Are you a processor of personal information?

The typical business model has significantly expanded in recent years, and often includes an element of collecting, using, storing or modifying personal information (also known as “processing”). If you are involved in processing personal information, you may likely be considered a “processor”. As a processor, it is crucial to understand the principles for processing data as well as the rights of the individuals whose personal information you are processing.

The following are some key principles for processing personal data:

  • Lawful Reason and Consent: Canadian privacy law typically requires processors to obtain consent from individuals in order to process their personal information. Such consent must be informed, i.e. the individual must understand why the data is being collected, how it will be used, etc.
  • Restricted Purpose: Processors are required to disclose the purposes for which the data is being collected. Processors are confined to that purpose, unless additional consent is obtained, or if disclosure is required by law.
  • Proportionality: Proportionality is an overarching principle that requires processors to limit their collection and use of personal information to what a reasonable person would consider appropriate in the circumstances.

Equally important to the principles are the rights that individuals have with respect to the processing of their personal information. Individual rights include:

  • Access Rights: Upon request of the individual, a processor typically must provide access to the individual’s personal information, including a list of all other entities with which such personal information was shared. Processors would also have to provide this information at minimal or no cost to the individual and would need to fulfill these requests within the prescribed time period.
  • Opt-Out and Complaint Procedures: If personal information is being used for marketing purposes, the individual must be made aware of this at the time of collection and processors must provide an easy opt-out option to individuals. Individuals must also be provided with a simple way of reporting monthly complaints and making inquiries in relation to their personal information collected by a processor.
  • Withdrawal of Consent: Individuals must be able to withdraw their consent to the collection and use of their personal information at any time. However, if the processor has entered into a contractual relationship with the individual, then the terms of the contract may prevail.

Employers as processors

In the case of employees, individual rights vary markedly from non-employment relationships. While informed consent is not required if the collection, use and disclosure of personal information is reasonably required to manage an employment relationship, employers must provide notice to employees that their personal information is being used, the means by which such information was collected and the purpose for which it will be used.

The principles of processing mentioned above inform the limitations placed on employers as it relates to monitoring employees. Employers are still required to limit their collection of personal information to what is reasonable in the circumstances. Employers also have to consider whether there is a less invasive way of achieving their goals. For instance, an employer concerned about theft may be required to implement a random bag check policy rather than 24/7 video surveillance.

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

Stay informed on M&A developments and subscribe to our blog today.

Certifiably inane: the unnecessary officer’s certificate

In many deals on which we work, it has been customary to deliver certificates of officers. Sometimes the form of them is prescribed by a purchase agreement. Sometimes they are in support of an opinion. Sometimes they are required to bring down certain representations and warranties for closing.

Sometimes, however, they serve none of these functions. Sometimes we’re just giving them because it’s market to give them and it’s not worth a fight. And so we trudge off to compile articles, by-laws, authorizing resolutions and, worst of all, incumbency certificates for people who didn’t even sign anything on the deal, which adds more signatures and slows down the process. Then we swap ours with opposing counsel’s, making sure everyone signed everything correctly, and never look at them again.

If that sounds like a waste of time and fees, we are in agreement, so I had a chat with some of my colleagues about when an officer’s certificate is actually a useful document. Here’s what I found for appropriate times for an officer’s certificate:

  1. When it is in support of an opinion. Nobody likes giving legal opinions. They can cost an extra five figures to do (not a price quote) and they are rarely if ever relied upon for anything. But even when we are giving a legal opinion, we are not giving it without an officer’s certificate that we rely on for the facts of the situation, so if you want an opinion, we need an officer’s certificate. Or we could skip both.
  2. When the closing is happening after the signing of the purchase agreement. We’ve all agreed to a bunch of representations and warranties in the purchase agreement that we’re all happy with. So what happens if something has changed between last month when we signed and now when we’re closing? How do we know everything is still fine? We get folks to sign officer’s certificates saying all of the representations and warranties are still as true as they were at the time of signing.
  3. When we think there is some gap in our public searches. As part of our transaction, do you need to file articles of amendment or something similar? We may ask you to provide a certified copy of that document from an officer of your corporation for our benefit so that we don’t wait three days (or more) to get a certified copy from the ministry.
  4. When we didn’t negotiate it away in the purchase agreement. Now, if I had my way, prescribed officer’s certificates wouldn’t be making appearances in purchase agreements unless it was for one of the above points, which would render this point moot, but the reality is that sometimes they sneak in as a closing deliverable. If so, go ahead and deliver it, as you don’t want to be missing a condition to close, but feel free to grit your teeth while doing so.

