Acquisitions of private businesses in Canada Acquisitions of private businesses in Canada

Authors: Alex Gorka and Brett Anderson

Other considerations

Overall transaction timing and risk allocation may also be impacted by regulatory considerations. Transactions involving private equity-sponsored purchasers often trigger filing requirements under the Competition Act and the Investment Canada Act.

Tax issues

The structuring of any acquisition is inevitably impacted by a multiplicity of tax considerations that arise depending on the nature of the business, as well as the specific circumstances of the parties. Some of these considerations include

• asset versus share acquisition or, possibly, hybrid transactions
• purchaser acquisition structure and capitalization (including the possible use, and legal form, of a Canadian acquisition vehicle by a non-resident purchaser)
• the ability to retain tax loss carry-forwards and other valuable tax attributes
• allocation of the purchase price
• pre-closing and post-closing reorganizations
• the treatment of any seller existing and/or purchaser newly offered incentive plans
• the application of Canadian sales tax
• tax residence of the seller

Competition law and foreign investment review

Competition law

Under the Competition Act, mergers and acquisitions are subject to pre-closing notification if they meet certain prescribed thresholds.

Where the thresholds are met, the parties must each submit a pre-merger notification. The notification triggers an initial 30-day waiting period during which the transaction may not be completed. In cases that raise potentially significant competition issues, a “supplementary information request” (SIR) may be issued by the Competition Bureau prior to expiry of that initial waiting period. The issuance of an SIR extends the waiting period for a further period of 30 days following full compliance with the SIR, after which the parties may close the transaction unless the Commissioner has sought and obtained an injunction to prevent closing.

Where a transaction raises no or minimal substantive competition law issues, parties may choose to file a request for an advance ruling certificate. Where issued, an advance ruling certificate exempts the parties from filing a notification and observing the statutory waiting period. If the Commissioner does not believe it is appropriate to issue an advance ruling certificate, the Commissioner may instead grant a waiver of the notification requirement and issue a no-action letter. Other than for transactions where an advance ruling certificate is issued, the Commissioner retains the right to challenge a notified transaction for up to one year following closing. For transactions that do not meet the mandatory pre-closing notification thresholds and where parties to such transactions elect not to voluntarily notify, the Commissioner has the ability to challenge the transaction for up to three years following closing.

See Osler’s guide to the amended Canadian Competition Act.

Investment Canada Act

Investments by non-Canadians in Canadian businesses are subject to regulation under the Investment Canada Act. Note that the Investment Canada Act applies even if the Canadian business being acquired is not Canadian controlled.

A direct acquisition of control where the prescribed monetary threshold is met is subject to pre-closing government approval on a “net benefit to Canada” basis. All other acquisitions of control are subject to notification only, which may be filed pre-closing or any time up until 30 days following closing.

The Investment Canada Act contains a national security review regime applicable to all investments in Canadian businesses by non-Canadians, including investments that do not constitute acquisitions of control.

In the context of an acquisition, filing the ”net benefit” review application or the notification, as applicable, triggers a 45-day initial review period under the national security review provisions of the Investment Canada Act. If, within that 45-day period, an investor does not receive notice that a national security review may be ordered or has been ordered, the investor can be certain that an extended national security review will not be undertaken. Where a notice is received and the transaction has not yet closed, the transaction is prohibited from closing until the review is complete. A full national security review can take upwards of 200 days. Where it is determined that an investment may be “injurious to national security,” remedial measures can be taken to protect national security, including directing the investor not to implement the investment (or divest if the investment has been implemented) or permitting the investment subject to certain conditions.

Amendments to the Investment Canada Act, passed in December 2023 but not yet in force, create a mandatory pre-closing national security notification regime for investments (including certain minority investments) in prescribed sensitive sectors. The regime will come into effect once the prescribed regulations are in force.

Privacy and personal information

In general, Canadian private sector privacy law allows prospective parties to a business transaction to share personal information between them for diligence purposes (such as employee information or customer lists, etc.) without the consent of individuals, as long as the parties have entered into a confidentiality agreement that, among other things, limits the use and disclosure of personal information to only that which is necessary for the purposes of assessing, completing or implementing the transaction.

When a business transaction is completed, personal information may generally be used and disclosed without consent if the parties to the transaction have entered into an agreement that, among other things, requires each party to use and disclose the personal information only for the purposes for which it was originally collected and permitted to be used or disclosed immediately before the transaction was completed.

It is also common practice to withhold particularly sensitive personal information (such as detailed employee or compensation data) until the parties have agreed on key terms and are close to signing. This helps to minimize privacy risks and ensures that only essential information is shared at the appropriate stage, in compliance with privacy laws and confidentiality obligations.

