CANADA Law and Practice Contributed by: Grant McGlaughlin, Sean Stevens and Claire Gowdy, Fasken
In recent years, Canada has seen a growing number of transactions involving representations and warranties insurance, especially in transactions involving private equity investors, as discussed further in 6.10 Other Protections in Acquisition Documents . 6.9 Warranty and Indemnity Protection In Canada, who gives the representations and warran - ties in a private sale transaction (whether the target company/management or the shareholders/private equity fund) is not a crucial argument, as indemni - fication will come from the sellers regardless of who gives the warranties. As an institutional investor, the private equity fund will typically represent as to its share ownership, capacity and due authorisation to sell the shares, as well as antitrust thresholds, where applicable, and will work closely and diligently with management to ensure the company provides com - prehensive operational representations. A private equity seller will necessarily seek to limit lia - bility as much as possible, thereby maximising returns for its investors within a shorter time period. However, as sophisticated buyers, funds are also accustomed to accommodating relatively robust representations and warranties on the target company, including: • the accuracy and completeness of financial state - ments; • that there are no undisclosed liabilities; • a list of material contracts; • that there is insurance coverage in place; • warranties provided to customers; • material compliance with the applicable laws for a limited look-back period; • pending and threatened litigation; • relationships with material customers and suppli - ers; • material compliance with employment and benefits laws; • a list of required consents, notifications and regula - tory approvals; • a list of owned and leased real property; • compliance with environmental laws and the avail - ability of environmental reports; • breaches of privacy, anti-spam, cyber-risk and anti- corruption policies and laws; • IP ownership and infringement; and
• the status of IT and information systems. Private equity sellers will conduct a thorough disclo - sure exercise with management and external counsel to ensure that all statements in the representations can be confirmed, and to identify all carve-outs or disclosures required to limit the scope of the represen - tations given in light of all known facts. In the context of transactions involving representations and warran - ties insurance policies, a buyer will typically require comprehensive representations and warranties, as the overall liabilities of the sellers will be limited to a small fraction of the purchase price (sometimes with exceptions for fundamental and tax representations, fraud and special indemnities). As a result, representa - tions and warranties are typically easier to negotiate between buyers and sellers where such policies are in place. Also, buyers will typically require a materiality scrape provision that will facilitate the determination of whether or not a breach has been made and the amount of damages incurred. As mentioned above (in the absence of representa - tion and warranty insurance), a private equity seller’s representations can be limited by pervasive qualifiers, in time (12 to 24 months), by capping the indemnifi - cation (as low as possible – noting trends in Canada appear to diverge from the low, US-style caps), and applying de minimis thresholds such as deductibles or tipping baskets. The contents of a data room are not used in Canada against representations and warranties; instead, a disclosure schedule that lists relevant items from the diligence conducted is annexed to and forms an inte - gral part of the purchase agreement. 6.10 Other Protections in Acquisition Documentation Representations and warranties insurance has become commonplace in Canadian transactions. Canadian bidders have been adopting this frame - work to provide a competitive edge (or to ensure they do not lose one to their US competition), and have become comfortable and familiar with the mechanics. Insurance has provided an attractive option to private equity purchasers purchasing companies from man - agement sellers who remain engaged in the business
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