State snapshot

Trends and climate

What is the current state of the M&A market in your jurisdiction?

Canada has a healthy M&A market.

In 2017 it had the highest number of M&A deals in the past five years – with 2,274 deals carried out, compared to 1,956 in 2016. Nonetheless, the number of so-called ‘mega deals’, or deals with a value exceeding US$5 billion, did not increase in 2017.

According to PwC’s 21st Annual Global CEO Survey released in 2018, 44% of Canadian CEOs are planning to engage in M&A activity in the next year in order to drive corporate growth and profitability.

Have any significant economic or political developments affected the M&A market in your jurisdiction over the past 12 months?

Canadian M&A activity has been negatively affected over the past 12 months due to uncertainty stemming from Canadian trade relations with the United States and a lack of agreement over the North American Free Trade Agreement. Despite 2017 Canadian M&A activity reaching the highest point of activity in the past five years, in the first half of 2018, deal volume declined by 2.3% to US$130.3 billion, compared to US$133.3 billion at the same time the previous year. Due to this uncertainty, Canada is expected to witness a decline in inbound M&A activity in 2018.

Are any sectors experiencing significant M&A activity?

In 2017 the most active Canadian industries were:

  • energy (26% of total deal volume);
  • finance (19% of total deal volume); and
  • consumer sectors (15% of total deal volume).

Are there any proposals for legal reform in your jurisdiction?

In 2016 the Yukon Court of Appeal case InterOil Corporation v Mulacek launched a movement for tighter regulatory instruments on the flexibility of financial advisers and fairness opinions in M&A activity.

Fairness opinions are provided by an investment bank, financial adviser or a third party to assess the reasonableness and fairness of the purchase price in a merger or acquisition. The opinion is based on an independent valuation of the company conducted by the writers of the opinion. By the nature of the transaction, the following issues may arise:

  • Conflicts of interest – a fee is generally issued to the party for providing the opinion. It can be assumed that the fee is payable only if the transaction occurs, potentially nullifying the impartial and ethical aspects of the opinion.
  • Shareholder access – it is debatable whether shareholders should be presented with the financial analysis used to create the opinion. This information may cause the shareholders to reconsider the transaction and to question management’s judgement.

Legal framework


What legislation governs M&A in your jurisdiction?

The legislations governing M&A in Canada are:

  • the Canada Business Corporations Act (or similar provincial statutes);
  • the Investment Canada Act;
  • the Competition Act; and
  • the Ontario Securities Act.


How is the M&A market regulated?

The Canadian M&A market is based on a free-market principle with minimal regulatory interference.

Are there specific rules for particular sectors?

When a Canadian business is acquired, certain industries – including telecoms, broadcasting, transportation and financial services (eg, banking and insurance) – are subject to additional, industry-specific rules.

Types of acquisition

What are the different ways to acquire a company in your jurisdiction?

A company can be acquired through the following means:

  • Asset purchase – the purchaser pays a negotiated price for all or specific assets of a company without acquiring the company itself.
  • Share purchase – the purchaser buys all or most of the outstanding shares of the target company.
  • Amalgamation – a transaction by which two or more corporations agree to create another corporation and to merge the first two into a new corporation. Under the Canada Business Corporations Act and the Ontario Business Corporations Act, only corporations may amalgamate.
  • Arrangement – arrangements re-arrange the affairs of a solvent corporation by way of application to the court. This requires both shareholder and court approval. The benefits of an arrangement include:
    • one transaction leads to 100% ownership – this has made arrangements the so-called ‘flavour of the decade’; and
    • the corporation must be solvent and must pass Section 192(2)’s:
      • solvency test, where it is unable to pay its liabilities; or
      • capital impairment test, where the realisable value of the corporation’s assets are less than the aggregate of liabilities and stated capital of all classes.
  • Continuance – federal corporations may request continuance into a jurisdiction that allows such continuance and complies with Section 188(9) of the Canada Business Corporations Act (eg, Ontario, Manitoba, Alberta, Saskatchewan, British Columbia and Quebec).


Due diligence requirements

What due diligence is necessary for buyers?

