Global automotive M&A ends 2017 in high gear with no signs of slowing down

As seen in this recent PwC article, global automotive M&A activity was strong in 2017.  Automotive deal value increased 29.9% to $53.2b from 2016 to 2017 primarily as a result of two mega deals in the Auto-Tech sector, which PwC defines as “investments in connectivity, autonomous, electrification, ride-sharing and the software, sensors, intellectual property and other components that support these trends.”  For 2018, it is expected that investments in the Auto-Tech sector will continue to drive global automotive M&A activity.

Auto-tech deals spark M&A activity

Auto-tech deal value increased from $5.3b in 2016 to $26.7b in 2017. Further, deal volume increased 28% from 50 deals in 2016 to 64 deals in 2017.  The main auto-tech attractions in 2017 were driver assistance technologies and alternative powertrains, which include lithium ion battery manufacturing. Other significant investments were made in ride sharing/mobility services and online vehicle dealerships/trading platforms.

Further, while traditional automotive companies were acquiring tech companies, tech companies were also acquiring traditional automotive companies and other auto-tech companies.

Auto-tech attracts venture capital

Last year was a record-setting year for venture capital with 11,042 deals completed worth $164b.  Despite the fact that the auto-tech sector is only a small portion of global venture capital, venture capitalists are showing interest in early stage auto-tech enterprises focused on artificial intelligence, software, and other mobility-related technologies. In 2017, venture capitalists injected significant capital into on-demand ride sharing applications, and electric and autonomous vehicles. PwC aptly predicts that the car of the future will be “electrified, autonomous, shared and connected.”

2018 outlook

2018 will likely see continued investments in the auto-tech sector with particular focus on alternative powertrains, connected car technologies, ride sharing, artificial intelligence and predictive analytics.

As seen in 2017, Asian buyers will continue to be active given further consolidation opportunities, market growth and expected regulations that will drive the need for alternative powertrain technologies. Further, in the US, the recent and significant tax reforms will provide US-based companies and venture capitalists with more cash to drive M&A activity.

As such, 2018 has plenty of fuel it needs for another strong year of automotive M&A activity.

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

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Legal update: common interest privilege in commercial transactions

On March 6, 2018, the Federal Court of Appeal reversed the decision of the Federal Court of Canada in Iggillis Holdings Inc v Canada (National Revenue).

As we discussed in a previous post, the trial court decision in Iggillis Holdings had called into question the availability of common interest privilege in commercial transactions. The trial court found that privilege with respect to a memorandum prepared by purchaser’s counsel (with input from seller’s counsel) outlining the most tax-efficient way to structure a series of transactions had been waived when it was shared on a confidential basis with the seller.

On appeal, the Federal Court of Appeal noted that transactional common interest privilege is a firmly entrenched principle of Canadian law.  Specifically, the Court found that the courts of Alberta and BC (the relevant jurisdictions for the transaction under consideration) recognize that a party to a transaction does not waive privilege by disclosing privileged advice on a confidential basis to another party having a sufficient common interest in the same transaction (at paragraphs 40-41):

These cases and the commentary in The Law of Evidence reinforce the conclusion of the Federal Court judge that common interest privilege “is strongly implanted in Canadian law and indeed around the common-law world” and in particular in Alberta and British Columbia which are the relevant provinces for the definition of solicitor-client privilege in subsection 232(1) of the Income Tax Act, in this case. It was therefore not appropriate for the Federal Court judge to rely on the decision of the New York Court of Appeals to effectively overturn the decisions of the Alberta and British Columbia courts.

Based on the decisions of the courts in Alberta and British Columbia, solicitor-client privilege is not waived when an opinion provided by a lawyer to one party is disclosed, on a confidential basis, to other parties with sufficient common interest in the same transactions. This principle applies whether the opinion is first disclosed to the client of the particular lawyer and then to the other parties or simultaneously to the client and the other parties. In each case, the solicitor-client privilege that applies to the communication by the lawyer to his or her client of a legal opinion is not waived when that opinion is disclosed, on a confidential basis, to other parties with sufficient common interest in the same transactions.

