Legal Updates

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Friday, January 27, 2017

The American Bar Association (“ABA”) recently published its 2016 Canadian Private Target Mergers and Acquisitions (“M&A”) Deal Points Study (the “2016 Canadian Study”) for transactions signed in 2014 and 2015. Wildeboer Dellelce LLP Partner, Troy Pocaluyko, participated in the preparation of the 2016 Canadian Study which was the fourth of its kind published by the ABA, with previous ones published in 2014, 2012 and 2010. In addition to analyzing specific deal points from 101 publiclyavailable agreements, the 2016 Canadian Study also includes data from the 2014 Canadian Private Target M&A Deal Points Study (the “2014 Canadian Study”) and the 2015 U.S. Private Target M&A Deal Points Study (the “2015 U.S. Study”) for comparison purposes. A review of the data indicates that while the M&A practices in Canada and the U.S. share many similarities, there remain significant differences between the two markets. The following is a summary of certain key findings.

Overview of Sample Used in the 2016 Canadian Study 

  • Only deals with a transaction value of more than $5 million Canadian dollars were examined for purposes of the 2016 Canadian Study. The 101 deals examined in the 2016 Canadian Study is almost double that of the 2014 Canadian Study (60), and is comparable to that of the 2015 U.S. Study (117).
  • Of the transactions studied, a significant majority (71%) were structured as a purchase of shares, 55% involved only cash consideration and 39% involved a mix of cash and share consideration. In only 6% of the transactions was the purchase price satisfied solely through the issuance of shares of the acquiror or one of its affiliates.
  • Compared to results from the 2015 U.S. Study, Canadian transactions tend to be smaller in transaction value, with an average size of $19.4 million. Further, more than 40% of the Canadian transactions were valued at less than $50 million, whereas only 2% of the U.S. transactions were valued at less than $50 million.
  • Not surprisingly, in the 2016 Canadian Study, the chemicals and basic natural resources (17%) and oil and gas (16%) sectors were the source of the most target businesses. In contrast, in the 2015 U.S. Study, the majority of the targets were from the technology, healthcare and financial services sectors.
  • A majority of the sellers (71%) and buyers (87%) in the Canadian transactions were corporate in nature. “Corporate” was defined to refer to entities where the founders appeared not to dominate management or ownership. Private equity, as a category of buyer and seller, was reported for the first time in the 2016 Canadian Study, representing only 8% of sellers and 10% of buyers.

Financial Provisions

  • Post-Closing Purchase Price Adjustment: While a majority (72%) of the transaction agreements included some type of post-closing purchase price adjustment, such practice remains less prevalent in Canada than the U.S., where 86% of the agreements provided for a post-closing purchase price adjustment. Similar to the U.S. data, the most popular adjustment metric was working capital (both 83%), followed in order by debt, cash and earnings.[1] Further, where the post-closing purchase price adjustments are based on working capital, there is a trend towards specifically excluding tax-related items from the calculation of working capital (increased from 10% to 25%).
  • Earn-out Provisions: Earn-out provisions entitling the seller to additional payments in the future if certain performance targets are met were less prevalent in the 2016 Canadian Study (17%) compared to the 2014 Canadian Study (25%).  Of those that had an earn-out, more than half used revenue or earnings as the future performance metric (63%) and had an earn-out period of 36 months or less (63%).

Pervasive Qualifiers

  • Material Adverse Effect: Material adverse effect (“MAE”) refers generally to the occurrence of certain events or emergence of conditions that has, or could reasonably be expected to have, a material and adverse effect on the business, assets, liabilities, capitalization and results of the operation or, in certain instances, the prospects of the target. MAE is often used to qualify specific representations, warranties, covenants and closing conditions in order to exclude events or changes that have or are likely to have minor effects on the current or future condition of the target business. While all of the Canadian transactions studied included such a concept, they differed as to whether MAE was defined, whether it was forward-looking and to what provisions it applied. Very few of the Canadian deals defined MAE by reference to a specific dollar threshold (3%) or to include any events that may materially and adversely affect the buyer’s ability to operate the target’s business after closing (2%). Compared to the results from the 2015 U.S. Study, Canadian acquisition agreements were less likely to include: (i) a definition of MAE (87% compared to 99% in the U.S. sample); (ii) a forward-looking standard in the definition of MAE (83% compared to 91% in the U.S. sample); and (iii) specific carve-outs in the definition of MAE (77% compared to 91% in the U.S. sample).
  • Knowledge: The use of a “knowledge” qualifier for certain representations, warranties and covenants is a common practice in both Canadian (98%) and U.S. (97%) deals. Similarly, in most of the transactions in both countries, knowledge was defined to include constructive knowledge (84% in Canada and 73% in the U.S.) based on reasonable inquiry (81% in both Canada and the U.S.) and imputed to certain identified persons (94% in Canada and 97% in the U.S.).

