At a glance: M&A structures and regulation in Canada

Structure and process, legal regulation and consents

How are acquisitions and disposals of privately owned companies, businesses or assets structured in your jurisdiction? What might a typical transaction process involve and how long does it usually take?

Generally, a purchase and sale agreement is entered into to govern the acquisition or disposition of privately owned companies, businesses or assets. The sale of a business is commonly accomplished by way of a sale of shares or assets. Sellers often prefer share sales because of lower applicable tax rates on gains. Buyers often favour asset purchases because of the possibility of achieving tax benefits and excluding unwanted liabilities. Sellers of smaller ‘Canadian-controlled private corporations’ may also be able to utilise a (limited) lifetime capital gains exemption on a share sale in addition to the other benefits of a clean exit by way of a sale of shares and, as a result, typically prefer share transactions.

Companies may also be combined by way of an amalgamation pursuant to the relevant corporate statute. Amalgamations must be approved by a super-majority vote of shareholders (generally two-thirds of the shares in attendance at a meeting).

A typical transaction process would involve signing a confidentiality agreement, developing a term sheet, a due diligence review, negotiation of transaction documentation and a closing. Companies at times utilise auctions to solicit a broad range of potential buyers.

The length of time to complete a transaction will depend on the complexity of the business, the number of interested parties, any special arrangements among the sellers and other factors, but two to four months is common.

Which laws regulate private acquisitions and disposals in your jurisdiction? Must the acquisition of shares in a company, a business or assets be governed by local law?

Canada is a federal state with one federal, 10 provincial and three territorial governments. Each jurisdiction has its own laws governing acquisitions and dispositions of companies, businesses and assets. Most provinces in Canada have private legal systems based on English common law and legal precedents, while in Quebec matters of private law (ie, contract, family and property matters) continue to be governed by the Civil Code. Although there are important differences in law among these jurisdictions, particularly in Quebec, most corporate and business laws and practices across Canada share common features.

Businesses in Canada are most commonly formed as corporations under one of the business corporation statutes that exist in each province, territory and under federal law (eg, the Canada Business Corporations Act). The incorporating statute will govern the transfer of shares or assets. Banks, insurance companies and trust and loan companies are governed by specialised federal statutes.

A number of other statutes may be relevant, depending on the nature and location of the business. Federal and provincial governments each have their own power to legislate on certain subjects, and share jurisdiction over some subjects. The range of statutes and regulations that may need to be considered will often include laws on employment, privacy, tax, pensions, securities, competition, foreign investment and specific regulatory regimes governing a company’s business.

Other than local mandatory laws, there is no constraint on the law that may be chosen by the parties to govern the transaction, but parties often elect the governing law based on the location of the seller, company or buyer.

What legal title to shares in a company, a business or assets does a buyer acquire? Is this legal title prescribed by law or can the level of assurance be negotiated by a buyer? Does legal title to shares in a company, a business or assets transfer automatically by operation of law? Is there a difference between legal and beneficial title?

The buyer will acquire the same title that the seller had in the shares or assets and will commonly negotiate for certain representations and warranties regarding ownership, ability to transfer and absence of encumbrances.

Legal title to shares or assets transfers upon the exchange of consideration, subject to satisfying agreed terms and conditions, and upon the transfer being recorded in the company’s securities register. Share transfers may be subject to conditions or restrictions in the company’s constating documents or in a shareholders’ agreement. For most private companies, the board of directors must approve all share transfers.

A distinction is recognised between legal and beneficial title. A person holding legal title to shares will be listed in the company’s share register as the registered holder but may hold the shares on behalf of an unnamed beneficial holder. Federal companies, and some provincial companies, are required to maintain a register of individuals with significant control – including beneficial owners. Beneficial interests in property may be transferred distinct from the interests of the legal, or registered, holder. Beneficial title would transfer automatically by operation of law upon the exchange of consideration and subject to satisfying agreed terms and conditions.

Specifically in relation to the acquisition or disposal of shares in a company, where there are multiple sellers, must everyone agree to sell for the buyer to acquire all shares? If not, how can minority sellers that refuse to sell be squeezed out or dragged along by a buyer?