With respect to the sufficiency of the common interest, the Court of Appeal noted that, particularly where complex statutes such as the Income Tax Act are at issue, the application of the legislation will be of interest to all of the parties to a transaction and that the sharing of opinions may also lead to efficiencies in completing the transactions.

As noted in our previous blog entry, the trial court decision in Iggillis Holdings was not binding in provincial superior courts, where most commercial cases are litigated and where the courts have consistently recognized common interest privilege in this context. However, this reversal by the Federal Court of Appeal is welcome nonetheless, as it serves to re-establish a consistent approach to common interest privilege across Canada.

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Cross-border agreements and the choice of governing law

In order to meet the demands of a constantly evolving global marketplace, companies often seek to expand their operations through cross-border mergers and acquisitions. When pursuing an international transaction, the parties must consider a unique aspect of the deal – the legal framework in which the deal and any contractual agreements within it are to be governed.

Governing law provisions

Canadian law generally espouses the principles of contractual autonomy and international comity (being respect for a foreign court’s jurisdiction and laws). As a result, when multiple jurisdictions are involved in an M&A transaction, the contracting parties have an opportunity to identify the law by which an agreement should be interpreted. This can be achieved by incorporating a “governing law” or “choice of law” provision into an agreement. For example, a choice of law provision may be drafted to establish Ontario as the preferred jurisdiction of law (i.e., “the laws of Ontario”). In this scenario, the governing law provision will provide evidence of the parties’ express intention to have the laws of Ontario applied to the interpretation, construction and enforcement of any substantive aspects of the contract. Essentially, the objective is to ensure that a particular body of law will be applied in the event of a dispute, and correspondingly, to avoid the laws of a jurisdiction which are thought to be less predictable or favourable. However, to further minimize the possibility that a court may apply the laws of another jurisdiction, contrary to parties’ written intention, conflict of law principles must also be considered.

Conflict of law principles

Where a party is concerned about the application of less favourable laws, counsel can also protect their client’s interests by warding off the application of conflict of law principles. In order to do so, the phrase “without regard to conflict of law principles” should be included in the governing law provision. This phrase further clarifies the parties’ intention that the governing law is to apply regardless of which court has jurisdiction over the dispute or the nature of the dispute itself. In the absence of such language, a party may argue that conflict of law principles permit the application of laws which differ from those chosen to govern in the case of a dispute.

Furthermore, the clause “without regard to conflict of law principles” can be useful in avoiding a renvoi, as it signals the parties’ intent to have the governing law provision apply regardless of whether the matter is considered to be substantive or procedural. As mentioned, the governing law provision would otherwise only apply to the substantive issues of a contract which may prove to be problematic and create a circular argument. For example, consider a situation where a contract is governed by the law of Ontario, but an action is commenced in Delaware to determine whether a limitation period has expired. In Ontario, limitation periods may be considered procedural (as opposed to substantive) and therefore adjudicated by reference to the law of the jurisdiction where the action was commenced. As a result, an argument might be made that Delaware should apply its own laws concerning limitation periods. A renvoi would occur if the limitation period is seen as a matter of substantive law in Delaware and the parties are referred back to the laws of Ontario. In these circumstance, a circular argument would be created as Ontario then refers the matter back to Delaware to determine what limitation periods should apply. The “without regard to conflict of law principles” clause can negate these intricacies created by the renvoi doctrine and the unpredictable circumstances they offer.

Public policy exception

With all this being said, there is one caveat – a party’s ability to expressly choose which law is to govern a contract is subject to narrow exceptions. In particular, the choice of governing law must be bona fide, legal and not contrary to public policy. Despite legal drafting, a choice that appears to circumvent commercial sensibilities will be scrutinized under the bona fide and legal test. In addition, if there appears to be an intention to evade mandatory provisions of the legal system with which the contract had its most substantial connection, the court would likely refuse to uphold the choice of law as a valid one.

