Brewery M&A in Canada

The brewing industry is one of Canada’s oldest, and has undergone substantive transformations in recent decades. After a period of consolidation that culminated in the mid-1980s, only ten Canadian breweries remained, of which three controlled more than 95% of the market. As a result of further worldwide M&A activity, the industry is now dominated by three major multinational players. These control 90% of all Canadian retail sales, and account for more than 70% of industry revenue in 2018.

Although the industry has enjoyed steady growth in recent years and continues to have a positive outlook, much of this growth can be ascribed to the increasing popularity of craft beer. According to a recent industry report, this shift in consumer tastes from mainstream light and premium brands towards craft beer is not only a Canadian phenomenon, but has also taken hold in Europe and the United States. While there is no universal definition of craft beer, it is typically associated with small, independent, traditional brewers producing less than 400,000 hectolitres a year. This shift in consumer taste is reflected in the number of new breweries that have entered the industry in recent years. In 2012, less than 250 establishments were operating in Canada. Today, despite substantial regulatory barriers to entry, there are 766 Canadian breweries, of which the vast majority are craft brewers.

The surging popularity of craft beer has created a challenge for the established players in the brewing industry, which is further exacerbated by the slow decline of Canadian beer consumption. Although Canadians’ spending on beer has increased, this is mainly because of the higher average price of craft beer compared to traditional brands. Currently, craft beer still only accounts for a fraction of the Canadian beer market, but is expected to make further inroads thanks to government incentives and increasing consumer demand for locally produced goods.

In their efforts to capitalize on this shift in consumer demand, the dominant companies may consider acquiring craft brewers. This strategy, however, has only seen mixed success in Canada and the United States, as the brand appeal of a previously independently owned brewery may be diluted. Further, craft breweries may have limited growth potential outside of their local market. As noted by others covering the industry, the ability of individual brewers to grow from small into medium-sized enterprises is limited, particularly because of tax reasons and regulations that make it difficult for microbreweries to sell outside of certain locations. This means that there are relatively few attractive acquisition targets. While M&A can help the established players in building out their brand portfolios, they will also need to invest greater resources in in-house innovation. Ultimately, no matter the approach taken, consumers will benefit from ever better selection in the coming years.

The author would like to thank Felix Moser-Boehm, articling student, for his assistance in preparing this legal update.

Technology and creativity: Keys to unlocking real estate?

With increasing globalization, shifting demographics and advancing technologies, just to name a few, society is changing rapidly. These changes, as reflected by evolving tastes, preferences and needs, influence both how and where people live and work. As part of their joint publication, Emerging Trends in Real Estate 2019 (the Report), PwC and the Urban Land Institute forecast that in response to mounting pressure on the Canadian real estate industry (the Industry) to confront these changes, we may begin to see Industry players increasingly embrace both technology and creativity.

Smart technologies may help the Industry adapt to a changing market

One trend that the Report identifies for 2019 is the “intersection of technology and real estate”. Virtual and augmented reality and drones, for example, will allow builders and developers to provide clients with greater insight into pre-construction projects and to show on-site progress once construction is underway, respectively.

Technology may play an even more significant role behind the scenes. In particular, we may see enhanced reliance on data analytics whereby Industry players use these technologies to help analyze consumer patterns and inform their decisions of which categories of property to target and/or avoid and how best to revamp their current portfolios so as to stay relevant in an ever-evolving market.

Higher price tags and risk aversion may encourage the Industry to get creative

With the rising costs of real estate and fewer “good deals”, the Report also forecasts Industry players getting creative in their approaches to navigating this riskier environment. One such approach may involve fewer purchases and instead, greater redevelopment of existing properties. Take retail, for example. With the acceleration of e-commerce (and certain other factors), retail properties have been experiencing pronounced difficulties such that the traditional “urban mall” is an increasingly less sustainable business model. However, these retail properties are prime targets for redevelopment. In fact, the Report cites a trend of landlords planning to convert their malls into mixed-use spaces that offer a combination of retail, residential and other amenities. Another approach may involve strategic partnerships and joint ventures. Specifically, some developers and investors intent on diversifying their portfolios by purchasing properties in unfamiliar markets are partnering with others who have expertise in those markets so as to minimize the risks associated with such acquisitions. Further, some developers and investors may shift their focus altogether to Canadian cities and/or other countries where real estate is less expensive.

With the new year just around the corner, it will be interesting to see how Industry players employ technologies and what creative approaches they adopt in order to effectively respond to the changes confronting the Industry and any further changes that may arise.

