Tag archives: M&A

A Slow Burn: The Cannabis Sector May be Ready for Market Consolidation

The first half of 2020 saw a significant decline in M&A activity as capital markets were impacted by the COVID-19 pandemic, but the second half of the year saw a surge in M&A activity that is expected to continue into 2021. One industry that may be particularly well primed for M&A activity in 2021 is the cannabis industry, where market consolidation is already underway.

Predictions of market consolidation in the cannabis industry are hardly novel. Even prior to the legalization of cannabis in Canada, research by Ernst & Young indicated that industry executives believed that consolidation was inevitable and would … Continue Reading

Corporate Divorce: An Analysis of Divestments and Lessons to Carry Forward

In the midst of these unprecedented times, many companies are looking to mergers and acquisitions to realize new growth opportunities and diversify; however, before heading down this road, one question needs to be asked: is it a marriage built to last or is it doomed from the start? A recent paper, which examined 1,365 M&A deals occurring between 1983 and 2010, found that 46% eventually resulted in divestment or “divorce”. Moreover, 77% of these corporate divorces stemmed from M&A failures. The authors identify post-acquisition industry shocks and cultural dissimilarities as the primary causes behind corporate divorce, but suggest that … Continue Reading

MAC/MAE Clauses in the Context of COVID-19

A recent Ontario decision of Fairstone Financial Holdings Inc. v. Duo Bank of Canada (“Fairstone”) became the first Canadian case to consider material adverse change (“MAC”) or material adverse effect (“MAE”) clauses in the context of COVID-19.  In Fairstone, Duo Bank of Canada sought to invoke the MAC/MAE clause to exit the transaction but the court did not allow it to do so.  This blog explains the reasoning of the court and takes a broad look at the law of MAC/MAE clauses within the context of COVID-19.

MAC/MAE Review

MAC/MAE is generally defined as … Continue Reading

Does board diversity lead to better M&A outcomes?

Board diversity has been at the forefront of the Canadian governance landscape for a number of years, and has recently been the subject of increased stakeholder focus. While gender and racial parity are ends in themselves, recent research shows that board diversity may be particularly beneficial in the M&A context.

The current state of affairs

Since 2014, Canadian securities regulators have required certain issuers to publish data on the representation of women on their boards and disclose the details of their gender diversity policies (or, if they do not have one, explain why not).

More recently, the federal government amended Continue Reading

Goodwill Hunting: The Value, Protections and Role of Intangible Assets in M&A Transactions

We have previously discussed goodwill as a distinct asset in purchase agreements.  In this post, we explore the growing value of goodwill and other intangible assets in mergers and acquisitions (M&A) and the legal issues parties should consider when seeking to value, protect and exploit these assets.

Intangible assets are often the most significant portion of a target company’s value and goodwill alone can be a very significant portion of a target’s purchase price. For example, in Amazon’s acquisition of Whole Foods, approximately 70% of the purchase price was allocated to goodwill. Although goodwill and intangible assets each … Continue Reading

Digital Taxation – Novel Considerations in M&A Transactions

Digital taxes have become a subject of significant debate in recent years. Following allegations that tech giants have paid very little tax anywhere in the world, some countries have moved to impose new taxes on profits derived from digital services provided by multinational enterprises on a jurisdiction-specific basis. For instance, France recently adopted a digital services tax of 3% per annum applicable to the portion of revenue that digital companies derive in France. Similarly, as of April 1, 2020, the UK imposed a 2% per annum tax on the revenue of search engines, social media services and online marketplaces that … Continue Reading

Post-Closing Adjustments

Previously, we wrote about the use of earn-outs as a means by which buyers mitigate the risk of a target’s post-closing under-performance by holding back part of the purchase price and paying it out as the target meets certain financial targets.  In this post, we examine a related topic that is often confused with earn-outs but in fact is a separate tool in a deal-maker’s kit: post-closing balance sheet adjustments.

Unlike an earn-out where parties look to the future performance of an acquired business, a balance sheet adjustment is the parties’ opportunity to draw comparisons between the business as it … Continue Reading

The Dynamic Duo: Cyber-security and Due Diligence during the COVID-19 Pandemic

The widespread impact of the COVID-19 pandemic (“pandemic”) continues to highlight the several ways in which M&A transactions have had to adapt to changing times, particularly by ramping up cyber-security measures in a digital world. Prior to the pandemic, there already existed a shift towards cyber-security due diligence since many businesses relied on digital assets. As a result, increased protection was paramount since a deficiency in the cyber-security measures of a target could lead to potential liability on the part of the buyer, after the transaction had closed.