In any event, where a party has a preference for the laws of a particular jurisdiction to govern, an analysis of the legal framework to be applied in the case of a future dispute remains key.

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

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Inherited liability under a workers’ compensation system: a surprise to avoid

Canadian provinces and territories all administer some form of a workers’ compensation system within their jurisdiction. Funded by employer-paid premiums, these no-fault insurance systems provide wage replacement and medical benefits to injured employees who relinquish their right to sue their employer for losses arising from their injuries. In Ontario, for example, the relevant legislation is the Workplace Safety and Insurance Act (WSIA).

Why is workers’ compensation relevant to M&A?

When acquiring a business, it is important to be aware of the seller’s record under the applicable workers’ compensation legislation. In Ontario, for example, when an employer sells its business, the buyer may be liable for all amounts owed by the seller under the WSIA immediately before the disposition. Unless the buyer is a person who falls within the persons excluded from this provision, the buyer will inherit the seller’s work record, which will in turn affect the amount of the buyer’s contributions under the WSIA.

Liabilities are unpleasant surprises, and inquiring into the seller’s record can help buyers eliminate one source of such surprise. In Ontario, again, as an example, buyers can obtain a “purchase certificate” from the Workplace Safety & Insurance Board (WSIB), the agency that administers the province’s workers’ compensation system. A valid purchase certificate verifies that the seller has WSIB coverage and that there are no outstanding debts on the seller’s account. In effect, the purchase certificate waives the buyer’s liability for any amounts charged to the seller’s account, up to the date of the sale.

As always, when buying an employer’s business, proper inquiries can help buyers steer clear of acquiring unwanted liabilities.

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

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Working capital adjustments: lessons from De Santis and Iacobucci v Doublesee Enterprises Inc.

In complex M&A transactions, there could be a significant delay between the initial valuation of a target company and the closing of the deal. As we explained in our previous article, “Net working capital adjustments: what’s the deal?”, parties can protect themselves against fluctuations in value during this period by negotiating purchase price adjustments (PPAs). According to the American Bar Association’s 2016 Canadian Private Target Mergers & Acquisitions Deal Points Study, the most common PPA is the working capital adjustment (which was included in 83% of recent Canadian M&A deals with a PPA).

Mechanics of working capital adjustments

Typically, working capital adjustments provide for an adjustment to the purchase price based on the level of working capital at closing. For purposes of negotiating the purchase price, the parties assume that the target company’s working capital at closing would be at a certain level or range at closing (target amount). At closing, if working capital falls below the target amount, the purchase price is reduced to reflect the fact that the purchaser may need to inject additional cash into the business. Conversely, if working capital at closing is greater than the target amount, the purchase price is increased to ensure that the purchaser does not receive a windfall.

While the working capital adjustment may be conceptually straightforward, it is important not to lose sight of the details. For example, when should the adjustment take place? A closing balance sheet needs to be prepared to form the basis of the adjustment, but it generally cannot be finalized immediately on the date of closing. Therefore, parties typically agree to make the adjustment post-closing once the closing balance sheet is finalized (usually 30-90 days after closing). This can be done in either a single adjustment, or a two-part adjustment where an initial adjustment is made based on estimated information at closing and a final “true-up” when the finalized information becomes available.

De Santis and Iacobucci v Doublesee Enterprises Inc.

Failure to account for such timing considerations could lead to uncertainty and disputes, as demonstrated by the recent Ontario Superior Court decision in De Santis and Iacobucci v Doublesee Enterprises Inc., 2018 ONSC 400 (De Santis).

In De Santis, parties entered into a Share Purchase Agreement (SPA) for the sale of Mavis Auto Collision and Auto Glass Ltd. (TargetCo) at a total price of $465,000. The SPA contained a unique type of working capital adjustment which provided that, on closing, TargetCo must not have negative working capital, otherwise there would be a corresponding reduction in the purchase price dollar-for-dollar. In other words, the target amount of working capital was effectively zero. As it would make no commercial sense for the vendors to leave additional funds in TargetCo in excess of this target amount, the SPA allowed TargetCo to declare and make a “special dividend” of any excess prior to closing.