I am sure I have missed one or two situation-specific items here, but that’s the main takeaway here is just that: these are situation specific. The general need for an officer’s certificate because it is “market” often ends up being a waste of time and paper, especially if there are sufficient representations and warranties in the purchase agreement, which should be your goal from the outset.

Stay informed on M&A developments and subscribe to our blog today.

“Crazy Rich Asia” – record growth in the Asia-Pacific region

The Asia-Pacific region experienced a strong year for mergers and acquisitions (“M&A”) in 2018 and the level of M&A activity in this region is expected to continue in 2019. It was anticipated that 2018 would be a busy year with regards to M&A for Asia-Pacific companies and these predictions proved to be true. In the first six months of 2018 alone, Asia-Pacific companies had announced M&A deals that totalled $734 billion. In particular, Japan had a record year for foreign M&A transactions. Last year, Japanese companies announced 1,000 offshore M&A deals which were worth a total of $191 billion. The most prominent of these deals was the takeover of Shire plc by Takeda Pharmaceutical Company Limited. This takeover was worth $62 billion, making it the largest overseas acquisition ever made by a Japanese company.

Possible Reasons for Japan’s Outward Focus

There are several reasons why Japan has focused its search for opportunities abroad, such as the country’s declining population and relatively static economy. Another reason why there has been a notable increase in overseas deals and why this trend will likely continue in 2019 is due to the strong cash reserves that Japanese companies currently have. It was noted that Japanese companies hold over $890 billion in cash. These substantial reserves are causing companies in Japan to feel pressure from their investors to spend the money carefully. It appears that the preferred method of utilizing these resources is investing in M&A, as opposed to apportioning the money as dividends. The increase in cash and pressure to spend it wisely, in addition to attractive opportunities to grow their businesses abroad, are reasons why there have been greater offshore deals for Japanese companies and why this trend will likely continue. In fact, despite the surge of foreign M&A deals and the banner year that Japan had in 2018, it is predicted that the country will have a new record year for cross-border deals in 2019. Further, as the United States appears to be the largest developing market, it will be a country of particular interest for Japanese offshore investment.

As 2019 has just begun, only time will tell whether Japan’s affinity for foreign deals and the high levels of M&A in the Asia-Pacific region as seen in 2018 will continue.

Stay informed on M&A developments and subscribe to our blog today.

2019 merger review thresholds for Competition Act and Investment Canada Act

The threshold for certain pre-closing net benefit reviews under the Investment Canada Act (ICA) and the threshold for a pre-closing merger notification under the Competition Act have been increased for 2019.

Competition Act

Canada uses a two-part test for determining whether a pre-merger notification is necessary. The two-part test is based on the size of the parties and the size of the transaction. The transaction size component can be adjusted annually for inflation. Under the size of the parties test, the parties, together with their affiliates, must have aggregate assets in Canada or annual gross revenues from sales in, from or into Canada, in excess of C$400 million. Under the size of transaction test, the value of the assets in Canada or the annual gross revenue from sales (generated from those assets) in or from Canada of the target operating business and, if applicable, its subsidiaries, must be greater than C$96 million. The 2018 transaction size threshold was C$92 million.

These changes took effect on February 2, 2019.

