CANADA Law and Practice Contributed by: Grant McGlaughlin, Sean Stevens and Claire Gowdy, Fasken
also applied. Typically, unvested options will be accel - erated upon the occurrence of a liquidity event. With the growing number of US private equity funds investing in Canada, there is a growing trend of hav - ing a portion of the stock options granted to man - agers vesting only upon the private equity fund hav - ing received a multiple of its capital in the target (for example, 1x, 2x or 3x), provided that management is still employed by the target at the closing of a liquid - ity event. 8.4 Restrictions on Manager Shareholders Non-competition covenants are enforceable in Cana - da (except in Ontario as it relates to non-competition clauses found in employment contracts of non-man - agerial staff) if they are crafted appropriately and are reasonable in terms of duration, scope and territory. Non-solicitation covenants and non-disparagement undertakings are also customary. Non-competition covenants are common in business acquisitions but are unenforceable in the province of Ontario in the case of mere employees (ie, they are only enforceable for individuals in president or chief-level positions and for executives who are shareholders in relation to a sale of business). In an employment agreement, the upper limit for a top executive in terms of a non-compete is typically up to two years. However, most enforceable covenants of late have been in the 12-month range. A private equity purchaser will often seek to obtain a seller non- compete from exiting management shareholders (in each case in their capacity as shareholders) for the following reasons: • employment non-competes are no longer permit - ted in certain provinces; and • in provinces where employment non-competes are still permitted, the scope of protection under a shareholder non-compete is generally for a longer period than non-competes tied to employment. Since June 2023, the Competition Act has included a criminal provision prohibiting unaffiliated employ - ers from agreeing “to not solicit or hire each other’s employees”. As with the general cartel provisions, this new provision includes an ancillary restraints defence.
According to recent guidance issued by the Bureau, this provision does not require that the unaffiliated employers be competitors or potential competitors, which is unlike the framework that applies to the gen - eral conspiracy provisions in the Competition Act. This guidance also makes it clear that the new provision applies only to agreements to not solicit or hire “each other’s” employees, with the result that “one-way” restraints (ie, restraints that only apply to one employ - er) are not subject to the new provision. However, when there are separate agreements between two or more unaffiliated employers that result in reciprocating promises to not poach each other’s employees, then the Bureau may take enforcement action. Accordingly, non-solicit clauses or other employee- related provisions in transaction agreements should have regard to this new no-poaching prohibition. In particular, provisions that go beyond what may be typical in duration and scope should be considered closely to ensure they are reasonably necessary to achieve the objective of the broader transaction agreement. 8.5 Minority Protection for Manager Shareholders Management shareholders do not typically benefit from robust minority protection, though they will typi - cally have some limited protection under corporate statutes through majority and supermajority share - holder approval requirements as well as remedies in the face of oppressive conduct against the corpora - tion. Anti-dilution protection (pre-emptive rights) may or may not be accorded to all shareholders on a pro-rata basis, although this is the most likely to be accom - modated by private equity partners. It is rare for a minority management position to have veto rights, which are typically in favour of the private equity investor and any other institutional investors holding material positions. If a founding member of management continues to hold a substantial percent - age of equity, certain veto rights might be granted, but such rights are highly dependent on the circum - stances.
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