Succession Planning: 0930032 B.C. Ltd. v. 3 Oaks Dairy Farms Ltd.

For those who pass their business on to the next generation, particularly to family, it is undoubtedly the hope that the successors will work together to ensure that the business continues to thrive for many years to come. It’s hardly anyone’s plan to see their children in court against one another.

However, such situations regrettably do happen. Recently, the Court of Appeal affirmed the decision of the Supreme Court of Canada in the matter of 0930032 B.C. Ltd. v. 3 Oaks Dairy Farms Ltd., and the Supreme Court’s interpretation of a promissory note in respect of a shareholder loan.

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Changes to Federal Privacy Laws and the Impact on Business Transactions

On a recent transaction where a client was purchasing an Ontario company we encountered some issues in conducting our due diligence.  On this deal, the vendor refused to disclose any personal information of any contractors, employees, customers or other relevant individuals related to their business to us or our client due to confidentiality concerns.  A timely amendment to the Personal Information Protection and Electronic Act (“PIPEDA”), however, enabled us to get past that hurdle.

What’s the issue? 

In BC, we rely on the Personal Information Protection Act (British Columbia) to disclose and receive personal information during the due diligence stage of a business transaction.  This act permits the disclosure of personal information to potential purchasers evaluating a company without obtaining consent.  Various other provinces however, including Ontario, do not have similar legislation (other than legislation directed at health information) and are instead subject to PIPEDA.  Prior to the aforementioned amendment, there were no exemptions similar to that in the BC Act and PIPEDA required a vendor to obtain an individual’s consent prior to disclosing their personal information to a potential purchaser.

What’s changed? 

In June of this year various amendments to PIPEDA came into force, including an exemption for obtaining consent to disclose personal information in the context of a business transaction.  In particular, if parties are involved in a prospective purchase and sale of an organization or its assets, merger or amalgamation of two or more organizations, financing to an organization, or charging, leasing or licensing an organization’s assets (each defined as a “Business Transaction”), such parties can use and disclose personal information without obtaining any individual’s consent if certain conditions are met.  One exception to this exception is where the primary purpose of the Business Transaction is the acquisition or disposition of the personal information itself.

How does it work?

In order to avail oneself of the exception to obtaining consent to use and disclose personal information under PIPEDA the following conditions must be met:

  1. the party disclosing, and the party receiving the personal information must enter into an agreement that requires the receiving party to only use the personal information for purposes related to the proposed Business Transaction, keep such personal information confidential and if the proposed Business Transaction does not proceed, to return or destroy such disclosed personal information;
  2. the personal information disclosed must be necessary both to determine whether to proceed with proposed Business Transaction and, if proceeding, to complete it; and
  3. with respect to the use and disclosure of personal information after the proposed Business Transaction completes:
    • both parties to such Business Transaction must enter into an agreement that requires both of them to only use and disclose personal information for the purposes for which it was collected or permitted to be used prior to the completion of the such Business Transaction, keep such personal information confidential and give effect to any withdraw of consent from an individual done in accordance with PIPEDA;
    • the personal information must be necessary to carry on the business that was the object of the proposed Business Transaction; and
    • one of the parties must notify each individual whose personal information was disclosed that the proposed Business Transaction completed and that their personal information was disclosed.

What does this mean?

For those of you familiar with the due diligence process with respect to the disclosure of personal information in BC, such process is now similar across the country.  For anyone involved in the acquisition, sale, lease or financing of a business, it is now easier to obtain, use and disclose personal information to evaluate and complete such transaction.

Buyer Beware: Employee Liabilities from a Business Purchase

A purchaser of a new business often keeps on existing employees who have the knowledge to help the buyer operate the business efficiently.  Purchasers are happy to pay and award these employees for their services since the purchase of the business; however, buyers often fail to realize that their obligations to employees may extend to periods prior to the acquisition.  This, unfortunately, can lead to headaches and financial liability, especially in cases where employees have been with the business for many years.  As a purchaser, you should be aware of Section 97 of the Employment Standards Act (the “ESA”) and its effects on the purchase transaction.   In particular, Section 97 of the ESA provides that:

[i]f all or part of a business or a substantial part of the entire assets of a business is disposed of, the employment of an employee of the business is deemed, for the purposes of this Act, to be continuous and uninterrupted by the disposition.

So, what exactly does continuous mean?  An employee who was working for the vendor at the time of acquisition will be deemed to be continuously employed and the buyer will assume the liabilities associated with that employee.  In contrast, if the employee is terminated by the vendor just prior to the closing date of the acquisition, then the employee will not be continuously employed and the vendor will assume the liabilities associated with that employee.

What liabilities are we talking about?  A prospective purchaser of a business should be aware of the consequences of Section 97 of the ESA listed below, which are not exhaustive.  Of course, if the employees of the business are terminated prior to the purchaser acquiring the business, the consequences do not materialize.

  1. Wages. The purchaser is responsible for all outstanding wages owed to an employee.
  2. Statutory Holidays. Employees are entitled to statutory holidays based on employment with both the vendor and the purchaser.
  3. Vacation Pay. Employees are entitled to vacation time and vacation pay as of their employment start date when the business was owned by the vendor. The purchaser assumes the liability for any accrued vacation pay owing to an employee if such pay has not been paid by the vendor.
  4. Benefit Plans. The benefit plans become a condition of employment with the purchaser and must be continued as a condition of employment.
  5. Employees on Leave. Employees on leave, whether paid or unpaid, are still considered employees of the business.
  6. Purchased Assets Subject to Lien. If any wages are owing to employees, the purchaser buys the assets with a lien attached to them.
  7. Severance and Notice.  The purchaser is responsible for ESA severance and notice obligations for employees to their original start date with the business and, in the absence of an enforceable employment agreement limiting severance and notice to the ESA minimums, for common law severance, which could be significant for long term employees.  Keep in mind that severance obligations only arise if an employee is terminated without cause.  Accordingly, a purchaser should factor in the cost of severance for any employees that it anticipates letting go of following the closing of the transaction.