Investment Canada Act

In general, any acquisition by a “non-Canadian” of control of a “Canadian business” is either notifiable or reviewable under the ICA. Whether an acquisition is notifiable or reviewable depends on the structure of the transaction and the value and nature of the Canadian business being acquired, namely whether the transaction is a direct or an indirect acquisition of control of a Canadian business. With limited exceptions, the federal government must be satisfied that a reviewable transaction “is likely to be of net benefit to Canada” before closing can proceed; notifiable transactions only require that the investor submit a report after closing. Separate and apart from the net benefit review, the ICA also provides that any investment in a Canadian business by a non-Canadian can be subject to a national security review.

The threshold for a pre-closing net benefit review depends on whether the purchaser is: (a) controlled by a person or entity from a member of the World Trade Organization (WTO); (b) a state-owned enterprise (SOE); or (c) from a country considered a “Trade Agreement Investor” under the ICA[1]. A different threshold also applies if the Canadian business carries on a cultural business.

Generally speaking, for a non-SOE from a WTO country (other than a Trade Agreement Investor) directly acquiring a Canadian business that does not carry on a cultural business, the threshold will be whether the Canadian business has an enterprise value of greater than C$1.045 billion.

For a non-SOE from a Trade Agreement Investor directly acquiring a Canadian business that does not carry on a cultural business, the threshold will be whether the Canadian business has an enterprise value of greater than C$1.568 billion.

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

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

The net benefit review threshold for investments by SOEs from WTO member states is based on the book value of the assets of the Canadian business. It increases annually, and for 2019 the threshold will be C$416 million, up from C$398 million in 2018.

The net benefit review threshold for investments by non-WTO investors, or for the direct acquisition of control of a cultural business (regardless of the nationality of the buyer) is C$5 million in book value. The threshold for an indirect acquisition of control is C$50 million in asset value.

It is important to remember that any acquisition, whether of control or even a minority interest, of a Canadian business by a non-Canadian can be reviewed to determine whether it could be harmful to Canada’s national security. Parties to transactions that could raise issues as identified in the Guidelines on the National Security Review of Investments, and that aren’t otherwise subject to a pre-closing net benefit review, should consider submitting their notice of acquisition in advance of closing.

[1]Trade Agreement Investors include investors from the European Union, the United States of America, Korea, Mexico, Chile, Peru, Colombia, Panama, and Honduras.  Effective December 30, 2018 (January 14, 2019 for Vietnam), investors from countries that are party to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) – Australia, Canada, Japan, Mexico, New Zealand, Singapore and Vietnam – are also Trade Agreement Investors.

Stay informed on M&A developments and subscribe to our blog today.

M&A activity in the insurance sector reaching new heights

M&A activity in the insurance sector in North America declined in the years immediately following the financial crisis, and has peaked in recent years. We previously reported on the boom in the North American M&A insurance sector in 2016, where Q1 saw a record high in insurance agency M&A deals with 109 transactions reported. These trends continued throughout 2016, which ended with 446 insurance M&A deals, and into 2017, and 2018, which Optis Partners LLC (Optis) reported saw record levels of M&A deals among insurance brokers. Although Optis reported 16% fewer deals in the first half of 2018 than in the first half of 2017, their prediction that this reduction was not an indicator of slowing M&A activity was accurate. By the end of 2018, 626 M&A transactions were announced in the sector, a further increase from the previous year’s record-breaking 611 deal announcements. These numbers continue to surprise and exceed the expectations of experts in the field.

Optis reported earlier this month that private equity/hybrid buyers, including “private-equity backed buyers and privately owned buyers with material internal or external acquisition financial support,” were the biggest group of buyers in 2018, “accounting for 67% of the deals.” The same group of buyers accounted for 63% and 53% of the deals in the sector in 2017 and 2016 respectively, but only for 21% of insurance M&A deals in 2008. Furthermore, Optis reported that property/casualty brokers and agents were involved in more than 50% of all insurance M&A deals in 2018.

A recent article addresses the role that information technology has played in the escalation in M&A activity involving property and casualty insurance brokerages. Experts posit that “acquiring new products, talent and technology are among the reasons behind [increased] M&A activity in P&C insurance” in recent years. They theorize that “some buyers may have a heavy focus on the technology that is being deployed in an organization [and may see a merger or acquisition] as a quicker route to implement technology in their own organization, rather than spend a number of years [and take on significant risk] in developing internally their own technology.”

