M&A Activity: 2020 Outlook

J.P. Morgan’s “2020 Global M&A Outlook” (the Report) reviews what we can expect with regards to M&A activity this year. Some of the key takeaways from the Report include:

  • Anticipated Trends in International M&A: We can expect to see an increase in the global M&A market due to greater geopolitical certainty and financially competitive opportunities in regions such as Japan.
  • The Role of Private Equity Firms in the M&A Market: With record levels of capital to deploy, private equity firms will continue to be active players in the M&A market.
  • Shareholder Activism: Shareholder activists will continue to challenge companies on their M&A activity, questioning the advantages of certain proposed transactions.

Anticipated Trends in International M&A

We can expect to see more international M&A deals in 2020. This sentiment was echoed in a recent Morgan Stanley article, which listed a few reasons for this expected increase, such as there being more certainty surrounding Brexit and the recent signing of the Phase 1 trade agreement by the U.S. and China. More specifically, Japan, who had a record of 53 transactions over $1 billion in 2019, will continue to have a strong year in 2020. It is anticipated that Japanese companies with diversified portfolios of businesses will either spin off these businesses or engage in divestiture transactions. Additionally, due to maintained low-cost funding, Japanese corporations and private equity firms have been encouraged to engage in a greater number of outbound transactions.

The Role of Private Equity Firms in the M&A Market

With the help of sustained fundraising activity, private equity firms will continue to be active in the M&A market in 2020. A recent Bloomberg article and Morgan Stanley article noted that the industry is starting 2020 with an unprecedented amount of cash. Private equity firms, such as Blackstone Group Inc. and Carlyle Group, hold approximately $1.5 trillion in unspent capital, making this year-end total of unspent capital the highest amount in history. Colloquially referred to as “dry powder”, this unspent capital could ultimately mean more M&A activity in 2020. By using this capital, private equity firms could help companies with limited resources to acquire other companies, improve operations and ultimately increase shareholder value. Further, as the costs of borrowing money are low due to low interest rates, we may see more leveraged buyouts. Having the ability to borrow money at a lower rate coupled with a healthy amount of cash, will allow private equity firms to maintain active in the M&A market in 2020.

Shareholder Activism

Shareholder activism, and particularly M&A-driven activism, will likely continue in 2020. As noted in the Report, more and more shareholders have been demanding that companies sell themselves or dispose of individual assets. Over the past three years, demands such as these have increased by 13% in 9M 2019 compared to that of 9M 2018. There has also been an increase in shareholder activists opposing proposed transactions of a company, whereby the activists do not disapprove of the deals in their entirety, but demand a higher price. Additionally, more shareholder activists are also requesting companies to go private, especially in instances where the targets would benefit from a reorganization.

Other increasingly significant topics to investors include environmental, social, and governance (ESG) issues. There have been activist funds created to solely focus on ESG issues alone. ESG issues are not only becoming more important to activist investors, but to passive investors as well.


In 2020, we can expect that companies around the world will continue to use M&A to improve their businesses. Shareholder activism will also continue to be used to encourage more dialogue between shareholders and a company’s management and board of directors in order for there to be more transparency regarding a company’s priorities and how it chooses to allocate its capital. Further, it is anticipated that the record amount of capital that private equity firms hold will likely be employed in the M&A market this year. Although various factors may influence these predictions, we look forward to seeing if they will prove to be true.

The author would like to thank Nazish Mirza, Articling Student, for her contribution to this legal update.

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

Acqui-hiring: What we know and what we need to know from a Canadian perspective

“Acqui-hire” transactions, which are particularly prevalent in the context of start-up technology-related M&A transactions in the U.S., focus on acquiring a company primarily to obtain its employees and their skills, in addition to other possible assets (see our earlier post on acqui-hires). In these type of transactions, it is thought that the greatest perceived value in the target lies in its employee base or segment(s) thereof. If there is also perceived value in the intellectual property (IP) or other assets of the target company, an acquiror might purchase those assets and possibly license them back. In some cases, the acquiror may be willing to allow the IP and other assets to revert back to the target’s shareholders and/or investors.

The terms and the structure of an acqui-hire transaction can vary depending on the size of the target company and the number of employees. The consideration paid and any remaining assets are distributed to shareholders, while the talent is retained. Although acqui-hire structures can vary, one common element can be contentious – purchase price allocation between the employee(s) being acqui-hired and the target’s remaining employees, investors and shareholders.

