CANADA Law and Practice Contributed by: Grant McGlaughlin, Sean Stevens and Claire Gowdy, Fasken
4. Due Diligence 4.1 General Information
and services produced in Canada, and exports from Canada; (ii) the degree and significance of participa - tion by Canadians in the business and in Canadian industry; (iii) the effect of the investment on productiv - ity, industrial efficiency, technological development, product innovation and product variety in Canada; (iv) the effect of the investment on competition within any industry in Canada; (v) the compatibility of the invest - ment with national industrial, economic and cultural policies; and (vi) the contribution of the investment to Canada’s ability to compete in world markets. If the applicable threshold for a pre-closing review of the net benefit to Canada under the ICA is not met or exceeded, the acquisition of control of any Canadian business by a non-Canadian is subject to a relatively straightforward notification, which can be made either before or within 30 days of closing. Separate and apart from the net benefit to Canada review process, the ICA also contains a mechanism to allow the Canadian government to review a foreign investment on national security grounds. There are no thresholds for such national security reviews; they can be initiated at the discretion of the government. As Canada relies heavily on its trading partners and is generally supportive of foreign investments that do not raise national security concerns, historically “net benefit to Canada” approval under the ICA, where required, is seldom denied. However, on 4 July 2024, the Minister of Innovation, Science Industry, issued a statement indicating that when it comes to “net ben - efit” reviews of foreign investments in large Canadi - an-headquartered firms engaging in critical mineral operations (presumably falling within Canada’s critical minerals list), “such transactions will only be found of benefit in the most exceptional of circumstances”. It is important to note that this statement relates to net benefit reviews, and not national security reviews. More importantly, this policy applies to all foreign investors, regardless of jurisdiction of origin or wheth - er the investor is a state-owned enterprise.
Comprehensive due diligence is customary for a pri - vate equity transaction in Canada. Financial, tax, oper - ational, environmental and general business diligence (including key partner, client and customer audits and meetings) is conducted with the private equity deal team for a new platform investment, and through a combination of the private equity deal team and exist - ing management for add-on acquisitions. Consultants may be engaged to cover environmental risks, client audits or other industry-specific considerations. General legal diligence will include a combination of: • a review of publicly available documentation (web - sites, Confidential Information Memorandums and public disclosure documents, if available); • preparing a detailed list of standard questions to be answered in writing by the target and its coun - sel, including topics covering corporate history, shareholder arrangements, material reorganisa - tions, acquisitions and divestitures, commercial agreements, debt arrangements, IP/IT, privacy and cyber-risk, environment, real estate, regula - tory compliance, litigation, labour, employment and benefits, and tax; • a review of a data room and other materials pro - vided in response to the diligence questions; and • follow-up calls with relevant members of manage - ment on specific areas of interest. Key areas of focus will vary depending on the indus - try in which the target operates. Over the past sev - eral years, we have seen private equity buyers have a heightened focus on privacy, cyber and IT diligence conducted by both the operations and legal teams, as well as on sanctions and import/export considera - tions. 4.2 Vendor Due Diligence Vendor diligence reports are not customary in Canada. Legal advisers rarely provide reliance on their buy-side diligence reports to other third parties other than their private equity clients and the portfolio companies in the case of add-on acquisitions, although pressure to
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