The purchase and sale of a business is a complex process.  Purchasers should seek the help of qualified advisors who can help purchasers avoid surprises after they have taken over the business. Qualified advisors can assist in structuring the transaction so that the vendor is responsible for severance costs associated with the purchase of a business.

Differences between the Oppression Remedy and Derivative Actions

The Ontario Court of Appeal (the “Court”) recently provided much needed guidance on the distinction between the oppression remedy and derivative actions. While both claims can be used to address corporate misconduct, there are important differences between the oppression remedy and derivative actions which should determine the choice of remedy in a particular set of circumstances.

The oppression remedy allows shareholders (and other appropriate persons) to apply to court if a company’s affairs have been conducted in a way that is oppressive or unfairly prejudicial to one or more shareholders. The oppression remedy is an equitable remedy which gives the court broad discretion to remedy the oppressive conduct. For example, the court can direct or prohibit any act, regulate the conduct of the company’s affairs and appoint or remove directors, among other remedies. In contrast, a derivative action is a procedural step necessary to bring a legal proceeding in the name of a company. Unlike the oppression remedy, a derivative action is designed to remedy harm that is done to the company. There are several procedural requirements that must be met in order to bring a derivative action, such as the complainant having made reasonable efforts to cause the directors of the company to prosecute or defend the legal proceeding.

In Rea v. Wildeboer, the appellants asserted an oppression claim under the Ontario Business Corporations Act alleging misappropriation of funds from a TSX-listed company. The appellants were seeking to recover the funds on behalf of the company. The appellants argued that they were entitled to proceed under the oppression remedy because the distinction between the oppression remedy and derivative actions has been significantly weakened over time. However, the lower court disagreed and struck the claim. On appeal, the Court dismissed the appeal and clarified that the oppression remedy and the derivative action are two different remedies with separate rationales and statutory foundations. The oppression remedy is a personal remedy, whereas the derivative action is a corporate remedy.

Specifically, the Court accepted that the oppression remedy and the derivative action are not mutually exclusive where the factual circumstances give rise to both types of claims. In this case, however, the Court held that a claim must be brought by way of derivative action in the following circumstances:

  • the claim only seeks to recover for wrongs done to a public company;
  • the relief sought is only for the benefit of the company; and
  • there is no allegation that the complainant’s personal interests have been impacted in a way that is different from other stakeholders’ interests.

The Court noted that in most cases where an oppression claim has been allowed to proceed for wrongs done to a company, the wrongful acts directly impacted the complainant in a way that was different from the indirect impact on other complainants. Further, most of these cases involved small closely‑held companies, rather than large public companies. Going forward, where the factual circumstances may give rise to both a personal claim (oppression remedy) and a corporate claim (derivative action), the question of whether the claimant is entitled to proceed under the oppression remedy will have to be determined on a case by case basis.

If you have any questions about the decision, please contact us and we can discuss the implications of the case with you, or contact the author Andrew Charters.

Friends with Money: A Cautionary Tale

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An interesting case has recently been heard in the Court of Queen’s Bench of Alberta in respect of a regrettable instance of friends loaning money to their friend’s business.  The plaintiff, Wan Ru Zheng, was asked by her friend Ryan Wittenberg to invest in his new car business, Your New Car Calgary Inc. Mr Wittenberg offered the investment as either a partner, with 20% of the shares of the business, or as a loan. Ms Zheng invested $125,000 in two loans, and received promissory notes in return. To her credit, Ms. Zheng requested significant information about the business and its assets from Mr Wittenberg, both before and after her investment, and even travelled to Calgary to investigate the business – but part of her decision to invest was influenced by her personal relationship with Mr Wittenberg, and his ability to talk up his business acumen.

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Donations of Private Company Shares

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Last week, the federal government released its 2015 budget. The budget contains a number of proposals to amend the Income Tax Act, and also provides updates regarding previously announced tax measures. One of the proposed changes announced in the budget will be especially relevant to business owners who are considering a future sale of their business.

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Private Equity and Cautious Optimism

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Lexpert, which describes itself as “Canada’s leading source of news and information about the business of law”, recently published an interesting article on the current state of private equity in Canada. With commentary from a number of leading mergers and acquisitions lawyers across Canada, as well as the statistics from Allen & Overy LLP’s quarterly international M&A Index, the overall tone was one of cautious optimism.

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Changes to the Investment Canada Act

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Changes to the Investment Canada Act (the “ICA”) review thresholds for WTO investors are on the horizon.  Currently, acquisitions by WTO investors are subject to review where the asset value of the business acquired exceeds the monetary threshold of $369 million.  However, on April 24, 2015, the review thresholds will change to consider enterprise value with the potential for more investments by WTO investors being scrutinized under the ICA.

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The Standstill and Exclusivity Agreement

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When a business succession plan involves the sale of the business to a third party, the buyer is often concerned about staying out of a bidding war. Of course, the buyer wants to avoid a bidding war to ensure that the price is not bid up. Therefore, a buyer will often request the seller to enter into an exclusivity and standstill agreement, sometimes called a “no-shop” agreement. Clearly, if the seller is not subject to a standstill agreement, the buyer may find that there are other buyers in the wings and therefore there is more pressure to increase the price and close the deal quickly. This situation will favour the seller and the smart buyer will therefore ask the seller to sign a standstill agreement to ensure this does not happen. Continue reading