Structuring the purchase price

A common feature of the acqui-hire model is the two-tier structure for the purchase price.

The first tier is used to acquire the startup itself. This will usually consist of cash or stock and can be used to pay for the release of the acquiror from any claims, to acquire assets and/or stock, or to serve as consideration in a merger. This consideration will be used to compensate the investors and shareholders of the startup. For investors in the target, this can be an attractive exit scenario, particularly in a situation where the startup is not performing as well.

The second tier is intended as compensation for key employees. This can take the form of equity in the acquiror, such as stock options or restricted stock. An acquiror can include incentives to ensure that the key employees being acquired are able to align their interests with that of the acquiror by having compensation mechanisms vest over a period of time. An advantage of this approach is that it requires a lower amount for the upfront purchase price. Typically, the second tier will be paid solely to the target’s employees that are brought over as part of the acqui-hire, and investors, shareholders and non-hired employees will not receive a portion of this compensation. When making offers to employees, it is important to keep in mind that subsequent defections are a possibility. To that end, structuring the employment offers in a way that provides for an extended time horizon over which the full benefit of the compensation will materialize is often top of mind for acquirors.

Why the purchase price allocation matters

It is important that an acquiror carefully consider the competing interests and potential deal tension created over how the purchase price is allocated in order to avoid stalling a transaction. Parties, particularly investors, who are not being brought into the acquiror will want to ensure that more of the purchase price is allocated to the first tier (described above).

On the other hand, an acquiror would typically consider that the employee skill set is unique to their capabilities, and that of the team. As this is where the acquiror derives value, the acquiror would determine that a greater amount of the purchase price should be allocated towards the compensation of key employees that are moving to the acquiror. Skewing the allocation towards compensation also provides the acquiror with the ability to create that much more of an attractive incentive structure to retain key employees.

Canadian market place to keep an eye out

This structure has been appearing more frequently in the Canadian marketplace over time due to Canada’s active technology industry. In particular, Canada has been establishing itself as a hotbed for the development of artificial intelligence and associated technologies. This is in part because of policies in place designed to attract skillful innovators to Canada. To that end, Canadian acquirors of companies would do well to consider the issues discussed in greater detail early on. Proper planning can provide a road map to ease potential tensions that could arise due to questions surrounding fair allocation of the purchase price.

Those seeking advice on transaction structuring should contact a member of NRFC’s M&A team.

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

Examining data analytics in M&A

The M&A world continues to evolve as transactions are becoming more diverse and complex. Timelines are getting shorter and acquirors have less time to assess their targets but more pressure to justify their acquisitions. Acquirors must simplify the process of acquiring a target, while simultaneously improving the accuracy of their predictions about the acquisition’s profitability. Could data analytics be one of the solutions?

More data is being created today than ever before. Generally, there are two kinds of data relevant to M&A transactions. The first is data created by companies spontaneously (e.g. social media chatter, CRM data, user behavior, and transaction-related data). The second is external data, such as demographic information, geographic data, etc.

Analyzing both data types provides a more comprehensive overview of the target, and this information can be compared to the analysis conducted by management of the target. According to a 2019 Accenture Strategy report, advanced analytics can add hundreds of millions in value to M&A deals. Data analytics can improve all stages of a transaction, including deal identification and screening, pre-close planning, and post-close integration.

Deal identification and screening

Acquirors may use automated data analytics to identify and screen a short-list of potential M&A transactions by analyzing financial and non-financial data, including social media sentiments or “hidden” patterns within news articles. Such collected data may be analyzed by itself, or incorporated into analytical tools that can have great utility across the stages of an M&A transaction. Predictive tools, for example, can analyze data to quickly highlight worthy M&A deals, and create an investment hypothesis based on the analysis. The findings can then direct the due diligence process into proving the hypothesis, and then serve as a roadmap for value realization post-acquisition. Such analytical tools can reduce time spent from traditional methods by 50%-60%.

Data analytics can also better gauge the value of a deal by broadening the number of factors considered. This includes identifying more sources of value from acquisitions, seeing more synergies and savings holistically, and reducing redundancies. And with advances in machine learning, AI can dynamically adjust those screening parameters based on market conditions and competitor behaviour.

Pre-close execution and planning

Data analytic tools can process a target’s raw transaction-level data to provide helpful insights on the business’ revenue and margin performance, as well as other insights such as the target’s customer base, regional impact, and its product mix’s impact on margins.

