CANADA Law and Practice Contributed by: Grant McGlaughlin, Sean Stevens and Claire Gowdy, Fasken
6.4 Conditionality in Acquisition Documentation
This approach differs from a typical strategic corpo - rate seller, who may entertain an escrow and longer indemnities. Private equity buyers continue to rely heavily on rep - resentations and warranties insurance to provide vendors with full consideration with minimal escrow and indemnification provisions. Although many deals continue to provide for indemnification escrows and robust indemnification clauses, the duration and scope diminished in the early 2020s, as there was a growing trend, particularly in competitive situations, of purchase agreements with public company-style representations and warranties packages with zero recourse after closing. This trend appears to have slowed down in recent years given recent market conditions. 6.2 Locked-Box Consideration Structures Locked-box structures remain highly uncommon for private equity funds in private M&A in Canada, which continue to favour a traditional working capital adjust - ment as of the date of closing. 6.3 Dispute Resolution for Consideration Structures A detailed dispute resolution mechanism with respect to purchase price adjustments is a standard provision in Canadian private equity share purchase agreements, whether on the buy side or the sell side. Traditional features of this provision include the appointment of an independent third party who evaluates only the specific items identified in the disagreement, and the terms upon which the selling and the buying party are to interact and share information with this inde - pendent third party. Typically, this party’s decision is binding, and fees and expenses for the independent third party would be allocated between the buyer and seller in the same proportion that the unsuccessfully disputed amount submitted bears to the total amount of disputed items submitted to such independent third party. Dispute resolution on other deal terms is typically through recourse to the courts. Arbitration (binding or not binding) is rare in Canadian private equity deals.
Conditions precedent to the closing of a private equity transaction vary considerably from one deal to anoth - er. Regulatory approvals (including the Competition Act and the ICA, where applicable) and required board and shareholder approvals are nearly universally imposed. In the case of other third-party consents (eg, material customers, landlord, etc), the conditionality of such provisions (required, best efforts, reasonable commercial efforts, no obligation) varies depending on the comfort level the private equity buyer has obtained in its due diligence, its familiarity with the other parties and its general operating practices. Financing condi - tions are less common and are typically found when the private equity buyer has substantial bargaining power over the target. Finally, a standalone condition that there be no material adverse effect between sig - nature and closing is relatively common for a private equity buyer to require. Prevailing market conditions during the COVID-19 pandemic had the effect of reducing closing con - ditions to a minimum as buyers were in a situation to require closing certainty. However, the market - place has recently trended back to a more balanced approach. 6.5 “Hell or High Water” Undertakings A “hell or high water” undertaking is sometimes accepted in private equity deals in Canada where there is a regulatory condition related to, for example, the merger review process or the foreign investment review process. As a practical matter, a full “hell or high water” undertaking is more likely to be provided in the merger review context than in the foreign invest - ment review context. That said, the scope of “hell or high water” undertakings is negotiated and ultimately depends on the nature and regulatory sensitivity of the deal and business dynamics. For example, in the context of a “sellers’ market” and regulatory complex - ity, such undertakings may involve the sharing of risk (rather than being fully “hell or high water”) and/or specific remedial commitments. 6.6 Break Fees Prior to the COVID-19 pandemic, break fees were rarely accepted by private equity-backed buyers in
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