Due diligence ensures that the purchaser is aware of all components (positive and negative) that exist within the target business. Due diligence is required of all aspects, including legal and financial aspects, and prospective assets and future business plans must be reviewed. Legal due diligence, including in regard to technology, intellectual property, physical plant equipment and real estate, is conducted by the purchaser in order to review outstanding contracts, corporate documents, financial statements and financial matters, public records and property, and to ensure both the operations of the target company and the impact that the acquisition may have.

The degree of due diligence required depends on:

  • the size and complexity of the transaction;
  • the nature of the target’s business and its regulatory environment;
  • the significance of the transaction for the purchaser;
  • the degree of indemnification available from the vendor;
  • the purchaser’s knowledge and expertise; and
  • the resources and time available.


What information is available to buyers?

If a public company is the target, it must comply with ongoing disclosure requirements and reporting obligations under the Securities Act. All filings and documents relating to any public company can be found at

There are four types of disclosure requirement:

  • Regular reporting requirements – these include quarterly and annual financials. The documents must be disclosed at predetermined intervals and include audited financial statements and information circulars.
  • Timely requirements – these reveal irregular or unpredictable changes in the affairs of the company, including any material change to the company and press releases.
  • Early warning requirements – early warning disclosure prevents a purchaser from slowly acquiring enough shares in a target company and taking it over without warning. The company must disclose ownership levels of 10%, as well as any additional 2% beyond this. A separate set of rules applies when there is a formal takeover bid in place; for example, the company must disclose at 5% instead of 10% and issue a press release.
  • Insider reporting requirements – ‘insiders’ include directors, senior officers and individuals with beneficial ownership, control or direction over 10% of the voting rights. Insiders must disclose any change in ownership and file reports within the prescribed period.

What information can and cannot be disclosed when dealing with a public company?

Unlike private companies, public companies cannot disclose a register of all their shareholders.


How is stakebuilding regulated?

Disclosure must be made when a person acquires:

  • 10% or more of a reporting issuer’s voting or equity securities, where the securities are not subject to an outstanding bid; or
  • 5% or more of a reporting issuer’s voting or equity securities, where the securities are subject to an outstanding bid.

Bidders must promptly issue and file a press release, as well as file an early warning report on the system for electronic document analysis and retrieval within two business days of acquisition.

A bidder must issue a further press release and publicly file an additional early warning report when:

  • it acquires beneficial ownership of, or the power to exercise control or direction over, an additional 2% of outstanding shares; or
  • there is a change in any material fact contained in a previously filed early warning report.


Preliminary agreements

What preliminary agreements are commonly drafted?

The following documents are typically entered into early in the negotiations of a private M&A transaction:

  • Term sheet or letter of intent – this document is executed by both the vendor and the purchaser. The term sheet will typically provide that it is not legally binding, except with regard to:
    • confidentiality;
    • access to information;
    • transaction expenses; and
    • exclusivity.
  • Non-disclosure agreement (NDA) – this agreement prevents the purchaser from disclosing the existence of the negotiations, as well as from disclosing or using the information provided by the vendor for any purpose other than evaluating the transaction.
  • Exclusivity agreement – purchasers may require an exclusivity agreement before expending significant resources to conduct due diligence investigations and negotiate definitive documentation in order to ensure that they are not competing with other prospective purchasers. Exclusivity may be granted in a term sheet or an NDA.

Principal documentation

What documents are required?

The purchase and sale of a Canadian business’s shares or assets usually involves a number of documents, including:

  • an NDA;
  • a letter of intent; and
  • a definitive purchase and sale agreement (PSA) with disclosure schedules.

Depending on the transaction, additional documentation may include:

  • a non-competition and non-solicitation agreement;
  • an escrow agreement;
  • executive employment agreements;
  • transition service agreements;
  • separate transfer conveyances of specific assets; and
  • third-party consent of regulatory approvals.

Which side normally prepares the first drafts?

Typically, the purchaser will prepare the first draft. If the purchaser has a target in mind, it will prepare a first draft (offer) and present it to the target. Conversely, if a business is looking to sell and engage in a sale or auction process, the vendor may prepare the first draft and present it to potential purchasers.

What are the substantive clauses that comprise an acquisition agreement?

Canadian PSAs typically include:

  • provisions dealing with the purchase, including the purchase price and/or other considerations, payment terms and adjustments;
  • holdback or escrow provisions;
  • comprehensive representations and warranties of the vendor, as well as provisions dealing with the survival of representations and warranties post-closing;
  • pre-closing covenants;
  • conditions of closing in favour of both the purchaser and the vendor;
  • specific indemnity provisions; and
  • general boilerplate provisions, including choice of law and venue.