Although the business transaction provisions allow for an exception to consent, all of the other data protection obligations continue to apply, including the requirement to safeguard the personal information during the course of the transaction.

Employment matters

Implications relating to employees that must be considered in any acquisition include

• Employment contracts. Parties must determine which employees or groups of employees will enter into new or amended employment contracts and the terms thereof. In an asset purchase, employment contracts cannot be transferred to the purchaser. The parties must agree on which employees to whom the purchaser will be required to make new offers of employment and the terms of those offers. Employees who are not offered employment, or who do not accept the purchaser’s offer of employment, are typically terminated by the seller, who remains responsible for any statutory or common law termination and severance obligations. In a share purchase, the employing entity remains the same and all employment contracts continue without interruption.
• Employee liabilities. The allocation of employment-related liabilities should be clear and comprehensive under the terms of the purchase agreement.
• Restrictive covenants. The purchase agreement will often contain restrictive covenants that apply to sellers or a group of sellers and that run from the date of the transaction. In addition, individual employment agreements, typically limited to C-suite or other key executives, will commonly have separate employment-related restrictive covenants that will run from the date of termination. The scope and length of the covenants should be informed by applicable statutory and common law principles.
• Privacy matters. Depending on the province, employees in Canada have privacy rights under statute and/or the common law. The transaction and any changes to terms and conditions of employment implemented in connection with the transaction must comply with applicable privacy laws (see “Privacy and personal information”).
• Collective bargaining rights. Under labour relations legislation, any applicable collective bargaining rights are generally assumed by the purchaser, even in an asset transaction. Similarly, any pending applications for certification in respect of the business will generally be unaffected by the transaction. The purchaser will also need to obtain advice to ensure it does not engage in unfair labour practices before or after the closing.
• Workers’ compensation. In Canada, workers’ compensation insurance is administered by provincial governmental agencies. The claims history of the business, and any surcharges, premiums or assessments by the insurer, should be appropriately reviewed as part of due diligence and factored into the transaction.
• Pension and benefits plans. Due diligence on pensions and employee benefits is critical to identify potential liabilities, such as unfunded pension obligations, compliance gaps or change-in-control provisions. Buyers should assess whether to assume, amend or terminate existing plans post-closing, while ensuring legal compliance and ensuring a smooth integration.

Private equity

Private equity funds, particularly buyout funds, are frequent buyers, owners and sellers of private businesses in Canada. Although private equity funds can vary considerably, they generally share the common trait of having a fixed life and therefore an investment thesis informed by a defined investment horizon and hold period for their portfolio companies. For this reason, while the same principles and mechanics described above generally apply equally to acquisitions and divestitures by private equity funds, private equity M&A transactions often include the following features:

• Leverage. Private equity acquisitions of Canadian companies are often meaningfully leveraged with concurrently negotiated debt facilities that are drawn down and effective on closing the acquisition.
• Restrictive covenants. Private equity buyers will look to carefully limit any restrictive covenants, including with respect to non-competition and non-solicitation, so that they only apply to the fund’s management or deal team and not the fund’s other, unrelated portfolio companies and investments.
• Rollovers. In many instances, private equity buyers may expect the target corporation’s incumbent executive team to roll over all or a portion of their equity into the acquired business to maintain continuity and to remain aligned with, and incentivized to stay with, the business.
• Acquisition vehicles. Non-Canadian private equity funds will typically establish a Canadian acquisition subsidiary for tax reasons (including deduction of financing expenses, return of capital invested free of Canadian withholding tax and step-up of the tax cost of certain assets). In such instances, equity commitment letters from the private equity fund and debt commitment letters from financing sources will often be delivered to sellers to evidence a binding financial commitment to the acquisition.
• Equityholder agreements. If acquiring less than 100% of the target corporation, private equity funds will enter into a shareholder or other equityholder agreement with minority shareholders to afford the funds sufficient influence and flexibility to pursue their goals unobstructed (including the ability to “drag along” minority shareholders in a sale/exit transaction).
• Post-sale obligations. Having a finite life, after which they are wound up with proceeds distributed to investors, private equity funds are very sensitive to long (or any) surviving indemnity obligations when selling a portfolio company. Increasingly, funds will look to insurance products as a way to facilitate a clean exit (see “Representation and warranty insurance”).
• Alternative exits. Where a sale is unlikely or uncertain, private equity funds may pursue a “dual track” process — that is, run a public offering process in parallel with a private sale auction.

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