Overall, M&A activity in the insurance sector in North America has sky-rocketed in recent years, and shows no sign of slowing down in the immediate future. As a recent Optis report referenced in a Business Insurance news article highlights, “there is no obvious end in sight for the continued aggressive M&A activity and valuations.”

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

Stay informed on M&A developments and subscribe to our blog today.

The impact of 5G technology on M&A

Global M&A activity in the technology, media and telecommunications industry reached an all-time high of 3,389 deals in 2018. The year was marked by several of the largest merger valuations in history, even though 70% of deals were for less than $100 million, demonstrating that much of the M&A activity was driven by smaller companies. This M&A activity is expected to remain strong and could increase even further in 2019 as the entire industry is set to be impacted by the implementation of 5G wireless technology. 5G – or fifth-generation – network technology is the newest iteration of mobile wireless technology, with speeds up to 200 times faster than current networks. These exponentially faster speeds are expected to drive significant consolidation and capital expenditures as market actors both large and small jockey for position in a drastically new environment. Verizon and AT&T’s expenditures on their 5G networks alone will amount to $35 billion and $40 billion, respectively, which will require huge amounts of resources, expertise and partnerships to implement.

The launch of the previous generation of mobile wireless technology, 4G, is estimated to have contributed more than $150 billion to U.S. GDP growth. Expectations for 5G are well in excess of that benchmark – an estimated $40 billion in Canada alone – and will significantly impact all aspects of the economy, including M&A, in the years to come.

Canada is expected to move more slowly than the U.S. in implementing the new networks, waiting until 2020 to auction off the parts of the wireless spectrum on which 5G technology will operate. However, this delayed launch date will still make Canada one of the first five countries to make the spectrum available for widespread rollout of the new system.

The impact of 5G is expected to fuel M&A across a range of industries, including real estate investment trusts (REITs) that invest in the fibre networks, and automation and robotics in healthcare and mining. Cable companies own much of the fibre network infrastructure that will play a role in the implementation of 5G and there may be increased M&A activity from those companies as they increasingly seek to compete in the wireless space and as wireless companies try to create their own infrastructure.

As mentioned above, 2018 was a record year for large-value deals. However, the large capital expenditures required for 5G implementation could mean further consolidation of the industry which is already dominated by a few large companies. For example, in a rapid about-face, the U.K. government has indicated that it would support further consolidation of the four U.K. telecommunications companies only two years after blocking a similar combination.

The impact will also be seen outside of technology-related industries. As ever-larger deals lead to more data for buyers to analyze, 5G technology has the potential to allow for faster processing of the data, allowing for more comprehensive and faster analysis of targets. Combined with data-driven technologies such as artificial intelligence, which we analyzed in a previous post, the ways in which M&A is performed, from communications to analysis and implementation, could rapidly change as new tools are developed to operate within the new networks. The increased efficiency, when combined with the preeminent importance that data generation and analysis plays in modern business, means that 5G networks will affect a vast array of business processes and M&A will likely reflect this disruption as companies plan and adapt to this rapidly changing reality.

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

Stay informed on M&A developments and subscribe to our blog today.

A budding investment – food and beverage investment opportunities and strategic partnerships in the growing cannabis industry

In December of 2018, Health Canada introduced draft regulations governing the production and sale of additional cannabis products, namely edibles, extracts, and topicals (the Cannabis 2.0 regulations). These regulations are set to take effect no later than October 17, 2019 and will introduce notable opportunities for food and beverage companies to enter into strategic partnerships with cannabis industry players.

In a recent report, Deloitte projected that legal, recreational sales are expected to generate up to $4.34 billion in Canada’s cannabis market in 2019. Further, Deloitte estimates that six out of 10 likely cannabis consumers will purchase and use edible products. Of the current and likely consumers surveyed, the types of edibles that garnered the most interest were baked goods, chocolate, candies, and beverages. Notably, the US market for marijuana-infused beverages is expected to hit $600 million by 2022, a trend already drawing the attention of large, mainstream beverage companies, perhaps in an effort to bolster the lagging beer and soda industries.