What provisions are made for deal protection?

The following provisions are made for deal protection:

  • No shop clause – a no shop clause is negotiated and included in an agreement to prevent the board of directors soliciting, discussing or encouraging competing offers or bids from other potential purchasers. The clause often includes a provision that permits the board to respond and accept a competing proposal that is financially superior.
  • Right to match – the purchaser of a target company is often given the opportunity to match or exceed any proposal that is considered superior.
  • Break fees – a break fee is typically paid to a party as compensation for a failed transaction. These generally range from 2% to 4% of the target equity value. Reciprocal break fees – pursuant to which a purchaser must pay a fee to the target if the transaction fails for specified reasons – have gained acceptance in Canada in certain situations (eg, where unusual regulatory issues exist or in sponsor-backed deals).

Closing documentation

What documents are normally executed at signing and closing?

Common closing documents that are prepared and executed include:

  • purchase agreements;
  • corporate resolutions;
  • employment or consulting agreements;
  • escrow agreements;
  • bring-down certificates;
  • third-party consents and releases (whether a consent is required depends on whether the transaction is structured as an asset or a share deal);
  • director and officer resignations; and
  • consideration receipts.

Are there formalities for the execution of documents by foreign companies?

There are no specific formalities applicable to the execution of documents by foreign companies. However, it is common for a legal opinion to be provided to foreign counsel in regard to the execution, delivery and enforceability of legal agreements.

Are digital signatures binding and enforceable?

All Canadian provinces and territories, with the exception of the northwest territories, have passed legislation to facilitate e-commerce and to recognise electronic signatures and documents. At the federal level, the Personal Information Protection and Electronic Documents Act provides for the use of electronic signatures. In certain circumstances, the act requires the use of a secure electronic signature.

Foreign law and ownership

Foreign law

Can agreements provide for a foreign governing law?

Canadian law generally espouses the principles of contractual autonomy and international comity (ie, respect for a foreign court’s jurisdiction and law). As a result, when multiple jurisdictions are involved in an M&A transaction, the contracting parties have an opportunity to identify the law by which an agreement should be interpreted. This can be achieved by incorporating a governing law or choice of law provision into the agreement.

Foreign ownership

What provisions and/or restrictions are there for foreign ownership?

Restrictions on share transfer

There are no general restrictions on the transfer of shares in a private company. However, under the applicable securities laws, a ‘private issuer’ is defined as an issuer that, among other things, has restrictions on the transfer of its securities in its constating documents or in a security holders’ agreement. The private issuer designation permits issuances and trades to be conducted on a prospectus-exempt basis. Private companies in Canada commonly have transfer restrictions, and transfers of shares in a private company typically require approval by the company’s board of directors.

Foreign ownership restrictions

In general, any acquisition by a non-Canadian of control of a business carried on in Canada is reviewable under the Investment Canada Act. The act applies only where there is an acquisition of control and gives the Canadian government the power to review transactions that exceed prescribed quantitative thresholds or that involve so-called ‘cultural’ businesses. The threshold for investors from World Trade Organisation countries is C$800 million (and will be increased to C$1 billion in 2019) based on the enterprise value of the Canadian business being acquired. Certain types of investor (eg, state-owned enterprises) can expect to experience a higher level of scrutiny in an Investment Canada Act review. The government will assess whether the transaction is of net benefit to Canada. Acquirers must often negotiate contractual commitments (eg, with regard to investments or maintenance of employment) with the federal government in order to satisfy the net benefit to Canada test. The government may also review any transaction that could affect national security.

Other restrictions

Certain sectors of the Canadian economy – including broadcasting, telecoms, financial services, transportation and other sectors – have industry-specific restrictions on foreign ownership. Many of these sectors have restrictions which impose Canadian ownership and control requirements, and which subject acquisitions by non-Canadians to regulatory review.

Valuation and consideration


How are companies valued?

The valuation of a company is not an exact science and will greatly differ depending on:

  • the industry of the company;
  • micro and macro-economic factors and assumptions;
  • available financial information; and
  • the individual metrics that a bank may value higher than others.