On the day prior to closing, the vendors’ accountant required additional time to calculate the amount of excess working capital in TargetCo. The vendor therefore prepared, signed, and delivered a draft resolution for a special dividend to the purchaser’s lawyers, which showed a dividend payable on the day prior to closing but the amount of the dividend was blank. The purchaser’s lawyers did not object or take issue with this approach. Several months later, the vendors’ accountant finally calculated the excess working capital in TargetCo, which was $68,263. However, when the vendors requested that the special dividend resolution be signed and paid out, the purchasers refused on the basis that the special dividend must be declared and paid prior to closing. The vendors brought an action to, among other things, recover the amount of the special dividend or alternatively rectify the SPA to deal with the special dividend payment.

The Court dismissed a motion for summary judgment by the defendant purchasers, as these issues require a trial for a fair and just determination. Despite the vendors’ non-compliance with the SPA, the Court found that the purchasers’ failure to object to the vendors’ approach could establish that the parties agreed to the payment of the special dividend after closing. In any event, the purchasers are estopped from denying entitlement to the special dividend or rectification.


Aside from the obvious lesson that a prudent party intending to rely on a contractual term should clearly object to any instance of noncompliance, De Santis demonstrates the importance of addressing timing considerations when drafting a working capital adjustment. Simply put, the working capital adjustment in De Santis was neither practical nor realistic. If the vendors in De Santis were to strictly comply with the requirement to dividend out excess working capital prior to closing, they would have had to finalize the balance sheet weeks or months in advance or otherwise rely on an estimate. Such information could be outdated and inaccurate upon closing, thereby defeating the purpose of the working capital adjustment.

In addition to timing, drafters of working capital adjustments should also keep in mind other key considerations as outlined in our previous article. For example, should an adjustment arise from any deviation from a working capital “peg”, or only deviations outside of an acceptable band of working capital? Which party’s responsibility is it to prepare the closing balance sheet? What standard of accounting applies to the balance sheet? Should a portion of the purchase price be held back by the purchaser or placed into escrow pending the adjustment? As adjustments to purchase price directly impact the core of the deal, addressing such considerations in advance is critical to the transaction.

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Hacking your way through cyber due diligence

Last year saw an increase in the frequency of data breaches and this trend is unlikely to disappear in 2018. We previously reported on the importance of cybersecurity in the M&A due diligence process. Conducting due diligence of a target’s cybersecurity procedures has become even more crucial in light of Canada’s new notification requirements. These requirements, regulated by the Personal Information Protection and Electronic Documents Act (PIPEDA), are based on amendments made to PIPEDA in 2015 as well as a regulation proposed in 2017 called Breach of Security Safeguards Regulations (Regulations). The Regulations will impose new notice requirements in the event of a ‘breach of security safeguards’ and are expected to come into force later this year.

The new security breach notification requirement is three-pronged. It requires:

  1. a report to the Office of the Privacy Commissioner of Canada;
  2. a notice to affected individuals; and
  3. a notice to other organizations (where such notification may reduce the risk of harm).

Organizations will also be required to retain records of every breach of security safeguards involving personal information for a period of 24 months after the day on which the organization discovers the occurrence of such breach.

Cybersecurity due diligence

In light of the new requirements, the following are some critical questions to ask when conducting due diligence in an M&A deal:

  1. Nature and risk profile of the data: Does the target company clearly articulate what IT systems, data sets and business processes are most valuable and vulnerable, and explain how they are protected?
  2. Cybersecurity controls and crisis management plans: What administrative, technical and physical information security controls safeguard the target’s most critical data sets?
  3. Senior management: How cyber-savvy is the senior management? How well do they understand the importance of data security?
  4. Third-party exposure: Do vendors or other partners hold or have access to any of target’s sensitive data? If so, does the target have a vendor risk management program in place?
  5. Cyber insurance: What are the details of target’s cyber insurance policy, such as exclusions, deductibles, coverage periods and limitations?
  6. Testing security protocols: In what manner and how frequently are the target’s security protocols tested?