Such US developments act as healthy indicators of a paralleled explosion in the Canadian food and beverage market, which has already taken root if recent transactions are any gauge of interest. The following deals highlight some of the forms that such investment opportunities can, and have, taken for a handful of industry players:

  • Molson and HEXO: In August of 2018, Molson Coors Canada, the Canadian arm of a multinational brewer, and HEXO Corp., a Canadian cannabis producer, formed a joint venture, “Truss”, to pursue the development of non-alcoholic cannabis-infused beverages in the Canadian market. Truss operates as a standalone company, with its own board of directors and management team. The board of directors will consist of five members, of which three are Molson appointees and two are HEXO appointees. Molson holds a controlling interest in the company.
  • Constellation and Canopy: In November of 2018, Constellation Brands, Inc., a leading international producer and marketer of beer, wine, and spirits, invested USD$4 billion in Canopy Growth Corporation, a Canadian cannabis company, to pursue cannabis market opportunities on a global scale. Constellation acquired a 37% ownership interest in Canopy, thus enabling it to veto “fundamental changes” (e.g. sale, lease or exchange of all or substantially all of the corporation’s assets, merger, amalgamation) that require the approval of two-thirds of Canopy’s shareholders under its governing legislation. In connection with the investment, Constellation also obtained an opportunity to acquire more than 50% control of Canopy, by virtue of the exercise of its warrants, as well as certain governance rights such as pre-emptive rights, demand and “piggyback” registration rights and the right to nominate four of the seven directors on Canopy’s board.
  • AB InBev and Tilray: In December of 2018, AB InBev, the parent company of Labatt Breweries and a worldwide brewer, announced a partnership with Tilray, Inc., a global cannabis producer and distributor. AB InBev and Tilray each invested USD$50 million and, together, will research potential non-alcoholic THC and CBD beverages to market in Canada.

Though beverage companies seem to be taking the lead in terms of stepping into the cannabis market, it is worth noting that Deloitte’s surveyed participants showed markedly higher interest in food products as opposed to beverages (i.e., 51% for baked goods, 43% for chocolate, 37% for candies, and 31% for beverages). Thus, food companies stand to generate perhaps even greater revenues from strategic partnerships.

As demonstrated by our review of the current landscape above, there is no “model” deal for players in the food and beverage industry seeking to expand into the cannabis sphere. Whether a “model” deal emerges in 2019 remains to be seen, as food and beverage companies continue to pursue opportunities in the cannabis space to take advantage of Health Canada’s Cannabis 2.0 regulations and the expected consumer demand for edible products.

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

Stay informed on M&A developments and subscribe to our blog today.

Strategies for parenting start-ups, post-acquisition

In recent years, we have seen more acquisitions of start-ups by big corporations in the tech industry, healthcare, retail, fashion, beauty, food, and transportation. The benefits of M&A transactions in these sectors has been more widely recognized. For instance, for a start-up, partnering with a large corporation provides broader market access, deeper industry knowledge and accelerated brand development opportunities. From the perspective of the corporation, it means access to growing markets, new technologies, and tapping into niche skills, talents and entrepreneurial and agile culture.

Despite the surging interest in enhancing collaborations between start-ups and bigger companies from both sides, Accenture research estimated half of such attempts are to fail, and Imaginatik and MassChallenge’s survey found that 50% of the start-ups rated their experience in interacting with big corporations as “mediocre or worse.” An important factor affecting the start-ups’ ability to adapt to the new relationship is the hierarchical nature and the well-established but rigid governance of most large corporations, which tend to suffocate the creativity and agility of the target. Consequently, the target becomes frustrated and the innovation that initially sparked the partnership is stunted.

