Canada’s Extractive Sector Transparency Measures Act (ESTMA, or the Act) came into force on June 1, 2015. The Act imposes disclosure obligations on certain Canadian businesses engaged in the commercial development of oil, gas or minerals with respect to payments made to domestic and foreign governmental bodies. As we previously noted, Canadian businesses subject to the Act are currently required to collect information on the payments they make, and the first ESTMA-compliant reports will be due to Natural Resources Canada by May 30, 2017 (for organizations with a December 31 financial year end).

Resource companies currently negotiating acquisitions as purchasers should be mindful of this legislation and ensure that appropriate provisions are included in the purchase agreement so they are able to comply with the Act and so they do not inherit any reporting obligations they cannot satisfy.

For instance, if a reporting entity under the Act (the Purchaser) acquires another company (the Target) by way of a share purchase, the Purchaser will be required to include disclosure in its ESTMA report with respect to payments made by the Target during the portion of the Purchaser’s financial year prior to the acquisition. This because the Act requires disclosure of payments made by entities controlled by reporting entities under the Act, regardless of whether or not the controlled entities are reporting entities themselves under the Act.

As a result, Purchasers may wish to include a representation and warranty that no payments were made to any domestic or foreign governmental body by the Target during that financial year, other than as disclosed in a disclosure schedule listing all the payments required to be disclosed under the Act. Furthermore, it would be prudent to include a representation that the Target has not structured any payments with the intention of avoiding the requirement to report those payments in accordance with the Act. Purchasers will also want to obtain comfort that the Target has complied with the Act in all respects, including filing its ESTMA reports. In certain circumstances, it may also be worth considering a specific indemnity with respect to non-compliance with ESTMA in favour of the Purchaser.

In the situation where assets are being purchased, rather than shares, there is generally less concern for inherited reporting obligations as these obligations and any liabilities associated with them remain with the seller of the assets. Note, however, that each transaction should be carefully considered in light of its particular circumstances and ESTMA-related provisions in purchase agreements should be drafted accordingly.

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