CANADA Law and Practice Contributed by: Grant McGlaughlin, Sean Stevens and Claire Gowdy, Fasken
conform to European trends has increased in recent months in this regard. Vendors typically provide a Confidential Informa - tion Memorandum, a detailed financial model and, depending on the stage and scope of the sale pro - cess, populated disclosure schedules based on rep - resentations and warranties provided in the vendor draft purchase agreement.
ly provisions (eg, shorter duration and smaller amount of indemnification holdback, acceptance of more per - vasive qualifiers in the representations and warranties, shorter lists of closing conditions, and a more limited indemnification regime) and the use of representation and warranties insurance are more prevalent. 5.2 Structure of the Buyer In Canada, a private equity-backed buyer will rarely be party to the purchase agreement directly. Where a newly created “shell” company is the purchaser, a fund may concede to providing equity commitment letters and causing banks to provide debt commit - ment letters as to the funding of the acquisition, and would also provide a limited guarantee to fund any reverse break-up fee, as the case may be, but this is more likely to be provided as a standalone undertak - ing as opposed to the fund intervening in the purchase agreement directly. In the case of public company tar - gets, the board will require debt and/or commitment letters, as applicable, before signing off on definitive agreements (even where there is no formal “funds cer - tain” statutory requirement to do so, as this obligation only applies to takeover bids in Canada). With respect to exits, as most private transactions are structured as share purchase agreements in Canada, it is customary to have all shareholders (including the private equity players) execute the sale agreements, and in some instances, indemnification obligations can be severally (and not jointly) allocated proportion - ately amongst the various sellers. 5.3 Funding Structure of Private Equity Transactions The funding of private equity-backed M&A in Canada varies from transaction to transaction. Certainty of funding is only required under Canadian legislation for a takeover bid. As mentioned in 5.2 Structure of the Buyer , equity commitment letters are often pro - vided by the private equity fund, particularly in com - petitive auction processes, with more sophisticated sellers and, in the case of privatisations, to provide vendors with comfort that funding will be available for the transaction. On the debt financing side, the so-called “SunGard/Limited conditionality” provisions have made their way into debt commitment letters.
5. Structure of Transactions 5.1 Structure of the Acquisition
Unless there is a significant known liability that needs to be carved out through structuring as an asset sale, the vast majority of private equity transactions in Can - ada are completed via share purchase agreements, with recent studies indicating 74% were effected by way of share purchase arrangements. Where the target has multiple shareholders or there has been significant restructuring of equity plans or other specific challenges in obtaining all required corporate approvals, and in the case of public com - pany targets, a plan of arrangement may be used. An arrangement is a court-sanctioned agreement (similar to the UK scheme) that can accommodate various structures (share purchase, amalgamation) and com - plex capitalisations. Although a plan of arrangement can be more costly and take slightly longer than a simple share purchase, it is an efficient way to “clean up” messy capitalisation, providing certainty to the buyer through the court’s seal of approval. Very few private equity deals are conducted by way of a takeover bid (whether friendly or hostile) in Canada. Regulatory hurdles and complex, extensive require - ments for non-Canadian bidders are major deterrents, as are the delays and costs associated with possible second-step (“squeeze-out”) transactions. The terms of the purchase agreement can vary signifi - cantly depending on the private equity player back - ing the purchaser and the strategic importance of the acquisition to an existing portfolio or the creation of a new platform, as applicable. In a competitive auction, the terms tend to be more balanced, and seller-friend -
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