Canadian M&A market still thought to be strong despite recent cut backs

Despite some cut backs in M&A activity expected over the next 12 months, the results reported in Ernst & Young’s (E&Y) 19th edition of the Global Capital Confidence Barometer (the “Report”) make clear that Canadian executives remain optimistic about Canadian and global M&A markets. Canadian executives are traditionally thought to be very bullish on the Canadian and global economy, and it is suspected that the decline in deals since the last Report is a temporary and strategic step back for companies to “digest recent acquisitions and assess the changing global geopolitical landscape.” The current state of geopolitical uncertainty in Canada stems primarily from the consequences of the newly negotiated USMCA and the next phase of Brexit, and it is expected that local M&A activity may pick back up once key players have a better idea of how these developments unfold.

The Report highlights a number of encouraging findings related to the Canadian and global M&A markets. These include that:

Despite these statistics, 34% fewer Canadian executives (from 80% on E&Y’s last survey to 46% this year) reported having the intention to actively pursue M&A deals in the coming year. Instead, Canadian respondents will aim to prioritize improving their working capital and further investing in existing operations. There is also a current push in Canada to invest in workforces, and specifically to motivate, retain, and reskill workers.

All in all, Canada is regarded as one of the world’s top investment destinations (ranking third in the world, the highest in its history). As such, despite the projected regression in M&A activity over the next twelve months, there are reasons for Canadians and Canadian executives to remain positive.

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

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The role of environmental, social and governance (ESG) factors in M&A

In private equity, environmental, social and governance (ESG) factors are often overlooked and undervalued. Due diligence is usually more focused on the financial and quantitative aspects of the target. However, in recent years, ESG has proven to be a powerful underlying factor for business successes and failures. As evidence by the #MeToo movement, and the various human resource scandals that have made headlines in recent months, an unhealthy corporate culture can have serious consequences for even the biggest of enterprises. A study that looked at 231 mergers and acquisitions between 2001 and 2016 found that ESG compatible deals performed better than those with disparate positions on ESG, by an average of 21%.

This figure should be considered alongside the fact that in 2016, more than 15,000 deals were terminated or withdrawn. The face value of these terminated deals totals USD three trillion. One can appreciate the time, effort, and costs incurred in relation to these proposed transactions, which is why investors need to look beyond the bottom line, and see how a target is achieving its results early on in the evaluation process.

The first challenge is in recognizing how ESG translates into financial success. Perhaps the most prominent link comes from employee management. Employees working within a healthy ESG environment are more focused on teamwork and productivity. There are also cost benefits to be realized from having a stable workforce and better employee retention. Studies have shown that companies with the best corporate culture generate three times the total returns to shareholders.

Another major link is sales. Consumers are paying more attention to environmentally friendly and ethically sourced products. In this highly connected global market, reputation is emerging as a key consideration. Consumers do not shy away from endorsing their favorite products or quite literally burning them on social media for millions to see. There is also a rational connection between ESG and a company’s overall maturity. A company that has sustainability measures and solid governance policies is likely to have optimized its operations to reduce costs. It will likely also have better community, and governmental relations to bolster its reputation. Therefore, identifying a target’s ESG becomes a valuable tool and a risk management strategy for an acquirer.

This can be a challenge because ESG is not readily apparent or quantifiable, and it’s often beyond the scope of the standard legal due diligence process. Recognizing the importance of these factors in the context of risk management, companies have harnessed the power of big data, to provide non-financial insights to businesses looking to make an acquisition. Such tools can not only provide a historical report card, but can also forecast risks and opportunities. While still at the early stages, higher demand will inevitably lead to better reporting and analysis. Investors looking to protect their capital should carve out ESG as a standard component of every deal, and the data will follow.

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

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Record year predicted for the cybersecurity industry

With a growing reliance on technology, it does not come as much of a surprise that the importance of cybersecurity is increasing as well. In its Mid-year Market Review, Momentum Cyber reported that $2.3 billion had already been lost as a result of cryptocurrency breaches. This staggering loss may be one of the many reasons why there is a greater focus on cybersecurity and why the number of mergers and acquisitions (“M&A”) in the cybersecurity sector has been rising. It was even predicted in August 2018 that this would be a record year for the industry.

This prediction is evidenced by Blackberry’s recent announcement that it intends to purchase Cylance for $1.4 billion in cash. Cylance creates software that is aimed to prevent cyberattacks from occurring on internet-connected devices, such as cell phones and tablets. This acquisition is not the first cybersecurity acquisition for the company. In 2015, Blackberry also purchased Good Technology, a company that specializes in enterprise mobile security products.