Another Shift Caused By The Pandemic

The pandemic forced many … Continue Reading

What’s the Alternative?: The Rise of Alternative M&A Deals in a Post-COVID World

Mergers and acquisitions activity was already off to a slow start when 2020 began, but the COVID-19 pandemic (the “Pandemic”) initially resulted in a further decline in the volume of M&A activity. This was due in part to the economic and commercial uncertainties and market volatility for buyers and sellers alike, which made it difficult for companies to conduct business as usual. However, it looks like M&A activity has picked up again with gusto. In an earlier post, we reported that in a global survey of 2,900 C-suite executives, more than half of them reported that they … Continue Reading

The Smart Choice: A Predictive View in Revamping M&A Contracts

The current pandemic presents a unique opportunity to revitalize traditional M&A process and provisions. While we have previously addressed how traditional M&A provisions are impacted by the pandemic, this blog post will explore the key opportunity industries and corporations alike have in improving contractual processes. Specifically, through the use of blockchain technology and smart contracts.

Smart Contract 101

First proposed thirty years ago by computer scientist Nick Szabo who coined the term, smart contracts are drafted using programming languages and software and can be made legally enforceable and binding for all parties involved.  In recent years, smart contracts have been … Continue Reading

M&A Opportunities in the COVID-19 Digital Transformation

While the COVID-19 pandemic initially had a general chilling effect on merger and acquisition (“M&A”) activity, we have seen an increase in M&A activity recently, particularly as industries rapidly adapt to the new environment and consider opportunities. Both consumer preferences and business models have been forced to change quickly due to the circumstances of the pandemic. This period of transformation provides opportunity for those investors and businesses who are able to efficiently adapt and take advantage of the new trends.

Increased Demand for At-Home Services:

The pandemic has transformed consumer preferences which has created tremendous potential for certain … Continue Reading

Speaking the portability language: How portability clauses are helping debt-laden companies enter into M&A transactions

There is no doubt that the Covid-19 pandemic has resulted in unprecedented social and economic ramifications, including a decline in M&A activity in Canada. The pandemic has also brought in changes to the way agreements are being drafted in light of what has become our new normal. Earlier, we reported that the pandemic has led to an increased focus on earn-out provisions in both existing and new M&A deals. A recent trend also emerged in lending transactions, where lenders are agreeing to include portability language in loan documents, which may remove an obstacle for private equity groups that are looking … Continue Reading

Representations and Warranties Insurance and COVID-19 Considerations

The use of representations and warranties insurance (RWI) has grown dramatically in recent years as buyers (and to a lesser extent, sellers) have increasingly relied on RWI to allocate risks and provide other benefits in M&A transactions. The COVID-19 pandemic and its economic impacts have led to significant uncertainty for buyers, as well as for the RWI insurers underwriting their transactions. However, as we have grown more knowledgeable about the effects of the pandemic, both the M&A market and RWI insurers have adapted to the meet the changing times.

What is RWI

RWI is used by transacting parties … Continue Reading

Determining fair value in appraisal proceedings: the Supreme Court of Canada dismisses application for leave to appeal in Carlock v ExxonMobil Canada Holdings ULC

On August 13, 2020, the Supreme Court of Canada (the SCC) dismissed the application for leave to appeal in the case of Carlock v ExxonMobil Canada Holdings ULC (Carlock), indicating that the negotiated deal price in a transaction between well-informed, sophisticated, arms-length parties that is the result of a vigorous sale process provides strong objective evidence of fair value in appraisal proceedings before Canadian courts. This aligns with the recent U.S. decision in DFC Global Corp. v Muirfield Value Partners, LP, where the Delaware Supreme Court strongly endorsed deal price as often “the best evidence of … Continue Reading

COVID-19 Series: Considerations and Modifications of Certain Provisions in M&A Agreements (Valuation and Post-Closing Pricing Mechanisms)

In recognition that businesses are adjusting to their “new normal” and some companies are exploring acquisitions or divestitures as opportunities to strengthen their bottom line, we will be publishing a series of blogs aimed at highlighting some of the considerations and key drafting areas in a purchase and sale agreement that parties to Canadian private M&A transactions should consider in light of the COVID-19 pandemic.

Valuation Gaps

The impact of COVID-19 creates a lot of challenges in determining the valuation of a target – which ultimately, helps the parties determine the price of the shares or assets being sold/purchased. For … Continue Reading

Fintech M&A Activity in 2020: The Digital Economy is Here

Paying for Payments

While uncertainty arising from the COVID-19 pandemic has slowed down most deal activity, Fintech, in particular the payments space, is a big exception. Recent analysis from KPMG revealed that UK payment deals in the first quarter of 2020 alone exceeded the total number of deals in 2019. Granted, deal sizes were relatively low value, but the incredible rate highlights how the usual frantic activity in this area has only been propelled by the unique challenges this pandemic has presented, namely the need to switch to cashless and contactless transactions. Canadian Fintech is also poised for more deal … Continue Reading

Threading the Needle: Drag-Along Clauses and Asset Deals

While continued economic uncertainty has dampened M&A activity in the past months, the transition from crisis management to recovery mode in the short to medium term will likely see many companies explore potential divestitures in an effort to dispose of underperforming assets, to increase cash on hand and business resiliency and to mitigate risk.