Cybersecurity playbook

Data breaches can occur as a result of an external hack or even because of an error made internally by an employee. Companies are recommended to maintain an internal playbook to assist with crisis management in case of a data breach. Such a playbook would not only assist an acquirer in conducting due diligence but would also ensure a simpler integration of cybersecurity issues into the M&A due diligence process.

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

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Canadian M&A: a look back 2017 and a glimpse into 2018

A retrospective look at 2017

In Canada, 2017 had the highest number of mergers and acquisitions (M&A) deals in the past five years. There were a total number of 2,274 deals carried out in 2017, compared to 1,956 in 2016. The number of “mega deals”, however, did not see an increase in 2017. “Mega deals” are categorized as deals that have a value of US $5 billion or more. The number of these types of transactions went down from seven in 2016, to two in 2017.

For 2017, PwC noted the following three common M&A trends:

1) Increased number of deals and value

Both the cumulative amount and value of Canadian M&A deals increased substantially in 2017. Apart from “mega deals”, deal activity flourished due to a variety of factors. For instance, sellers wanted to capitalize on high stock prices to receive significant gains and engaged in succession planning for their family businesses. Buyers, on the other hand, engaged in M&A as a result of their confidence in the economy, their sufficient cash reserves, having securities that could easily be liquidated and the existence of prolonged low interest rates.

2) Strength in technology M&A

This past year also surpassed 2016 in terms of the volume of Canadian M&A in the technology sector, as evidenced by the 34% increase that was reported. Most of the deals in the technology industry related to IT services and consulting deals, in addition to software deals. In 2017, the number of software deals increased by 25% from 2016, while IT services and consulting M&A deals increased by a remarkable 63%. It is believed that these findings indicate that Canada is heavily involved in developing, buying, expanding and selling technology companies.

3) Prevalence of outbound deals

Perhaps unsurprisingly, deals involving the US still accounted for a significant amount of M&A outbound deals. Outbound deals are ones that involve a Canadian buyer and a foreign target. This finding may not be surprising, since the rate of outbound deals to the US has been increasing every year since 2008. In 2017, 60% of Canada’s outbound deals involved the US. These findings show that the US is the most promising region for Canadian acquirers.

A forward glimpse at 2018

According to PwC, ­­the surge of M&A in Canada that we saw in 2017 will likely continue carry through 2018. A survey found that 44% of Canadian CEOs plan on engaging in an M&A transaction this year. However, three factors were listed as likely influencing the fate of Canadian M&A activity this year, including the unpredictability surrounding NAFTA, the US tax reform and the technology sector continuing to be an impetus for deal activity.

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

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Cybersecurity update: from transaction start to finish

Cybersecurity has never been more critical. This growing area of concern has been on the mergers and acquisitions (M&A) radar for some time, and we’ve previously blogged on its effect on the due diligence process, regulatory requirements, and overall acquisition risk assessments. With only 4% of organizations reportedly agreeing that their current cybersecurity strategies had been fully considered, with all risks incorporated and relevant threats and vulnerabilities monitored, it’s crucial to push forward in developing a comprehensive and current cybersecurity strategy to manage risks at all stages of an M&A transaction.

In a recent report, EY identified M&A as a “cyber threat flash point” and suggested the following key questions for companies at all stages of an M&A transaction.