Although there are many different methods, the following metrics are widely considered the most popular:

  • Discounted cash flow (DCF) – a DCF is a popular and accurate method to conduct a valuation. A DCF evaluates a company's future cash flows to determine the projected return on investment (ROI). The future cash flows are adjusted and discounted using an accepted discount rate (generally the weighted average cost of capital of the firm) determined by the risk assessment and timeframe. A DCF is an intrinsic value approach which provides the most detail of the mentioned approaches and, due to its technical nature, should be conducted only by individuals with adequate proficiency.
  • Comparable analysis – this is a valuation method which compares the current value of the company to similar businesses in the industry by using trading multiples, such as price/earnings, enterprise value/earnings before interest tax depreciation amortisation and ROI.

Bankers will use multiple metrics to evaluate and compare companies in order to create an accurate evaluation of a company. In practice, a perfectly comparable company does not exist; therefore, the valuation will use many metrics and companies in a similar industry.

  • Precedent transactions – precedent transactions are a form of relative valuation which compares the company (or assets) to others which have recently been sold or acquired within the target industry. Transactions of this nature will generally include a premium (also called a ‘take-over premium’ or ‘acquisition premium’), which is the difference between the estimated real value of the company or its assets versus the actual price paid. There is no requirement for such a premium to exist; however, it generally occurs during a positive economic environment in the target industry to:
    • deter competition;
    • benefit from potential synergies; or
    • acquire a public entity.

In negative economic times, companies or their assets may be purchased at a discount.

Many other valuation methods exist; for example, the cost approach, which is used in corporate finance and evaluates the costs associated with rebuilding a business. This method ignores cash flow and simply holds that value is derived from the associated costs only.


What types of consideration can be offered?

In an M&A transaction, consideration can be offered in multiple ways. In standard practice, the most popular means of consideration include one or more of cash, stock and vendor financing (eg, deferred payments and promissory notes). Cash provided at closing is the simplest form of consideration and may be obtained through:

  • acquiring short or long-term debt;
  • mezzanine financing;
  • cash on hand; or
  • various other means.

Other types of consideration (eg, stock or equity) will generally be agreed on before the transaction and will depend on the individual interests of the parties.


General tips

What issues must be considered when preparing a company for sale?

There are no set guidelines or lists of issues to consider when it comes to preparing a company for sale. Instead, commentary exists which provides strategic initiatives to make a company more desirable for potential purchasers.

What tips would you give when negotiating a deal?

While purchasers and vendors often see themselves as seated at two opposite ends of the table, they share one critical goal: getting the deal done. Purchasers aim to buy companies at the lowest possible price and on the most favourable terms, while vendors look to realise the fruits of their labour by maximising price and favourable vendor terms. Therefore, skillful negotiation is an essential component of any deal process.

Negotiation tactics and strategies will vary depending on the circumstances of each transaction. While not an exhaustive list, the following negotiating tactics and techniques should be considered:

  • Look beyond the price – earn-out clauses, among other things, can enable a deal to go through where there is disagreement on the sale price.
  • Make concessions strategic – negotiators should create conditions where both parties will benefit in the long run. They should find creative ways to satisfy the primary objectives of both parties.
  • Make the first offer – this can be beneficial in setting a ballpark figure or anchor point.
  • Research – companies should conduct thorough research to:
    • ensure that it has legal rights to all of its products;
    • check outstanding liens; and
    • establish any litigation or legislation that could affect acquired assets.

Due diligence is the most crucial underlying component of making a deal.

Hostile takeovers

Are hostile takeovers permitted and what are the possible strategies for the target?

A hostile takeover is a form of acquisition which goes directly through the company’s shareholders. The purchaser will acquire a controlling interest in the target company through the public markets without the consent or cooperation of the target company or its board of directors. Hostile bids can occur through:

  • a toehold acquisition;
  • a tender offer; or
  • a proxy fight.

A target company has multiple strategies to counter a hostile takeover bid. First, management should convince shareholders that the current ownership can create greater value than the bidder and that they should not sell their shares.

Alternatively, target companies may use hostile defensive tactics themselves. For example, a target company may issue its shares into friendly hands or buy shares of itself at a higher price than the acquirer has offered.