When seeking approval for divestitures, many companies that have a shareholders’ agreement in place rely on drag-along provisions contained therein to quickly approve the transaction. However, in the context of an asset sale, the applicability of a drag-along is not always clear and both sellers and … Continue Reading

Providing or Procuring Ed-Tech Products? Educate Yourself about Privacy Matters

A new wave of advancement in the education industry has emerged. Schools, universities and colleges are relying more on technology now than they ever have before – and this reliance on technology will only increase in the coming years. Educational institutions are using technological solutions to assist in teaching, engaging in discussions with their students and more recently, in evaluating student performance and proctoring examinations on a remote basis.

As an educational institution entering into contracts with service providers who are offering ed-tech solutions or as a company providing such technological tools to various institutions, it is important to consider … Continue Reading

Diamond In The Rough: Mining as a potential bright spot in M&A

The mining sector has been one of the few bright spots in Canadian M&A since the COVID-19 pandemic drastically changed the landscape for transactions, with several large deals announced and continuing despite the pandemic.

As with other business sectors, mining has been significantly impacted by regulations and the economic slowdown caused by the pandemic. However M&A opportunities for Canadian mining companies have persisted despite these issues.

One of the first significant deals announced during the COVID-19 pandemic was Endeavor Mining Corporation’s combination with SEMAFO Inc., which valued SEMAFO at $1 billion. Other recent deals include Shandong Gold Group acquiring Canadian-based … Continue Reading

Purchasing Companies That Sell Technology to the Government: The Details Matter

Procurement contracts are increasingly used in both Canada and the United States (US), particularly with respect to technological services. Federal procurement expenditures for Canada amount to an average of CAD $22 billion in goods and services annually. Further, the US typically awards USD $500 billion in contracts annually, with Canadian companies actively participating in that market.

Where an acquirer is purchasing or investing in a vendor selling to government entities, the diligence process and subsequent transaction documents should carefully consider the risks arising from such dealings. Government contracting with respect to technological services, such as cloud computing, provide unique risk … Continue Reading

Measuring The Impact Of COVID-19 On Canadian M&A

The future of M&A beyond the COVID-19 pandemic remains fiercely debated and quite unclear. We’ve already seen transactions and their underlying agreements change in a number of ways, including more scrutinized structures, and more detailed negotiations regarding contractual carve-outs, such as material adverse change and force majeure clauses. As previously noted, this will undoubtedly lead to significant changes to M&A transactions in the near future. In addition, the COVID-19 pandemic has shown to have a macro-level impact on M&A transactions. Indeed, EY’s recent M&A report “Global Capital Confidence Barometer” (the Report) has analyzed COVID-19’s influence on M&A to-date, and … Continue Reading

Timely, or too soon? Competition Bureau releases guidance on “failing firm” claims in merger reviews

On April 29, in a rare decision based on the “failing firm” rationale, the Competition Bureau announced it would not challenge the acquisition of Total Metal Recovery (TMR) Inc. by American Iron & Metal Company Inc. (AIM), because TMR would have likely exited the market without the merger.

The Bureau released a detailed position statement on the transaction, which will assist parties seeking to rely on a “failing firm” argument. This will be particularly important in the wake of the COVID-19 economic downturn, as many businesses may face failure and seek to be acquired by a competitor if they cannot … Continue Reading

Canadian Government Announces New Policy Applying “Enhanced Scrutiny” to Certain Foreign Investments During COVID-19

Market Contraction

The financial markets and global economy have experienced a precipitous decline and substantial volatility due to the economic impact of the ongoing COVID-19 pandemic. This has had a significant and immediate impact on the level of M&A activity, both in Canada and globally, as companies are shelving deals or simply walking away entirely.

In fact, Thomson Reuters, citing data from the financial research firm Refinitiv, recently reported that there was a 57% decline in M&A activity in Q1 2020 as compared to Q1 2019, as Canadian M&A activity dropped to its lowest level since 2015. Globally M&A activity … Continue Reading

Earnouts: Sharing Risk and Reward in Uncertain Times

The turbulent economic environment resulting from the COVID-19 pandemic has affected the M&A world in numerous ways. Among them is the increased focus on earnout provisions, both those in place from legacy deals and those being considered for inclusion in an upcoming transaction. This post provides an overview of the earnout mechanism and describes the alternative approaches dealmakers have at their disposal.

The purpose of an earnout is to allocate risk and reward between a purchaser and a seller in respect of the post-closing success of the acquired business. Earnouts are useful as a means of bridging the valuation gap: … Continue Reading

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