So how can we improve the situation? In an interview by Mergermarket of three experts in the start-up M&A filed (the Interview), the answer is fairly straightforward: much like parenting in the real world, when a corporation acquires a start-up, it has to be a good parent and foster the growth of the newly acquired company.

Although all of the interviewees agree that there is no one-size-fits-all integration model, a successful model should bring everyone in the merging entities on board and be in informed by the strategy of the parent. Once the partnership is underway, experts such as Jamie Leigh have suggested that the parent ensure that open communication channels are being developed to empower entrepreneurship, and allow for experimentation, while at the same time providing financial and operative oversight and support.

Further, corporations need to be flexible and open to changes in order to avoid post-acquisition apathy. A report by hello tomorrow and the Boston Consulting Group echoed this point and suggested that the parent should avoid imposing its existing governance model on the target, or going too far in the other direction and adopt a laissez-faire model. A tailored governance plan should be in place that strikes the right balance between swift decision making and appropriate risk management. Finally, in the Interview, the experts emphasize the importance of recognizing the mentality of the employees in the process. Corporate employees should be informed about the upcoming alliance to enhance acceptance. As with any addition to a household, employees tend to feel threatened by a newcomer, and they often require reassurance and coaching to facilitate the integration process.

At the same time, while being parented, a start-up also needs to be active in the formation of the new relationship with the parent. As Dawn Belt of Fenwick & West pointed out in the Interview, as early as the negotiation phase, a start-up should be aware if the vision and values of the two companies are in alignment, and if a cultural marriage is attainable. While it is easy to get excited about the dollar amount of the M&A, start-ups need to be thoughtful and deliberate about finding a good home. Arnaud Leroi, a partner at Bain & Company, commented that large companies have become more open to accommodate the needs from start-ups. As such, start-ups are encouraged to initiate discussions about the level of post-acquisition autonomy, control over operations as well as the future roles of its key members with the parent. Much like the change management required for large corporations, start-ups need to ensure that they have a strategy that is deliberately planned and implemented.

Generally, it is important for both the parent and the start-up to acknowledge that not everything can be planned out up front and that both sides need to be prepared for some hiccups along the way. As such, it is important for both parties involved in the acquisition to have a strategic plan in place, and approach the transition with a flexible mindset.

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

Stay informed on M&A developments and subscribe to our blog today.

eSports: making it into the big leagues means learning the new rules

As mentioned in our first blog post on eSports, the eSports industry has experienced, and is projected to experience substantial growth. As the eSports industry continues to develop at a rapid pace, we are starting to see risks that are specific to the industry. In assessing whether a target is worth its price tag and whether its projections are attainable, the following are a few unique characteristics that pertain to the eSports industry that you should know about prior to entering into this space.

Know the game

Firstly, knowing the game and the third parties involved is crucial in the eSports industry. Despite several eSports teams exceeding the $100 million valuation, their value is often heavily reliant on tournaments and competitions held by the game developers because these widely broadcasted events in turn attract sponsors and advertisers. However, the goals of the game developers may not always align with the owners of eSports teams. For instance, Blizzard Entertainment, Inc. (“Blizzard”) recently announced that it will drastically cut their support for one of its most popular eSports games, Heroes Of The Storm. This included an announcement that Blizzard will cancel, among other things, the Heroes Global Championship, the premier tournament that boasted a $1 million prize pool and drew over 3.2 million hours of viewership in just 10 days back in 2018. Unexpected announcements (such as a game developer deciding to focus its resources elsewhere) have the potential to cripple the future revenue of a company that generates a portion of its revenue through prize money, sponsorships and streaming for that particular game. While many would call this instance an anomaly, the damage this announcement had on team owners and professional players that invested their resources into the game was material.

Furthermore, game developers often have unrestricted control over the structure and format of how the eSport ecosystem is run for their specific game. For instance, Riot Games, creator of League of Legends, switched their eSports operations to a franchise model (similar to traditional sports) for the beginning of their 2018 season. Aside from the ‘buy-in’ fee of USD$10 million (or USD$13 million if the team was not part of the previous 2017 season), this switch resulted in Riot Games having full control over which 10 teams (of a rumoured over 100 applicants) would be allowed entry into the franchise. Some teams, such as Dignitas, one of the original League of Legends professional teams in North America, who participated in tournaments since 2011, had their application denied. Unexpected changes such as this have the potential to greatly diminish, or even eliminate the value of an investment in an eSports team.