  • Is data regarding the transaction secure? Several vulnerabilities can drastically increase risk that data is not secure, from employees who are careless or unaware, to outdated security controls, to simple unauthorized access. This risk is particularly acute during the due diligence phase of an M&A transaction as information must be legitimately shared among several parties.
  • How does the merger or acquisition affect the existing cybersecurity strategy? As noted above, few organizations have confidence that their existing cybersecurity strategy covers existing risks. Nonetheless, the evolution of the organization through a merger or acquisition should also result in the evolution of its cybersecurity strategy. New threats related to particular industry or other characteristics of the target should be carefully considered and integrated into the post-transaction organization’s cybersecurity strategy.
  • Does the merger or acquisition create new vulnerabilities or targets for cyber threats? Over the last five years, while cyber-attacks targeting financial information and intellectual property have declined slightly, malware and phishing attacks are on the rise. However, organizations should be particularly attentive to risks to any new intellectual property acquired through an M&A transaction, and what threats may be posed in relation to the newly acquired intellectual property.
  • Is the due diligence into cybersecurity sufficient to evaluate risk? We previously blogged on the importance of due diligence and cybersecurity. While cybersecurity in conducting the due diligence itself is critical, so too is analyzing a target’s cybersecurity risk profile. Cybersecurity issues should be considered early and often, as major vulnerabilities discovered in due diligence will almost certainly affect the success or failure of an M&A transaction.
  • How will new employees fit in? There is increasing recognition that building an effective cybersecurity strategy requires incorporation of a talent-centric model, in turn building a conscientious risk and security culture through training and awareness. When absorbing new employees through an M&A transactions, organizations should consider how best to inculcate newcomers into its cybersecurity culture and strategy for a seamless transition into a single organization.
  • What governmental regulation or oversight will the merger or acquisition attract in relation to cybersecurity? As we’ve previously reported, cybersecurity in particular can attract government regulation and oversight. Organizations should carefully consider the level of government attention that a potential M&A transaction will attract, and work to manage any associated regulatory burdens.

For more information, please see our additional posts on cybersecurity risks and regulation.

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

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Legal update: M&A in the pharma sector

Of counsel James Baillieu explores the pharma M&A horizon in PharmaTimes magazine. The pharma sector saw deal activity fall in 2017 compared to previous years. While the number of deals remained robust, their value was significantly lower due to fewer large acquisitions. Looking ahead, however, many expect deal levels to pick-up as Trump’s tax reforms give US companies increased cash resources to fund acquisitions. Indeed, as of mid-January deals worth over $30 billion have already been announced.

Please check out the article in PharmaTimes for more.

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Investor confidence, disruption risk and US tax reform will continue to spur M&A activity

JP Morgan recently released its 2018 Global M&A Outlook report, predicting that 1) investor confidence from solid GDP growth, 2) disruption risk from technological change, and 3) opportunities from the passing of the US tax reform will drive significant M&A activity in the year ahead.

Investor confidence

In 2017, nine out of ten equity sectors in the US achieved positive returns.  The strong equity performance was driven by several factors, including:

  • strong corporate earnings growth across sectors (apart from the energy sector);
  • historically low interest rates;
  • low unemployment rates and improving GDP growth; and
  • increasing consumer and business confidence.

It is expected that solid GDP growth in all major economies and healthy equity and debt markets will continue to provide companies with confidence to pursue M&A opportunities with an emphasis on bolstering organic growth and shareholder value.

Disruption risk

Technological change continues to create disruption risk for big companies and drive cross-sector M&A activity as companies look to acquire new technologies and capabilities to compete. In 2017, there was over USD $950b in cross-sector M&A volume, which was 21% above the 10-year historical average of $794b.

As digitally-fluent millennials now represent the largest demographic with an increasing influence in the markets, companies will have to develop or acquire new technologies, especially in the retail sector, to meet millennials’ expectations of instant delivery services and gratification, continuous purchasing relationships and the ability to compare prices, product information and peer reviews. Given the rate of technological advances and the reality of demographic changes, it is inevitable that technology will continue to create more differentiation between the largest, most successful firms and the rest of the market.

US tax reform

The Tax Cuts and Jobs Act of 2017 (US tax reform) was passed in December 2017 with seismic implications for US corporations.  Most significantly, the US tax reform lowered the US corporate tax rate to 21%. This will likely lead to certain behaviour changes for US companies, such as repatriating cash to buy other US assets. Further, the new territorial tax regime (i.e., tax-free dividends from foreign subsidiaries) accompanied by a one-time transition tax on repatriated foreign earnings should increase cash balances on the whole and spur M&A activity for US incorporated multinationals.

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

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