Blackberry is not the only company contributing to the recent spike in cybersecurity M&A activity. In August 2018, Cisco announced that it would be acquiring Duo Security for $2.35 billion and only earlier this month, Thoma Brava announced that it would purchase the software security firm Veracode, for $950 million. In the first half of 2018, 101 cybersecurity M&A deals had been reported, resulting in an 11% increase year-over-year.

Reasons for the growing interest in cybersecurity include:

  • An increase in investment opportunities;
  • Further innovation, revealing the need for greater cybersecurity; and
  • The heightened need for confidentiality and anonymity on the internet.

As the end of the year approaches, we will soon learn whether 2018 is in fact a record year for cybersecurity M&A. Moreover, given the importance of cybersecurity and recent acquisitions within the industry, it is likely that the upward trend of cybersecurity M&A activity will persist in 2019.

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Summarizing the 2018 M&A Holdback Escrow Study

One of the common tools to mitigate transaction risk is a holdback escrow, where the buyer can retrieve funds in escrow if the seller fails to meet certain terms of the purchase agreement. There are numerous benefits to holdback escrows, such as broad claim coverage, publicly-available payout statistics to assist with cost estimation, and shared risk between buyer and seller.

For practitioners curious about how best to structure holdback escrows in their deals, J.P. Morgan’s 2018 M&A Holdback Escrow Study summarizes recent holdback escrow trends by analyzing 3.5 years of its M&A transactions containing these provisions:

  • Amount in escrow: The amount of the consideration put into escrow can be significant, with a median of 8.6% of the purchase price. However, this decreased to a median of 6.1% for deals closed in the last 12 months of the Study. This decrease may partially reflect the recent trend toward larger deals, which tend to have a smaller percentage of the purchase price placed into escrow. The amount in escrow also varies by industry. The information technology sector had the highest average percentage of purchase price in escrow (10.8%) while the energy sector had the lowest (6.9%).
  • Indemnity Claims on the Escrow Amount: The most common type of indemnity claim on the escrow amount was for taxes (27%). Litigation claims (25%) and financial statement claims (23%) were the next most common claim types, although many claims contained multiple claim types. Although reasons for litigation claims were usually not provided, commonly stated reasons were for patent infringement and employee-related claims. Financial statement claims were split between misstated assets and misstated liabilities. The industrial sector had the lowest frequency of indemnity claims (10%), while the consumer sector had the highest (22%). There was also a significant reduction in environmental claims over the course of the study.
  • Amount of Escrow Paid: Estimating potential liabilities can be difficult, but the publicly-available data for escrow payouts can help parties estimate costs when issues arise. In the 3.5 years of the study, the average percent of the escrow paid for individual claims increased from 51% to 70%. However, as noted above, the amount of the purchase price that was put into escrow also decreased in that time. The average indemnity claim amount was 43% of the value of the escrow.
  • Timelines: 88% of escrow agreements specified claim objection periods of 10, 15, 20 or 30 days, with 30 days appearing in 52% of agreements. Initial objections were received within 2 weeks on average, with claims resolved in a median of 73 days (although outliers increased the average to 160 days). Employee-related or financial statement claims had the shortest resolution times while litigation and tax-related claims had the longest average time.
  • Structure: 30% of deals had escrows that were bifurcated for distinct purposes. These generally specified a primary general indemnification account with one or more secondary accounts, usually for tax-related indemnity. The buyer and seller generally split the escrow fees (80% of deals), but one party, usually the seller, received the interest over time (58% of deals).


This study provides useful insights into how best to structure holdback escrows to account for typical payouts, timelines, and variations across claim types and industries. In order to facilitate payments from the holdback escrow, the study’s authors recommend that law firms partner with banks to create templates that incorporate these practical considerations. As always, precise drafting is key. Agreements should clearly spell out applicable timelines and all steps in the claim process, including a cut-off date and the specific processes by which parties can submit a claim and/or object to asserted claims.

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

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Dissecting MedTech M&A deals

As we previously reported, this year has seen a surge in healthcare-related M&A. Many of these transactions are in the medical technology industry, or MedTech. While the industry’s healthy profit margins and opportunities for growth have driven a flurry of activity, the potential for large rewards from MedTech acquisitions also comes with unique obstacles:

  • Regulatory compliance: The healthcare industry is heavily regulated, with recent privacy legislation requiring stricter due diligence practices. Medtech companies often collect sensitive user data and in addition to conducting cybersecurity due diligence, buyers must ensure that the target’s data collection policies and practices comply with health privacy legislation such as Ontario’s Personal Health Information Protection Act (PHIPA) or its applicable counterparts. Compliance with legislation such as the Food and Drugs Act in Ontario may also become essential when valuing and allocating risk in a transaction.
  • Clinical trials: Many MedTech transactions involve products that are still under development. In order to determine a proper valuation, it may be essential to thoroughly review the clinical trial’s design, the reliability of the preliminary studies on which the trials are based, and the trial records to ensure regulatory compliance.
  • Product liability: Even if a target complies with all applicable laws, MedTech companies may be vulnerable to potential lawsuits related to patient injuries and casualties. Statutes of limitations and standards of care vary by jurisdiction and must be thoroughly vetted to ensure the target is adequately covered.
  • Intellectual property: Intellectual property (IP) is often a MedTech company’s most valuable asset. However, it may also be a source of potential liability, resulting from infringement of another company’s IP. As a result, to help mitigate such risks, buyers should ensure extensive freedom-to-operate due diligence is conducted or was conducted at some point by the target
  • Anti-corruption laws: Sales and advertising of medical devices are strictly regulated. In many countries, customers such as hospitals and healthcare practitioners are affiliated with the government and therefore, improper payments formerly made by a target may be at odds with the US Foreign Corrupt Practices Act (FCPA) or other anti-corruption legislation.

Deal protections

Structuring a deal in a manner that isolates as well as mitigates product and regulatory liabilities is essential to ensuring success in MedTech transactions. Indemnities may be modified to cover not just product liability but voluntary recalls and other regulatory issues. Other solutions include acquiring representations and warranties insurance or setting up of escrow funds so certain payments only when corresponding milestones are reached. MedTech companies and medical data are increasingly international.

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

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Q3 2018 review: venture capital financing and deal activity decline after record-setting H1

PwC and CB Insights recently released their Q3’18 “MoneyTree Canada report (the Report), which provides an overview of investments in Canadian venture-backed companies. According to the Report, after an exceptional H1’18 (which we’ve covered in an earlier post), Q3’18 has seen a decrease in the number of deals, as well as in dollars invested.

General overview

According to the Report, Canadian venture capital (VC) funding has decreased for the second quarter this year, falling 42% to USD $541M in Q3’18 (from USD $927M in Q2’18). Similarly, despite a record-high of 127 deals in Q2, Canadian companies only completed 87 deals in Q3’18.

Despite these falling numbers, corporate VC investment in Canadian start-ups increased to 39% of all deals in Q3’18, which marks a significant increase from 32% in Q2. This is an area that has seen a lot of growth in recent years, rising from 17% of all deals in Q4’16.

Canadian investors continue to make up the majority of investors across the various funding stages, especially in the seed and later stages, followed by US investors.

Sector trends

Consistent with the past few years, the Internet sector witnessed the highest number of deals and investments, with 42% of all Q3’18 deals in this sector and approximately USD $256M invested across 37 deals. The sector, however, continues to experience a decline in activity for the second straight quarter, falling from 46 deals and USD $357M invested in Q1’18.

The healthcare sector is the second highest sector in terms of deal flow, with 12 deals in Q3’18. While healthcare has experienced a slight increase from 12% of deals completed in Q2’18 to 13% in Q3’18, Canadian healthcare companies only raised USD $45M in Q3’18 – the lowest across seven quarters, falling from USD $341M in Q4’16.

Thematic areas

After a record Q2’18, investments in artificial intelligence companies fell from 14 deals and USD $163M to nine deals and USD $106M in investments in Q3’18. Funding for Canadian Financial Technology (FinTech) companies, on the other hand, is on the rise, hitting a high for 2018 of 12 deals and USD $115M in Q3’18. Interestingly, five out of the 12 FinTech companies funded in Q3’18 are headquartered in British Columbia, demonstrating that the province is a Canadian hub for FinTech.

While the Canadian healthcare sector may be at a low for now, investment in the Canadian digital health space increased 170%, with USD $83M raised in Q3’18, compared to USD $31M in Q2. This is the third-straight quarterly increase in Canadian digital health investments.

Canadian markets

The Toronto market continues to lead, both in terms of the number and size of deals (30 deals, USD $248M raised), followed by Vancouver (21 deals, USD $104M raised), and Montreal (16 deals, USD $95M raised). Both the Toronto and Vancouver markets experienced a significant decline this quarter, with total investments falling from USD $301M in Toronto last quarter, and USD $120M in Vancouver last quarter.

Despite the downward trends in Q3’18, the Report suggests that there is little reason for concern, especially given the high bar set by H1’18. The Canadian VC landscape remains exciting as it continues to evolve, and we will be keenly following the trends in the last quarter of 2018.

