CANADA Trends and Developments Contributed by: Grant McGlaughlin, Sean Stevens and Claire Gowdy, Fasken
Plans of arrangement A plan of arrangement is the preferred transaction structure used to implement negotiated public merg - er and acquisition transactions in Canada. A plan of arrangement is a court-sanctioned process (similar to the UK scheme of arrangement) used when both parties to a transaction are “friendly” and willing to enter into an agreement subject to negotiations and requisite approvals. When completing a transaction via a plan of arrangement, the whole process generally takes 50-60 days, subject to third-party and regulatory approvals. Takeover bids Conversely, few private equity deals are conducted by way of takeover bids (whether friendly or hostile) in Canada. Regulatory hurdles and complex compli - ance requirements for non-Canadian bidders, as well as delays and costs associated with possible second- step (squeeze-out) transactions, are major deterrents. A formal takeover bid is required under Canadian securities laws when an acquirer acquires 20% or more of the securities of a class of a target company. Key elements of a Canadian takeover bid include: (i) offering identical consideration or an identical choice of consideration to all holders of the same class of securities; (ii) bidders being prohibited from taking up securities under a bid unless the bid received tenders of more than 50% of the securities of the class subject to the bid, excluding those beneficially owned by the bidder; (iii) keeping the bid open for a period of 105 days subject to certain exceptions; and (iv) launching the bid without a condition for financing as part of the offer. Canadian hostile bids are not commonly used by pri - vate equity firms. Share deals Unless there is a significant known liability that needs to be carved out by structuring the deal as an asset sale, share purchase transactions are the most com - mon form of private equity structure in Canada given the tax advantages to the seller (capital gains treat - ment) and the reduced legal complexity. The terms of the purchase agreement can vary significantly depending on the private equity player backing the
purchaser and the strategic importance of the acqui - sition 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-friendly provisions (for example, shorter duration and smaller amount of indemnification holdback, acceptance of more pervasive 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 is more prevalent. Representation and warranties insurance and indemnification Most of the mid-market private M&A and the great majority of the large private M&A involving private equity investors will involve representations and war - ranties insurance. When first introduced, indemnifica - tion provisions in purchase agreements with represen - tations and warranties insurance policies provided a “first recourse” against the sellers (often for a value not exceeding 0.5% of the enterprise value after hav - ing applied a deductible (often in the same amount)) before accessing the policy. As a result, sellers had some “skin in the game” before the policy would kick in. These limitations did not typically apply to funda - mental or tax representations or to fraud. Private equity buyers are increasingly relying 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 have been diminishing in recent years. In fact, we have recently seen a growing trend, particularly in competitive situations, of purchase agreements with public company-style representations and warranties packages with zero recourse after closing; however, this trend began to slow down in 2023 and as a result of more uncertain market conditions. In contrast, transactions with zero post-closing recourse are not typical for strategic corporate buyers in Canada.
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