Target’s Representations, Warranties and Covenants

  • Fair Presentation and Undisclosed Liabilities: The Canadian practice with regard to the target’s representations, warranties and covenants is similar to that in the U.S.  The vast majority of transactions in each country required that the target’s financial statements be “fairly presented” (96% in Canada and 99% in the U.S.) but the fair presentation representation was not GAAP qualified in most cases (81% in Canada and 83% in the U.S.). Similarly, most deals in both countries included representations regarding undisclosed liabilities of the target (85% in Canada and 93% in the U.S.), of which the large majority were not qualified by knowledge (93% in Canada and 97% in the U.S.). However, the countries diverge on the type of undisclosed liabilities represented. Whereas Canadian deals largely favored the buyer by requiring representations with respect to all undisclosed liabilities (81% in 2016), an increasing proportion of the U.S. deals limited undisclosed liabilities to GAAP liabilities (41% in 2016 and 22% in 2014).
  • “No Shop” and “No Talk” Provisions: Canadian transactions were also less likely to include a “no shop” or “no talk” provision (62% in Canada and 90% in the U.S.). A “no shop” provision prohibits the seller from soliciting or “shopping around” for an offer or proposal from other buyers. Similarly, a “no talk” provision bars both sides of the transaction from disclosing any information about the transaction to non-parties.
  • Update and Notification: With respect to target covenants, it was less common for Canadian targets to be required to update their disclosure schedules before closing (17% in Canada and 42% in the U.S.). However, a year-over-year comparison of the Canadian studies shows a trend in Canadian deals to require the target to notify the buyer of any breaches of representations, warranties and covenants when the closing does not occur concurrently with the execution of the purchase agreement (71% in 2016 compared to 53% in 2014).

Conditions to Closing

  • Accuracy at Closing: While all of the transactions studied in the 2016 Canadian Study and the 2015 U.S. Study required the target’s representations to be accurate at closing, it was more common for U.S. purchasers to require the target’s representations to be accurate at both signing and closing (32% in Canada and 63% in the U.S.). With respect to the degree of accuracy required, a majority of Canadian transactions required the target’s representations to be accurate in all material respects at both signing and closing (66% and 62%, respectively).
  • Pending Legal Proceedings: Most Canadian transactions required that, as a condition to closing, there be no pending or threatened legal proceedings challenging the transaction (96%).
  • Legal Opinion:  There has been a continued decrease in the proportion of Canadian transactions that contain a requirement for the delivery of non-tax legal opinions from the target’s counsel (34% in 2016 compared to 40% in 2014 and 55% in 2012). However, this practice is still more prevalent in Canada than in the U.S., where only 11% of the deals had such a requirement.

