CANADA Law and Practice Contributed by: Grant McGlaughlin, Sean Stevens and Claire Gowdy, Fasken
10. Exits 10.1 Types of Exit
Similarly, whether or not a management team (either collectively or certain executives) has board appoint - ment rights depends on the proportionate control of the management stake. Where management is on the board, this is most commonly tied to the position of the CEO. The same is true of exit rights. It is rare to see man - agement have any right or control of the private equity exit. Shareholders’ agreements tend to be crafted to provide for a “drag” provision for all shareholders. A management shareholder would need to have a con - siderably large percentage of the company for a pri - vate equity investor to entertain the idea of giving this power to management. 9. Portfolio Company Oversight 9.1 Shareholder Control and Information Rights Private equity funds typically seek maximum control over their investment, in terms of board oversight and veto rights. The board is customarily controlled (majority-composed) by the lead private equity inves - tor. Veto rights requested can include a variety of items, including: • consents required as to any proposed corporate restructurings, acquisitions or divestitures;
Sales to foreign (mostly US) private equity firms have dominated recent exits in Canada. Private equity exits through M&A and secondary buyouts have been the most prevalent. While dual-track processes are sometimes con - sidered, private equity funds have been opting for faster exits with immediate liquidity, without the lee - way required to set up for a public offering. IPO exits remained stagnant in 2024 with no private equity- backed exits. Recapitalisations and continuation vehicles are options on the table in the current climate as private equity sellers’ traditional exit strategies are seeing lower valuations and challenging public market oppor - tunities. 10.2 Drag and Tag Rights Private equity funds will typically include sophisticated drag mechanisms in their shareholder agreements to ensure that they can force an exit on the shareholders of a portfolio company. In practice, these provisions rarely have to be enforced as private equity funds will rely instead on the co- operation and willingness of minority investors to par - ticipate in the sale. There is no typical drag thresh - old in Canadian jurisdictions, other than in the public company context (of 90% + tendering to a bid under a statutory squeeze-out or more than two-thirds but less than 90% tendering to a bid for a second stage squeeze-out). In the private company context, this is a contractually negotiated threshold. Tag rights are sometimes granted to minority share - holders (including management), especially in the case of change of control transactions. There is no typical tag threshold in Canada. However, institutional co-investors will be required to fully tag along with any sale by the private equity sponsors (subject to certain limited exceptions).
• the incurrence of additional debt; • the issuance of additional equity; • budget approvals; • changes to key management; and • a change to the head office location.
Information rights are also regularly provided to insti - tutional investors, including quarterly financial report - ing, management reports and forecasts, details on pending or threatened litigation, and any other data required for the fund’s tracking. 9.2 Shareholder Liability Courts in Canada will generally not pierce the corpo - rate veil, except in very unusual circumstances, such as the company being used to shield against illegal or fraudulent acts.
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