could potentially create an atmosphere of resentment and hostility. Following the ruling of the Supreme Court of Canada in Evans v Teamsters, Local 31, 2008 SCC 20, the Court determined that an obligation to mitigate does not include an obligation to work in an atmosphere of hostility or embarrassment.

Ultimately, the Court in Dussault noted that the assessment of whether the Plaintiffs had an obligation to accept the offer of employment from Mac’s is to be done from the perspective of a reasonable person in the Plaintiffs’ position. In conducting this assessment, the Court considered the discrepancies in the salary and benefits, along with the fact that the Plaintiffs did not know how much the lump-sum offered by Imperial would be, nor the salary that they would receive after the 18-month period expired. On this basis, the Court found that it was reasonable for the Plaintiffs to forego the offers of employment from Mac’s.

Length of notice and damages

In determining the length of notice that the Plaintiffs would be entitled to, the Court considered the Bardal factors, including the character of the Plaintiffs’ employment, their ages and length of service, and availability of similar employment in light of their experience, training and qualifications. The Court then drew parallels to the plaintiff’s circumstances in Keenan v Canac Kitchens Ltd., 2016 ONCA 79, where the Court of Appeal accepted the trial judge’s findings that the circumstances in that case were exceptional and warranted a longer notice period than the usual limit of 24 months’ notice. Ultimately, the Court awarded the Plaintiffs 26 months’ notice from the time that they received notice letters from Imperial, and deferred to the parties to reach an agreement on the quantification of damages.


In order to avoid wrongful dismissal damages, employers who are the selling party in an M&A transaction would be well advised to ensure that, if an offer is made to the employees to continue employment with the buyer, that the offer is left open after any official termination, that the offer is not contingent on a release, and that the buyer recognizes the employees’ years of service when the business is sold as a going concern. More generally, it is advisable that every effort is made to provide employees with reasonable employment transition conditions.

The author would like to thank Alex Kokach, Articling Student, for his assistance in preparing this legal update.

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