While it is often the practice, and is certainly preferred by buyers, that all sellers be party to one or a series of purchase agreements, it is possible to acquire all of the shares of a private company without agreement from all shareholders. Many private companies have shareholder agreements that provide significant shareholders with the ability to ‘drag’ non-consenting shareholders into a transaction.

In the absence of such an agreement, minority shareholders can also be squeezed out or dragged into a transaction by way of an amalgamation, plan of arrangement or similar shareholder vote-based transaction approved by a supermajority vote of the shareholders (typically two-thirds of the shares represented at a meeting).

Specifically in relation to the acquisition or disposal of a business, are there any assets or liabilities that cannot be excluded from the transaction by agreement between the parties? Are there any consents commonly required to be obtained or notifications to be made in order to effect the transfer of assets or liabilities in a business transfer?

Unlike in share transactions, a buyer of assets is generally free to choose which assets and liabilities will be transferred. Depending on the assets and liabilities being acquired, government and third-party consents may be required.

If the target’s operations are unionised, the buyer will be deemed to be a successor employer under applicable labour relations legislation and will ‘step into the shoes’ of the seller for the purposes of the collective bargaining agreement. Most Canadian provinces have employment standards legislation that deems continuity of employment if employees of the business accept or continue employment with the buyer. Similarly, workers’ compensation legislation in most Canadian provinces will deem the buyer of assets to be a successor and liable for unpaid premiums of the seller. In non-arm’s-length transactions, tax authorities may have the ability to trace the transfer of the assets to pursue the payment of tax liabilities.

Contracts will often have assignment provisions detailing whether consent or notice is required to assign the contract. If the contract is silent, it is generally assignable subject to any statutory and common law limitations. A third party may assume obligations, but an assignment of obligations will not relieve the assignor of liability without the counterparty’s consent.

Are there any legal, regulatory or governmental restrictions on the transfer of shares in a company, a business or assets in your jurisdiction? Do transactions in particular industries require consent from specific regulators or a governmental body? Are transactions commonly subject to any public or national interest considerations?

The Investment Canada Act (ICA) governs the acquisition of control of Canadian businesses by non-Canadians. Investments governed by the ICA are either notifiable or reviewable depending on the size of the target, the structure of the transaction, the identity of the parties and the nature of the target’s business. The test for approval of a reviewable transaction under the ICA is whether the investment is likely to be of net benefit to Canada, and approval may be conditioned on undertakings made by the foreign investor regarding employment, capital expenditures, Canadian management participation, research and development activity, production and exports over a three- to five-year period after closing.

The ICA allows the government to review, prohibit or impose conditions on a broad range of investments by non-Canadians on the basis of national security concerns. Transactions involving Russian investors have recently attracted increased scrutiny under the net benefit and national security concern tests.

There are also restrictions on foreign ownership and sector-specific review regimes in a number of industry sectors, including commercial aviation, telecommunications, financial services, fishing and certain other sectors, and some provinces have restrictions on foreign ownership of land.

Are any other third-party consents commonly required?

Any sale by a company of all or substantially all of its assets must be approved by a supermajority (typically two-thirds) vote of the shareholders. Shareholders’ agreements may impose additional requirements.

Third-party consents may be required to assign contracts. Shares and assets may be subject to third-party security interests, in which case the secured party must provide a release or no interest letter in respect of the transfer to convey title free of encumbrances.

A private company’s articles of incorporation or similar constating documents will typically restrict transfer of the shares of a company without approval by the company’s board of directors.

Must regulatory filings be made or registration (or other official) fees paid to acquire shares in a company, a business or assets in your jurisdiction?

Generally, no regulatory filings are required to be made or registration fees paid in share or asset transactions. Certain transactions may also be notifiable or reviewable under the ICA.

If a transaction engages the notification provisions under the Competition Act, based on factors including the size of the transaction and the size of the parties to the transaction, an application must be made, with an application fee, and approval must be obtained before completion. The acquisition of real property will typically require registration, with payment of a nominal fee, and may require payment of land transfer taxes.