Data analytics can also assist an acquiror in preparing for integration. For example, talent management and retention post-acquisition is often a challenge. Companies that do not undertake retention efforts may lose up to 70% of their senior managers in the first five years after a merger, something which data analytics can alleviate.

Advanced analytics can assist in talent acquisition by providing better insights on the available market, and which skill sets are missing from the target’s current employees. Similarly, acquirors can use data analytics to prepare for talent retention by determining which roles are most critical to value creation, assessing employee performance, and using company and external data to highlight which employees are most at risk of leaving. This information can help design targeted retention plans as opposed to blanket incentives to all employees.

Post-close integration

Companies using analytics can design new combined organizations in up to half the time it traditionally takes as the predictive tools discussed above can provide the acquiror with the foresight to prepare for integration earlier on.

Additionally, advanced analytics can improve the asset effectiveness of the post-transaction company’s assets, including machinery, equipment, or even employees/functional groups. During integration, advanced analytics can be used to create a model that assesses the likelihood of equipment failure, allowing companies to develop solutions in advance. In sales, advanced analytics may be used to address coverage overlaps by using data on territories and travel patterns.

Data analytics can also be used towards continuing diligence and data gathering post-close. This data can be included in the company’s business intelligence platforms and processes, allowing the company to continuously improve its business outlook.


Data analytics raises numerous considerations including the potential need to employ data scientists, the initial large costs associated with creating bespoke analytic tools, and the need for compliance counsel that can advise on (among other things) the privacy and anti-competition aspects of data gathering/analysis. Given the changing M&A landscape, companies that can effectively embrace innovation to improve both the speed of the acquisition and the accuracy of relevant information may gain an advantage over their competitors.

In a future post, we will explore data analytics in M&A further, including deal types that may especially benefit from incorporating such tools, and novel considerations for buyers and sellers arising from utilizing them in their deals.

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

How to ensure that emails of former employees do not fall through the cracks when purchasing a business

The importance of email in the workplace presents a variety of legal challenges when purchasing a business. Among those are concerns relating to emails and the email addresses of the seller’s employees who are no longer employed by the purchaser after closing.

First, there are confidentiality concerns in connection with former employees receiving information they should no longer have access to. Second, there are concerns that customers or other relevant individuals may be emailing former employees instead of the current employees of the purchaser. This can result in missed sales opportunities, gaps in customer service and a negative impact on the purchaser’s bottom line.

That being said, by carefully drafting a purchase agreement to include one or more of the following provisions, a purchaser can help protect itself against these pitfalls.

Post-closing covenants are obligations of the buyer or seller to do something after the transaction takes place. One way of avoiding the concerns mentioned above is to include a post-closing covenant which requires the seller to promptly forward all emails received at the former employees’ email addresses to the email addresses of the new employees of the purchaser. This ensures that the purchaser’s employees will receive all emails addressed to the former employees and assist with business continuity and integration.

A purchaser should also consider including a post-closing covenant requiring the seller to set-up automatic replies from the email addresses of the seller’s former employees directing senders to contact the appropriate person in the purchaser’s organization. In addition, it may be wise to include a provision where the seller agrees to give the purchaser access to all archived emails of the seller’s employees.

Another way of avoiding these concerns is to ensure that the purchase agreement includes a clause where all rights, title and interest in the emails or other electronic communication used by the seller and the seller’s employees are assigned to the purchaser on closing.

Given the number of aspects involved when purchasing a business, the facilitation of access to the seller’s email addresses and email correspondence is something that can easily be overlooked. By turning their minds to this issue early in the acquisition process and including the necessary clauses in the transaction documents, purchasers can help avoid falling prey to these pitfalls. Addressing these types of issues early on is also increasingly important in an environment that has seen a greater focus on rigorous information management by target companies.

The author would like to thank Josh Hoffman, articling student, for his assistance in preparing this blog post.