Indemnification and Escrow

  • Survival Periods: Almost all Canadian transactions included provisions regarding survival periods (97%). Similar to the U.S. data (93%), most of the Canadian transactions (87%) had a survival period of 24 months or less and the most common was a period of 18 months (32% in Canada and 36% in the U.S.). It is also common for Canadian purchase agreements to contain certain carve-outs to the specified survival periods such as representations on fraud, taxes, due organization and due authority which are typically subject to longer survival periods.
  • Damages: In the vast majority of Canadian transactions, purchasers were not limited to recourse for “out of pocket” damages (98%).  Further, most agreements were silent on the ability to pursue claims for diminution in value (79%) but there seems to be a trend towards expressly excluding punitive damages (57% in 2016 compared to 42% in 2014) in Canada; however, that practice was still less common in Canada than in the U.S. (78%), which may be due to the fact that punitive damages are not as commonly awarded by Canadian courts as in the U.S.
  • Baskets: Baskets provisions are clauses that establish thresholds that must be exceeded before the seller is required to make an indemnification payment to the buyer. There are three types of baskets commonly used in purchase agreements.  In a “deductible” clause, only the amount above and beyond the amount of the threshold are payable to the buyer, whereas in a “first dollar” clause, the amount of all losses must be paid to the buyer once the threshold is reached. Parties can also agree to a hybrid of these two provisions, in which indemnification claims only become payable once the basket threshold is exceeded but only those losses above a specified threshold that is higher than zero but lower than the basket threshold are payable to the buyer. While the “first dollar” clause remained the most popular type used in Canadian transactions (45%), there has been a trend towards the “deductible” type (an increase from 36% to 41%). Further, the size of baskets as a percentage of the transaction value tend to be higher in Canada, where most of the baskets were valued at 0.5% or more (67%), than in the U.S., where the majority of baskets had values of 0.5% or less (52%). In fact, it is not uncommon for baskets to have a value of more than 2% of the transaction value in Canadian deals (14%), which may be partially due to the fact that transaction values in Canada tend to be smaller than in the U.S. Further, the prevalence of excluding certain representations and warranties from the baskets continues to increase, with the most prevalent ones being fraud, intentional misrepresentation and breach of the due organization, due authority and capitalization representations.
  • Indemnification Caps: Similar to the baskets concept, indemnification caps are clauses that establish a maximum amount payable pursuant to the indemnification provision of the transaction agreement. The majority of the Canadian transactions included indemnification caps that were less than or equal to the purchase price (80%). Again, indemnification caps as a percentage of transaction value continue to be higher in Canada, with an average of 44% of transaction value, than in the U.S. where over 80% of the caps were 15% or less. Similar to baskets, the higher relative caps in Canadian transactions are likely a result of the smaller deal sizes in Canada. It is also common for claims related to fraud, taxes, ownership of shares, due authority and due organization to be excluded from the indemnification caps clauses.
  • “Sandbagging”: “Sandbagging” refers to the ability of a buyer to make a claim for indemnification based on a breach of representation, warranty or covenant in the purchase agreement when it has knowledge of such breach prior to closing but nevertheless proceeds to close the transaction. While a modest majority of the Canadian transactions remained silent with respect to sandbagging (54%), there is a trend towards including an express “pro-sandbagging” provision (31% in 2016 and 15% in 2014), in which the buyer’s right to indemnification would not be limited even if it had knowledge of a breach prior to closing. This is comparable to the U.S. data, where 35% included a pro-sandbagging provision.
  • Escrow or Holdback: Less than half of the Canadian transactions (43%) contemplated an escrow or holdback of a portion of the purchase price as a means of ensuring sufficient funds were readily available to satisfy indemnification claims. Where an escrow or holdback was used, the mean amount placed in escrow or held back on closing was 8.3% of the transaction value, which was lower than results from previous studies (11% in 2014 and 13.8% in 2012). Further, the sizes of the escrow or holdback were comparable in Canadian and U.S. transactions, with over 90% of the transactions having an escrow or holdback of less than 15% of the transaction value in both countries.

Dispute Resolution

  • Alternative dispute resolution (“ADR”): ADR are ways to settle disputes resulting from the transaction agreement outside of the formal court system. Only 28% of the Canadian transactions included provisions regarding ADR, which is consistent with data from previous years’ studies (30% in 2014 and 34% in 2012). Where the parties agreed to use ADR, almost all of them included binding arbitration as at least a component of their dispute resolution process (96%) and a majority of them chose to be silent on the payment of arbitration expense or leaving it to be determined by the arbitrator (63%). Compared to the Canadian data, the U.S. transactions were less likely to include provisions on ADR (15%). When such provisions were included, parties in the U.S. prefer to specify how the expenses would be divided (100%), rather than leaving it to the arbitrator or in silence.


The results from the 2016 Canadian Study demonstrate a continued convergence of private target M&A practices between Canada and the U.S. While Canadian practices appear to be influenced by trends and customs in the U.S., there remain a number of areas of distinction.

The M&A practitioners at Wildeboer Dellelce LLP have significant experience in both domestic and cross-border M&A transactions, and would be pleased to assist in navigating the various issues and practices associated with them.

If you have any questions with respect to this update, please contact Troy Pocaluyko (, Charlie Malone (, Davia Wang ( or any other member of our Mergers and Acquisitions practice group.

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.

If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.

[1] Note that 34% of those that included post-closing adjustment used “other” as metrics. However, the study did not specify what this includes.