If you are contemplating a cross-border M&A transaction involving a target business in Canada, it is essential to have the expertise to guide you through the various legal and practical aspects of the process. While M&A transactions in Canada are very similar to those, for example, in the United States, there are significant differences to be aware of. The following summarizes some of the key points to consider. For more a more comprehensive discussion, please see BCF’s Guide to Mergers & Acquisitions in Canada, which provides an overview of both private and public M&A in Canada, with special attention to important considerations under the legal system in the Province of Quebec.
Canadian corporations have significant shareholder protections codified under the law, unlike the situation in some US and EU jurisdictions. Significantly, minority shareholders may exercise “dissent” rights if they object to certain major corporate changes. These corporate changes generally include the sale of all or substantially of all the corporation’s assets, an amalgamation or a so-called squeeze-out transaction. Under a squeeze-out transaction, a shareholder’s voting rights are effectively terminated without the shareholder’s consent and the corporation must acquire the shares of a dissenting shareholder at their fair value.
The merger review process under Canada’s anti-trust statute, the Competition Act, is very similar to the merger review process under the Hart-Scott-Rodino Antitrust Improvements Act in the United States. Canadian law establishes criteria for pre-merger notification, including thresholds based on the size of the parties and the size of the transaction. Where the criteria are met and the thresholds reached, the transaction may not close before the expiry of the applicable statutory waiting period unless the merger has been cleared by the authorities. Note that even transactions that do not need to be notified are subject to scrutiny if they “prevent or lessen” competition substantially, or are likely to do so.
Any acquisition of a Canadian business by a non-Canadian is subject to the Investment Canada Act. This legislation regulates foreign investment in Canadian businesses, and acquisitions of control (in fact or in law) are subject to review if they exceed the prescribed threshold. Special attention is required for the acquisition of a cultural business, a review of which is required if the target’s assets have a value of more than just CAN $5 million. The law also contains additional restrictions for acquisitions that raise concerns over national security.
Somewhat unusually, Quebec law regulates the language of business. Among others things, it requires the use of French (usually allowing English to be used in parallel) for employee communications, signage and business documents. It also imposes a “francization” requirement for any business with 50 or more employees.
Quebec employment laws also differ from many US jurisdictions. For example, the buyer of the assets of a business operating in Quebec is deemed to acquire all of the business’ employment contracts, along with the employees’ years of service, resulting in the buyer being responsible for accumulated severance obligations upon closing of the transaction. Canada courts are also generally very conservative in the enforcement of non-competition covenants. Canadian courts cannot “read down” such clauses. If they are overly broad, they are simply invalidated as a whole.
Provincial environmental laws are an important consideration when acquiring environmentally-sensitive businesses. There are numerous grounds on which directors can be held personally liable for environmental violations. Furthermore, in certain circumstances, activities cannot be carried on, changed or even halted without first preparing a submission to both the environmental authorities and the owner of the land.
Finally, Canadian law addresses a number of concerns applicable only to public M&A. These include public filing requirements with respect to the holdings of any person controlling 10% of the securities of a single class of a public company, procedural requirements for the acquisition of 20% or more of the outstanding securities of a public company in a single class, as well as disclosure requirements via press release of any material change in a public company (which includes a major acquisition or sale).
This summary highlights only a few of the issues relevant to Canadian M&A. BCF’s Guide to Mergers & Acquisitions in Canada goes into more detail and reviews other legal aspects to be considered. For comprehensive and practical advice on how to complete your M&A transaction, whether as buyer or seller, contact Richard Epstein, co-leader of BCF’s M&A practice, at [email protected] or 514-397-6700, or Adam Allouba, securities and regulatory lawyer at [email protected] or 514-397-6918.