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

Let’s see the money! Debt finance options in M&A

In many cases purchasers in an M&A deal will obtain debt financing to cover a portion of the purchase price. Fortunately, in Canada the options for acquisition financing are plentiful. Common ‘types’ include:

Senior Debt: the Bank Loan

Banks and other senior lenders can design a range of tailored solutions to purchasers’ funding needs. Broadly speaking, these loans can be classified as follows:

  • Fixed Term Loan or Revolver: The fixed term loan is credit for a fixed amount to be funded, and paid back, according to a pre-determined schedule. A revolving loan allows a borrower to drawdown, pay back and re-borrow a capped amount of credit at its own discretion. Loan agreements can feature some combination of the two depending on the purchaser’s up-front financing needs and future working capital requirements.
  • Single Lender or Syndicated: Syndicated loans refer to credit granted by a syndicate, or group, of lenders. This form allows lenders to participate in larger financings without requiring high capital outlay or risk exposure. A syndicated loan is often led by one lender acting as agent, a role which typically includes negotiating and administering the loan. Syndicated loans can add complexity to a deal due to issues, including ranking, that must be negotiated between lenders.
  • Unsecured vs. Secured: These categories are distinguished based on whether security is taken over the assets of the purchaser (or target) to secure payment of the loan. In large acquisition financings the lender(s) will always demand security, which can be taken over virtually any tangible or intangible assets. It is common for lenders to also require that the purchaser or its affiliates provide guarantees, which can be secured or unsecured.

Asset-based Loans (ABL)

ABL is a niche form of lending that will be attractive to borrowers in certain circumstances. The amount of credit available under the loan is tied to the value of specific assets of the borrower. Typically, ABL lenders prefer liquid assets such as accounts receivable and inventory, and will advance funds based on a percentage of the assets’ value. ABL can be attractive where the borrower is rapidly growing or highly leveraged, and needs fast, flexible funding. Borrowers should know that proof of steady, high-quality receivables and strong financial reporting capabilities are pre-requisites to obtaining ABL financing.

Leveraged Buy-Out (LBO)

An LBO is an acquisition finance structure in which debt is used as the main source of funding for the purchase price. This structure allows a purchaser to make large acquisitions while contributing relatively little of its own capital. Security is taken in the assets of the purchaser and the assets of the target being acquired. Lenders, cognizant of the risks associated with high leverage, will often insist upon strict operating and notice covenants. For this reason, purchasers typically only engage in LBOs of mature companies with stable, predictable cash flows. While high-profile LBO failures have illustrated the risk inherent in this approach, if used successfully purchasers can realize a higher return on equity than they would if ‘ordinary’ levels of debt were used.

Owner (or Vendor take-back) Financing

In this acquisition finance structure, a portion of the purchase price is paid on closing and the seller agrees to defer and finance the balance of the purchase price. Post-closing, the purchaser owns the business while making principal and interest payments to the former owner. The appeal of this structure is context-dependant. Sellers are most likely to offer financing at a lower cost to sweeten (and expedite) the deal. Both parties will appreciate the reduced cost that comes with avoiding third party financing, but sellers should have a clear understanding of the credit-worthiness of the purchaser and the risks of lending.

Mezzanine Financing

Mezzanine financing is a hybrid form of debt that gives the lender the right – in certain circumstances – to convert its loan into an equity interest in the borrower. This form of debt is typically unsecured and subordinate to senior debt, and as such usually carries a higher interest rate. Lenders often prefer mezzanine financing over an equity injection as interest payments on debt are tax deductible. The caveat is that, should the mezzanine debt be converted into equity, the purchaser’s shareholders will experience ownership dilution. Overall, the convenient nature of mezzanine financing makes it well-suited as a secondary source of funding for acquisitions.

Many financing solutions are available to cater to the complex needs of the parties to a Canadian acquisition. Purchasers should be aware – in advance of seeking acquisition financing – that these arrangements can add complexity and time to a transaction. Further, in the Canadian private M&A context ‘financing out’ clauses are not common, and as such financing should be established early so that the purchaser is not forced to proceed without it. Those seeking advice about their acquisition finance options should contact a member of NRFC’s M&A or Corporate Finance teams.

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

2019 in Review: eSports edition

The eSports industry experienced monumental growth in 2019 and is well underway to becoming a financially lucrative market.

By the end of last year, eSports had over 433 million global viewers, more than American Football and rugby combined, and is expected to reach over 645 million viewers in 2020. For perspective, the 2019 League of Legends World Championship alone amassed a peak viewership of 3.98 million, far surpassing earlier eSports viewership records.

2019 also marked the year that eSports became a billion dollar industry. In line with its massive following, eSports drew in record revenues last year, experiencing a 26.7% year-on-year growth. Sponsorships topped the charts and proved to be the most profitable revenue stream for eSports companies at $456.7 million, a 34.3% increase over the previous year. Media rights and advertising followed closely, with $440.5 million in combined revenues. The global eSports market is expected to grow to $1.79 billion by 2022.