Takeover bid rules

Canadian securities regulators have traditionally understood that unrestricted auctions produce the most desirable results in change-of-control contests. Similarly, securities regulators frown on tactics that are likely to deny or severely limit the ability of security holders to decide whether to accept an offer. Certain amendments to the rules governing takeover bids in Canada came into effect in 2016, harmonising the takeover bid regime across all jurisdictions. These amendments require that all bids:

  • allow for shareholder collective action — bids are subject to a minimum 50% tender condition and must be extended for 10 days after the minimum tender condition has been met; and
  • allow target boards time to react — bids must remain open for at least 105 days (an increase from 35 days), unless the target board waives that minimum in favour of a shorter period (no less than 35 days).

Poison pills

As a result of the amendments and given that Canadian securities regulators generally will not allow a security holders’ rights plan (commonly known as a ‘poison pill’) to permanently block a bid, it is expected that rights plans will not be permitted to remain in effect after the 105-day formal bid window absent unusual circumstances. Rights plans will continue to play a role in protecting target issuers against so-called ‘creeping bids’, which may be made by way of private agreement or other exemptions to the takeover bid rules. Given that hostile takeover bids previously took 60 to 75 days to complete, the increase to a minimum of 105 days is a significant change that will provide the target board additional time to identify and explore other value-maximising alternatives.

Staggered boards

A staggered board occurs when the directors are grouped into classes serving different lengths of term. While there is no prohibition against staggered boards in Canada, corporate statutes permit the removal of directors at any time upon a majority vote of shareholders. Accordingly, staggered boards are of limited utility.

Warranties and indemnities

Scope of warranties

What do warranties and indemnities typically cover and how should they be negotiated?

Acquisition agreements typically include:

  • corporate matters, such as:
    • due incorporation, organisation and qualification to do business;
    • corporate authority to enter into the transaction;
    • confirmation that entering into the transaction would not conflict with:
      • articles;
      • bylaws;
      • applicable laws; or
      • material contract;
    • confirmation that the necessary corporate authorisation and consent have been obtained; and
    • confirmation that the acquisition agreement has been duly executed and delivered as a binding obligation;
  • general matters relating to the business, such as:
    • confirmation that the business has been carried on in the ordinary course since a benchmark date;
    • confirmation that there has been no material adverse change in the business since the benchmark date – usually with a list of specified activities (eg, not having entered into material contracts);
    • compliance with the law; and
    • the authorisation and consent required;
  • matters relating to assets, such as:
    • sufficiency of the assets to enable the purchaser to carry on business in the ordinary course following closing;
    • title to the purchased assets;
    • the condition of tangible assets;
    • separate provisions dealing with particular types of property, including:
      • owned real estate;
      • leased real property;
      • contracts;
      • accounts receivable;
      • inventory;
      • subsidiaries; and
      • other equity investments;
    • warranties on assets or revenues used to determine thresholds under the Competition Act and the Investment Canada Act; and
    • warranties on registration under the Excise Tax Act and for goods and services tax or harmonised sales tax purposes;
  • financial matters, such as;
    • confirmation of the accuracy and completeness of books and records;
    • confirmation that the financial statements fairly present the financial condition of the company;
    • confirmation that adequate financial controls are in place; and
    • confirmation of no liabilities, except as disclosed in:
      • financial statements;
      • the purchase agreement; or
      • the ordinary course; and
  • particular matters relating to the business, such as:
    • environmental matters;
    • employees;
    • employee benefit plans and pension plans;
    • insurance;
    • intellectual property;
    • outstanding litigation and proceedings;
    • customers and suppliers;
    • taxes; and
    • compliance with privacy legislation.

Limitations and remedies

Are there limitations on warranties?


What are the remedies for a breach of warranty?

If a warranty is breached, the remedy for the aggrieved party is typically an indemnification claim. However, indemnification is a useful remedy only where the indemnifying party has the financial capacity to satisfy the claim. To address the risk that a party may not be able to satisfy the claim, parties may consider alternatives, such as:

  • holdbacks;
  • escrows; and
  • insurance.

Representations and warranties insurance can be used to supplement or even replace indemnity obligations and can usually be tailored to correspond to the transaction at hand.

Are there time limits or restrictions for bringing claims under warranties?

Under Ontario law, there is a default limitation period of two years from discovery or discoverability on most types of action, which may be varied by agreement in most cases.

Tax and fees

Considerations and rates

What are the tax considerations (including any applicable rates)?