Know the trend

Like other industries, the eSports industry is equally subject to the trends of what’s cool and popular at the time. Given the growth of the industry, it is no surprise that new games are hitting the market at record speeds. Newcomers such as Blizzard’s Overwatch and Epic Games’ Fortnite have taken the industry by storm. For instance, Epic Games announced that it will provide $100 million for Fortnite eSports tournament prizes for its first year of competitively play (2018-2019 season). This number is nearly four times larger than any other prize pool announced for any other eSports game. Furthermore, Epic Games boasts about their 78.3 million players for the month of August 2018, which is just one year after they launched in late July 2017. This immense popularity directly takes away from play time, viewership and advertising exposure of the previously established games. Therefore, in eSports acquisitions, it’s more important than ever to focus on gaming trends and product life cycles. As an eSports team owner, you wouldn’t want to miss the boat on a game you didn’t expect to take off.

Know your rights

An important consideration for every team is choosing their name and associated brand. It’s crucial to know your branding rights and the parties that can affect those rights before you pour resources into building your brand. For instance, a recent article highlights how the Toronto Esports Club was forced to remove the word “Toronto” from its team name “Toronto Uprising”, despite having built a brand with that name over the previous Overwatch season and being in the minor league of Overwatch. Toronto Defiant, a new team that received the Overwatch league franchise for 2019, purchased the exclusive naming rights for “Toronto” and Blizzard responded by forcing Toronto Esports Club to rebrand their team within 6 weeks. These issues are often not resolved by exercising ones’ intellectual property rights to the brand name nor is it about whether a company has the right to exclusively buy the use of a word that is already in use by another party, in this case, “Toronto” – it is based on the terms and conditions these teams first agreed to in order to join the league or play the game in the first place – and these terms and conditions often give, in this case, Blizzard, the authority to enforce decisions in its sole discretion.

The substantial growth of the eSports industry makes companies in the space a desirable target for acquisition. However, given the unique characteristics of this emerging industry, it is important to pay attention to the risks and perform the proper due diligence before expanding into the world of online gaming.

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

Stay informed on M&A developments and subscribe to our blog today.

Looking back at M&A activity in 2018

Looking back at global M&A activity during 2018, a report on global M&A by Mergermarket shows that while global M&A deal value rose over the last year, the number of deals fell for the first time since 2010. The value of deals rose to $3.53 trillion US dollars, an increase of 11.5% since 2018, making last year the third-largest year on record for deal value since 2001. This rise in value was partly due to 36 deals with value of over $10 billion as well as the pressure felt by companies globally to consolidate, driving firms to compete for targets and increasing target valuations. Despite the rise in deal value, overall volume fell for the first time in a decade. Increasing trade tensions, political instability, the effect of Brexit and increased regulatory oversight are some of the factors believed to have taken a toll on M&A activity in 2018.

One particularly notable trend was the decrease in Chinese acquisitions of US firms, which fell by a staggering 94% in the past year to $3 billion from a record setting year of $55 billion in 2017. Many experts point to a deteriorating political and trade relationship with China as the cause of such a sharp decrease. In contrast, Chinese acquisitions of European businesses rose by over 81% sin the last year, totaling $60.4 billion US dollars in value. In June 2018, Lin Feng, founder and CEO of Chinese investment and advisory firm DealGlobe stated “We are now focusing on Europe-bound deals and having U.S. deals on hold. The trade war between China and U.S., if not short-term, will be a mid-term thing and will take some time to conclude.” With no sign of political tensions easing between the two countries, it will be interesting to see if this trend of Chinese M&A activity will continue in 2019.

Stay informed on M&A developments and subscribe to our blog today.

LexBlog