Tournament prizes also saw a noteworthy increase in 2019 over the previous year, estimated to have reached a record $211 million, 29% higher than the previous year.

The eSports industry has now garnered a slew of partnerships and sponsorships, spanning a variety of industries. On the Canadian front, our firm advised a leading North American eSports company, Aquilini GameCo Inc., on the acquisition of Luminosity Gaming Inc. and Luminosity Gaming (USA), LLC, the subsequent amalgamation with J55 Capital Corp. and the arrangement with Enthusiast Gaming Holdings Inc. The merged entity, Enthusiast Gaming Holdings Inc., also acquired a non-controlling interest in the Vancouver Titans professional Overwatch eSports team and a non-controlling interest in a Seattle-based team in the newly franchised Call of Duty® esports league from Activision Blizzard. The transaction was the first of its kind in the eSports industry. In the media world, Microsoft’s Mixer signed an exclusive deal with the world’s most well-known streamer, Tyler “Ninja” Blevins, in an attempt to increase Mixer’s viewership and market share in the industry. And just last month, Louis Vuitton announced a collaboration with Riot Games. The retailer produced a 40-item collection inspired by Riot Games’ League of Legends, making this the first-ever collaboration between a luxury fashion house and a global eSports company.

2019 was undoubtedly a prosperous year for the eSports industry and the continued growth expected in the space makes eSports an attractive and exciting investment opportunity.

The author would like to thank Alexandra David, Articling Student, for her contribution to this legal update.

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

NAFTA 2.1: Bringing certainty to an uncertain time

If there is anything that Canadian dealmakers are all too familiar with in 2019, it’s the concept of uncertainty. Raging trade wars, geopolitical tensions, elections, and a forecasted economic downturn are all pervasive in everyday conversation. Despite this, deal flow has remained robust throughout the first three quarters of 2019, as summarized in a recent post. Fortunately, significant uncertainty in relation to trade with the U.S. and Mexico is hopefully coming to an end.

Representatives from Canada, the U.S. and Mexico met last week to sign what some are calling “NAFTA 2.1” but is formally known as the Canada-United States-Mexico Agreement, or CUSMA. There are still hurdles before CUSMA becomes domestic law as each country must ratify it. Prime Minister Justin Trudeau said that Canada is currently deciding whether his government should reintroduce the bill to ratify the trade deal before or after the holidays. Experts on the topic agree that passing the bill is unlikely to be contentious in Canada.

We discussed the importance of tariff-free entry for goods and services from Canada into the U.S. previously. Canada is often viewed as a gateway to U.S. markets. As such, the prospect of this new agreement should perk up the ears of dealmakers both within and outside Canadian borders. With more certainty regarding U.S. and Mexican duties and tariffs on the horizon, companies will have a greater ability to assess the risks associated with supply chains and to value companies posed to the be their targets with increased confidence.

According to PricewaterhouseCoopers, in the first half of 2019, the number of inbound and outbound deals stayed relatively stable when comparing to the second half of 2018. Commentators reason that trade tensions and uncertainty cause dealmakers to proceed with caution. That being said, Crosbie and Co. reported that foreign acquisitions of Canadian companies increased by 7% in Q3 as compared with Q2, and were the highest quarterly volume since Q2 2017. The introduction of relative trade certainty should further encourage dealmakers to move forward with in-and-outbound acquisitions in 2020.

While the exact content of the amendments accepted by the U.S. House of Representatives are unknown at the date of writing, we do know that if CUSMA is passed by Congress (Congress is expected to vote on CUSMA in early 2020), at least cross-border dealmakers will have a level of certainty about trade relations between the three countries that has not existed in years. Dealmakers can hedge their risk on other areas instead, such as foreign geopolitical tensions and trade wars.

The author would like to thank Kiri Buchanan, articling student, for her assistance in preparing this blog post.

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

Dealing with pending or threatened litigation in M&A

A significant consideration when considering an M&A target can be the impact that pending or threatened litigation has on the proposed transaction.

While some organizations may balk at the idea of acquiring a target that is (or is likely to be) the subject of a lawsuit, such companies are often available at significant discounts to purchasers that are able to understand and address the risks.