The shareholders disposing of their shares of the target corporation may realise taxable gains or losses on the sale to the purchaser. If certain conditions are met (generally including that the selling shareholder receives shares of the purchasing corporation as consideration for the sale), the shareholder may be able to defer the taxable gain to a later time when they dispose of the new shares.

An amalgamation of two corporations can give rise to two taxable dispositions:

  • by the predecessor corporation’s disposition of assets to the amalgamated corporation; and
  • by the amalgamated corporation’s disposition of shares of the predecessor corporation.

If certain conditions are met, gains or losses from the taxable dispositions may be deferred and the amalgamated corporation will acquire the assets from the predecessor corporation at cost.

The thin capitalisation rules may apply when a Canadian corporation pays interest on debt owing to a non-arm’s-length, non-resident shareholder. If the ratio of debt owing to the non-resident shareholder to equity (comprised of paid-up capital and retained earnings) exceeds 1.5:1, the portion of interest exceeding that ratio may not be deductible by the Canadian corporation.

Where there has been an acquisition of control of a Canadian target corporation with losses, the losses may be used by the acquirer corporation only if the corporations are amalgamated. For the loss to be deductible, the amalgamated corporation must carry on a business:

  • with a reasonable expectation of profit; and
  • that is the same as or similar to the business previously carried on by the target corporation.

Exemptions and mitigation

Are any tax exemptions or reliefs available?

For a selling shareholder to defer a capital gain on the disposition of shares of a target corporation, generally:

  • the seller must receive shares of the purchasing corporation in exchange for the old shares; and
  • the value of any non-share consideration may not exceed the cost of the old shares.

The new shares received may not have a paid-up capital greater than the paid-up capital of the old shares.

For an amalgamation of two corporations to occur on a tax-deferred basis, the following conditions must be met:

  • Each predecessor corporation must be a taxable Canadian corporation immediately before the merger.
  • All of the predecessor corporations’ property before the merger must become property of the amalgamated corporation.
  • All of the predecessor corporations’ liabilities before the merger must become liabilities of the amalgamated corporation.
  • All of the predecessor corporations’ shareholders before the merger must receive shares of the amalgamated corporation.

When these conditions are met, the tax basis of the properties of the predecessor corporations is generally carried over to the amalgamated corporation. An amalgamation will result in a deemed tax-year end for each predecessor corporation. Tax losses of a predecessor corporation may be used by the amalgamated corporation.

If the cost of the shares of a wholly owned subsidiary exceeds the tax cost of the subsidiary’s net assets on a vertical amalgamation, the parent company may be able to increase the cost of non-depreciable capital property acquired from the subsidiary up to the amount of that excess, provided that certain conditions are met.

What are the common methods used to mitigate tax liability?

An asset sale is generally completed for tax advantages. In an asset sale, tax authorities enable the parties to assign their own value to the assets, provided that these are reasonable (the values are listed in the asset purchase agreement). Where the transaction involves depreciable assets (eg, machinery or goodwill), the parties will typically assign greater value. However, where non-depreciable assets (eg, land) or less valuable inventory (eg, Beanie Babies) are involved, the parties will typically assign less value.

A share deal may have certain tax advantages where the target is sitting on tax losses. Here, the acquirer, if it carries on the same or similar business, may be able to access the losses of the target and then offset these losses against its own income (ie, a win-win scenario for both the purchaser and the target business). This may enable the parties to structure a deal where the acquirer obtains a more favourable purchase price and tax situation, which may not be achieved by way of an asset deal.

It may be beneficial to use a Canadian holding corporation to acquire a Canadian target corporation, rather than having a foreign corporation acquire the Canadian target directly when the purchase price for the target’s shares exceeds their paid-up capital. A foreign acquirer can return only an amount equal to the paid-up capital of the purchased shares on a tax-free basis from the target. The foreign acquirer would not be able to receive all of its cost basis tax-free if the paid-up capital is less than the acquisition price. Instead, the foreign parent can form a new Canadian holding company and capitalise it with shares. The Canadian holding company will acquire the shares of the Canadian target from the vendor. This way the foreign parent’s shares of the holding corporation will have full paid-up capital equal to the purchase price, out of which the foreign parent can extract as a tax-free return of capital.