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

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Securities laws – you should follow them

Raising money is exciting. Complying with securities legislation, however, is not quite as exciting, but it is necessary. It is a pain, at the best of times, and a constant struggle between lawyers, who would like every investor in your company to fill out a fifty page document detailing exactly how risky the investment is, and their clients, who would like the money now, please.

A big part of my job is seeking exemptions for my smaller clients from having to comply with the requirement to file a prospectus when they are taking in money. A prospectus is about 200 pages and $200,000 in legal fees (that’s not a price quote, to be clear – if you want more details I can put you in touch with one of my colleagues who does more work in this space). Such exemptions can be through accredited investor exemptions, family, friends and business associates exemptions, private issuer exemptions, minimum investment amount exemptions and a few other exemptions that I may be able to tailor to the specifics of your investors. If we can get all of your investors under an exemption from the prospectus requirement, you don’t need a prospectus and everyone is happy.


My frame of reference when helping a client with prospectus exemptions is that I have gotten them down from 200 pages to 20 pages. Unfortunately, though very understandably, my securities laws disclosures and certificates to get there often takes their simple share purchase document from 5 pages in their mind to 20 pages when all is said and done. I think I am reducing your paper by 90%. To you, it feels like I am quadrupling it.

And it doesn’t end there. OSC guidance says that you actually need to be reasonably satisfied that your investors fall under the exemption that they say they are under. That means that if your investor, a nurse out in Oakville, fills out the forms by indicating that he is a Schedule 1 Bank under Canadian law, you can’t just drive on and say that’s his problem, not yours. The OSC expects you to take an active role in ascertaining and verifying that your investors know what they are getting themselves into.

The corollary of that expectation is that if you don’t, your company is at risk, and you personally too. Your company can be forced to return the investor’s money, you can be personally liable for certain fines, and you can be barred from trading in securities for as long as ten years.

So, when your company is taking in money from an investor, talk to your lawyer about what sort of documentation you need. We will say we have a streamlined process, but it will still seem like we are making it more difficult. We will say we have this down to a simplified set of documents, but it will still seem like we are creating more paperwork. We get that. At the same time, however, we’re inconveniencing you now so the OSC doesn’t ruin the next several years of your life later, which we think is a good deal at the end of the day.

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Key findings: 2018 SRS Acquiom Buy-Side Representations and Warranties Insurance (RWI) Deal Terms Study

SRS Acquiom recently published its first Buy-Side Representations and Warranties Insurance (RWI) Deal Terms Study. The study analyzed the terms of 588 private-target acquisitions that closed between 2015 and 2017, the majority of which are not required to be publicly disclosed. As Canadian M&A deals continue to use RWI at an increasing pace, insights from firms such as SRS Acquiom offer valuable perspective on popular terms in RWI covered deals. Some of the study’s key findings are outlined below.

Financial terms

  • Escrow. One of the most pronounced effects of RWI coverage is the reduction in the amount of the purchase price to be held in escrow in satisfaction of potential indemnity obligations. In deals that were covered by RWI, the median escrow size is 1% of the purchase price compared to a median escrow size of 10% of other deals.
  • Purchase price adjustment. Deals covered by RWI were very likely (to the tune of nearly 90%) to include a purchase price adjustment mechanism. This is a significant increase over the 71% of other deals that did not contain a purchase price adjustment mechanism. The purchase price adjustment mechanism was most often tied to an explicit working capital adjustment process

Qualifiers and Individual Representations and Warranties

  • Sandbagging. In deals that were covered by buy-side RWI, parties were over twice as likely to agree to anti-sandbagging provisions. Additionally, only 32% of deals contained pro-sandbagging provisions which is a significant reduction compared to 56% of deals that were not reported to be covered.
  • Materiality. While buy-side RWI coverage did not significantly change the how often materiality scrapes were used, it did have an impact on the language of materiality scrapes. In deals that were covered by RWI, materiality was far more likely to be relevant in determining both whether a breach exists and determining damage amounts. There was a corresponding decrease in the use of the materiality qualifier for determining damages only in covered deals.

Loss Mitigation

  • Offset of indemnity. Deals that were covered by RWI were significantly more likely to have an provision expressly prohibiting the offset of indemnity claims against future earnout payments. In any case, approximately 6% of deals with buy-side RWI coverage were silent on this point, compared to 10% of deals where no RWI was reported.
  • Baskets. Deals with buy-side RWI coverage showed a strong preference towards a simple deductible basket with 67% of covered deals having that provision. The popularity of deductible baskets comes at the expense of first dollar baskets which were seen in 22% of covered deals, down from 56% of non-covered deals.

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

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