Private M&A purchase and sale agreements in Canada follow a very familiar pattern and typically include what can be described as the ‘usual representations and warranties’. In sophisticated purchase agreements the usual representations and warranties are comprehensive and cover everything from corporate, employment and environmental matters to financial, tax and intellectual property matters. While the usual representations and warranties cast a wide net, they are by no means a one-size-fits all solution for addressing risk. Each transaction is unique and requires that clients, their financial advisors and their legal advisors turn their mind to drafting representations and warranties that address the specific risks of the transaction. Continue reading
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.
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:
- 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;
- the personal information disclosed must be necessary both to determine whether to proceed with proposed Business Transaction and, if proceeding, to complete it; and
- 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.
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.
- Wages. The purchaser is responsible for all outstanding wages owed to an employee.
- Statutory Holidays. Employees are entitled to statutory holidays based on employment with both the vendor and the purchaser.
- 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.
- Benefit Plans. The benefit plans become a condition of employment with the purchaser and must be continued as a condition of employment.
- Employees on Leave. Employees on leave, whether paid or unpaid, are still considered employees of the business.
- Purchased Assets Subject to Lien. If any wages are owing to employees, the purchaser buys the assets with a lien attached to them.
- 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.
Are you thinking of selling your business or buying a business? As part of the pre-transaction due diligence process, one of the first items potential buyers and their advisors will want to review is the target company’s corporate minute books. This applies to both asset and share transactions, but is particularly the case when a potential buyer is going to buy the shares of the target company. In more cases than not, corporate minute books need to be updated prior to the actual closing to address outstanding matters, filings and deficiencies in the records. While this often results in more pre-closing costs than would have been the case had the minute books been properly maintained all along, there are more reasons than just avoiding the added costs for keeping proper minute books and corporate records. Here are a few considerations: Continue reading
For many private business owners with strong annual earnings the ultimate retirement plan or exit strategy is to sell their business to a strategic buyer or private equity firm for a high multiple of earnings. It is not unusual for such business owners to think that once they achieve attractive EBITDA numbers for three to five years running, they are ready to go to market and achieve premium pricing.
In reality, good financial metrics are table stakes in the M&A game. Sophisticated buyers conduct comprehensive due diligence on all value drivers to assess the merit of a transaction and determine price. Some of those value drivers include commercial and operational synergies, growth potential, intellectual property, human capital, risk management and legal profile.
On January 15, 2015, further provisions under Canada’s Anti-Spam Law, commonly known as “CASL”, came into effect. These provisions prohibit the installation of computer programs, or sending of electronic messages from a computer system where a computer program has been installed, without express consent. More information can be found on these new provisions in an article I wrote for our Technology and IP Group. With these provisions coming in to effect, it is an opportune time to remind ourselves of the impact of CASL on M&A transactions.