Each transaction will have its own unique considerations. However, an organization that is contemplating acquiring a target that is the subject of pending or threatened litigation should, among other items, address the following high-level considerations:

  • Due Diligence: Purchasers should involve litigation counsel at the outset of the due diligence process to understand and evaluate the costs, risks and likely outcomes of the litigation, as well as develop strategies to address those risks and engage with the target.
  • Negotiate the Costs of the Claim: Informed by the due diligence process, the parties may discuss which party will assume costs of the claim if judgement against the target is awarded. A purchaser may discount the purchase price by the quantum (if known) of the claim, or saddle the vendor with ongoing liability for the claim by way of specific indemnity.
  • Negotiate Control of the Defense: If the claims are fundamental to the purchased business, the purchaser will likely wish to maintain full control of the defense strategy in order to protect its acquisition. If the target is assuming control of the defense, the purchaser must stipulate that any settlement or admission of responsibility requires its consent or else it risks outcomes that may not be in its best interest.
  • Representations, Warranties and Indemnification: The purchaser must have sufficient assurances that the information that it has received from the target regarding the pending or threatened litigation is accurate in order to properly structure the litigation risks into the transaction. The target’s indemnification of the purchaser should, as specifically as possible, reflect the litigation risks identified in the due diligence in order to sufficiently protect the purchaser. Purchasers may also consider withholding a portion of the purchase price, subject to certain litigation outcomes, for additional protection.
  • Asset Purchase: If the litigation risks are too great for the purchaser, it may consider buying the assets of the business rather than the shares/units/interests of the target, and leave some or all of the liabilities behind with the target. However, purchasers should be aware that some liabilities, such as environmental liabilities, may follow the related assets without a specific assumption in the asset purchase agreement. Tax considerations of asset purchases are also very important to consider as we discussed in a previous post.

Each transaction will always have its own unique circumstances which should be evaluated by counsel. Please contact Norton Rose Fulbright Canada LLP for specific inquiries.

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

Parties to M&A must be diligent about climate change

Climate change has become a high profile issue that is expected to have significant implications for M&A transactions going forward. As public awareness and scientific understanding of climate change continues to evolve, we are more informed about the climate change-related risks that businesses must grapple with and get ahead of. As a result, businesses need to be especially diligent in their assessment of a range of factors that may be impacted by the changing climate when completing M&A transactions. While the risks that should be considered will, of course, vary between transactions, the following is a list of climate-related factors that will likely be relevant to the majority M&A transactions.

The Sustainability of Assets in a Changing Climate

The sustainability of assets and operations, also termed “physical risk”, is always a crucial consideration when evaluating M&A opportunities. Changing weather patterns will further complicate this analysis going forward. For example, the risk of supply chain disruptions may increase as severe weather events become more frequent, while the possibility of changing sea levels may effect industries ranging from agriculture to tourism. Similarly, businesses that require significant infrastructure to operate may face the difficult decision between investing in assets that can withstand increasingly severe weather and risking the costly damage that may or may not occur if more affordable options are chosen. The vulnerability of certain regions to natural disasters – for example, forest fires – has already had a major impact on electricity providers in California as they proactively shut down service in an effort to prevent devastation.

The sustainability of assets should especially be considered in the due diligence and valuation phases of a transaction. Buyers and parties to a merger should consider, among other factors: the location of assets, how vulnerable the location and assets themselves are to severe weather events, the impact that severe weather events may have on assets, the local labour force, and supply chains, overall. Although speculative, the consideration of physical risks to a business should not be ignored.

In short, climate change has the potential to impact an exceptionally wide range of businesses, and failure to assess these risks when evaluating M&A opportunities may result in costly mistakes.


As both awareness and concern about climate change have grown rapidly among members of the public, environmental responsibility has become a central component of many companies’ branding strategies. Research has shown that consumers prefer to support brands that align with their values, and experience has shown that becoming the subject of environmental scrutiny can have drastic negative consequences for businesses. Accordingly, a brand’s reputation for environmental responsibility, good or bad, may be an important determinant of their value going forward. Transactions that move a business in an environmentally responsible or sustainable direction may magnify the value gained as a result of the merger or acquisition.

Transactions that facilitate eco-friendly branding may bring significant advantages, while transactions that reflect negatively on a brand’s environmental responsibility may risk leaving a company behind the eight-ball. Therefore, the values espoused by a brand are an important consideration in evaluating a transaction, particularly where environmental responsibility is an existing component of a company’s branding strategy.