Where a Canadian acquirer corporation borrows money to finance the acquisition of a target corporation and the acquirer and target corporation are subsequently amalgamated, the debt may become operating debt. Interest payments on the debt may be deductible to the amalgamated corporation.


What fees are likely to be involved?

Although there is no exhaustive list of potential fees to be incurred, an M&A transaction will incur fees including, but not limited to:

  • bankers’ fees;
  • transaction or advisers’ fees;
  • legal fees;
  • accounting or auditing fees; and
  • industry-specific appraisals.

Management and directors

Management buy-outs

What are the rules on management buy-outs?

To undertake certain fundamental changes (including Section 176 of the Canada Business Corporations Act (RSC 1985, c C-44) and Section 170 of the Ontario Business Corporations Act (RSO 1990, c B16)), a corporation may be required to obtain approval from holders of at least two-thirds of the shares represented in person or by proxy at a duly-called shareholders’ meeting.

Canadian provincial securities laws regulate takeover bids; namely, Part XX of the Ontario Securities Act (RSO 1990, c S5). In addition, under Rule 61-501, the Ontario Securities Commission imposes additional requirements on insider bids. In this respect, the commission holds that all security holders must be treated in a fair manner. As such, securities regulation:

  • generally mandates the equal treatment of shareholders;
  • requires additional disclosure regarding the background of and approval process undertaken by a target company, which is intended to focus the board of directors on their fiduciary duties;
  • requires minority shareholder approval in certain instances; and
  • in some cases, requires independent valuations.

Directors’ duties

What duties do directors have in relation to M&A?

Section 122 of the Canada Business Corporations Act states that directors and officers, in exercising their duties, must:

  • act honestly and in good faith with a view to the best interests of the corporation; and
  • exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.


Consultation and transfer

How are employees involved in the process?

Purchasers to the transaction inherit the same terms and conditions that the vendor possesses with its employees. Accordingly, the purchaser will be responsible for terminating any employee whose employment it does not wish to continue. Employees generally have a duty to mitigate any losses suffered as a result of such termination by seeking alternative employment. Employees who refuse offers of employment continue to be entitled to their statutory notice and severance entitlements under Sections 54-58, 61 and 64 of the Employment Standards Act.

What rules govern the transfer of employees to a buyer?

If the purchaser offers employment to employees of the business and the employees accept those offers, employment standards legislation in most provinces (including Ontario) will deem their employment not to have been terminated or severed. Section 9 of the Employment Standards Act states that on the sale of a business, employment is deemed not to be terminated for the purpose of:

  • statutory notice of termination;
  • severance;
  • vacation pay;
  • vacation time; and
  • various leaves, including pregnancy and parental leave.

However, Section 9(2) of the act creates an exception where a purchaser hires an employee of the vendor more than 13 weeks after the date of the sale or the last day of the employee’s employment with the vendor – whichever is earlier.


What are the rules in relation to company pension rights in the event of an acquisition?

Generally, if a member of the vendor’s registered pension plan commences employment with the purchaser and participates in the purchaser’s registered pension plan, then the individual continues to be entitled to all benefits accrued in the vendor’s plan up to the date of the sale. In addition, for the purposes of eligibility conditions, vesting and locking-in of benefits in the plan, all years of employment and membership in both the vendor’s and the purchaser’s plans will be taken into account. This deemed continuation of plan membership is relevant in cases where a member of the vendor’s plan could be eligible for enhanced early retirement benefits if they meet the age and service combination of 85. The member’s years of service with the purchaser would count towards that age and service threshold, and the member could be entitled to such enhanced early retirement benefits in the vendor’s plan by virtue of their employment with the purchaser.

Other relevant considerations


What legislation governs competition issues relating to M&A?

The Competition Act (RSC 1985, c C-34) governs competition issues relating to M&A.


Are any anti-bribery provisions in force?

Although not law, the United Nations Convention against Corruption is a multilateral treaty negotiated by member states of the United Nations and promoted by the United Nations Office on Drugs and Crime. 


What happens if the company being bought is in receivership or bankrupt?

Distressed companies can be attractive acquisition targets, as their price often reflects the difficulties that the company faces. Most distressed M&A transactions are structured as asset sales rather than corporate mergers where companies are undergoing corporate debt restructurings. If all or substantially all of a company's assets are due to be sold, then shareholder approval is also generally required outside of a formal court-supervised proceeding.