Legislative changes

A third factor which warrants consideration when evaluating an M&A transaction is regulatory risk. The new federal carbon tax now in effect in much of Canada has been met with a wide range of responses. Some have argued that the tax will reduce the competitive edge of Canadian businesses and result in increased costs for consumers. Indeed, recent research suggests that the tax will cause a short-term increase in production cost of more than 5% in some industries. On the other hand, some have suggested that the tax may actually increase profits for some firms by encouraging investment in sustainable sources of energy and thereby reducing reliance on fossil fuels. While the business implications of the carbon tax are not yet clear, it is clear that the ability of businesses to adapt to legislative changes aimed at protecting the environment may be an important determinant of the profitability of a business going forward.

It is expected that further pro-environment legislative changes will follow as uncertainties related to climate change risk become increasingly mainstream and dire. Businesses considering transactions in carbon- or water-intensive industries such as, inter alia, energy, transportation, and agriculture, should pay special attention to the legislature and regulatory trends, globally. This way, buyers and sellers can be proactive about company policies, due diligence, transactional terms, and deal valuation. It goes without saying, then, that attention to the possibility of legislative changes is now a critical component of evaluating M&A transactions.

Parties to a transaction, regardless of the industry, should be diligent in their consideration of climate change-related risks. Although physical and regulatory risks may be specific to businesses operating in particular industries, branding and company values are relevant across all industries. Consideration of climate change-related risks may increase costs in the short term but attention to these risks is likely to pay off in the long term by way of: decreased risk associated with the sustainability of assets, increased value related to branding, and greater preparedness for predicted legislative change.

The author would like to thank Brandon Schupp and Kiri Buchanan, articling students, for their assistance in preparing this blog post.

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

Location, location, location: Where’s your chief executive office?

In the context of cross-border secured financing transactions involving Canada and the United States, the rules relating to perfection and priority of personal property pledged in favour of a lender or agent are similar. In the U.S., Article 9 of the Uniform Commercial Code governs while each Canadian jurisdiction has its own personal property security regime.

The PPSA is largely based on the UCC framework and the PPSAs of each common law Canadian jurisdiction are generally very similar to each other. There are however, a few key distinctions between the UCC and the PPSA, one of which will be discussed below.

In the context of an all-asset pledge by a debtor in favour of a secured party, one notable difference between the UCC and the PPSA perfection frameworks relates to where registrations need to be made to perfect a security interest in collateral against a debtor. While there are some nuances with respect to the type of collateral in which the security interest has been granted which require analysis beyond the scope of this post, generally speaking, Article 9-301 of the UCC requires that for a debtor, irrespective of whether it is a U.S. or any foreign entity, the local law of the jurisdiction where the debtor is located will govern perfection, the effect of perfection or nonperfection, and the priority of a security interest in the debtor’s collateral pledged in favour of the lender or agent.

In most cases, the debtor’s location for purposes of the UCC will be its jurisdiction of formation or, if such jurisdiction does not have a searchable registry (which is of course not the case for Canada), its location would be deemed to be the District of Columbia. On the other hand, the PPSA approach requires a registration to be made in the location where the collateral is located to perfect against tangible personal property such as goods (which would include items like inventory and equipment). So for example, an Ontario company with operations only in Canada having tangible assets in Manitoba and Alberta would typically require PPSA filings in Manitoba and Alberta in order to perfect the security interest in such collateral. The PPSA framework for perfecting against intangible personal property (such as receivables or intellectual property) takes one of two approaches, depending on what “located” means for purposes of the particular PPSA – registrations need to be made where the entity is formed and where its place of business or chief executive office are located. For purposes of perfecting against our all-asset pledge, another registration would therefore need to be made in Ontario because the company was formed there.

Some PPSA jurisdictions, including Ontario, have caught up with the UCC framework in terms of debtor location. Where it gets interesting is when the chief executive office of a Canadian company is in the U.S. Sometimes the parent of a Canadian company is a U.S. company and the primary business dealings of the Canadian company are run out of the U.S. The chief executive office concept can be challenging to pin down because it is a factual rather than legal determination but let’s assume that it has been determined that our Canadian company’s chief executive office is in the U.S. To cover the bases in terms of conflicts of laws rules, a UCC filing would also need to be made in the relevant U.S. jurisdiction (plus, sometimes a DC filing is also made as a precautionary measure).

To close, in cross-border secured financings it is always important to ensure that it is determined (and represented, if applicable) where the chief executive office of a Canadian company is located.

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