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Preliminary agreements

What preliminary agreements are commonly drafted?

The two most common preliminary agreements that are drafted to commence the acquisition of a private corporation are:

  • a letter of intent – a non-binding document, in most respects, that summarises the principal terms and conditions of the proposed transaction. A letter of intent will typically contain some binding provisions, including a no-shop covenant from the seller and mutual confidentiality provisions; and
  • a confidentiality and non-disclosure agreement (NDA) – an agreement which restricts the collection, use and disclosure of the information conveyed by the target for the sole purpose of evaluating the proposed transaction. 

If the selling shareholders want to solicit multiple bids for the acquisition of the target, they (or their M&A advisers) will generally prepare a teaser document summarising the target and potential acquisition opportunity in order to generate interest. Once potential bidders have executed an NDA, they will usually receive a confidential information memorandum (CIM) prepared by the sellers which includes a greater level of detail of information on the target in order for potential bidders to decide whether to submit a bid and continue in the bidding process.    

Principal documentation

What documents are required?

A definitive purchase agreement – which sets out the terms of the transaction and all of the substantive clauses – is required. Common types of definitive purchase agreements include:

  • arrangement agreements, if the acquisition is completed by way of a plan of arrangement;
  • share purchase (or exchange) agreements, where the purchaser acquires all of a controlling majority of the issued and outstanding shares of the target; and
  • asset purchase agreements, where the purchaser acquires all or substantially all of the assets of the selling corporation.

In addition to the definitive purchase agreement, the following may be necessary, as applicable:

  • an escrow agreement – for any deposit or escrow amount for purchase price adjustments;
  • an instalment, demand or term promissory note – if the payment of all or a portion of the purchase price is deferred;
  • a general security agreement or pledge agreement – security in favour of the seller securing the obligations of the purchaser under the promissory note;
  • a non-competition, confidentiality or non-disclosure and non-solicitation agreement if such covenants are not already covered under the definitive purchase agreement;
  • release from the selling shareholders in favour of the target in the event of a share transaction;
  • a new employment agreement for selling shareholders and key employees in the event of a share transaction or for all employees that the purchaser wishes to hire in the event of an asset transaction (other than in Quebec or in the case of a collective agreement, there is no obligation on the purchaser purchasing assets to hire any of the employees of the selling entity);   
  • a consulting and transitional services agreement if that the purchaser wishes to retain the selling shareholders for a transitional period;
  • any other document necessary to evidence the transfer of title of the assets or shares;
  • a resolution or minutes of the meetings of the directors and shareholders approving the transactions contemplated by the definitive purchase agreement;
  • title insurance and insurance relating to representations and warranties;
  • a new shareholders agreement, where sellers retain a minority interest in the target; and
  • opinions from legal counsel to the parties.

For a public company, if shareholder approval is necessary to affirm the transaction, an information circular will also be required.

Which side normally prepares the first drafts?

The purchaser’s counsel will normally prepare the first draft of the letter of intent, purchase agreement and material closing documents. However, the corporation seeking approval from its shareholders is responsible for preparing the information circular. There are instances where the seller’s counsel will prepare the definitive transaction documents, including where the seller is running an auction process that includes interested bidders submitting offers in the form of a seller-prepared purchase agreement.

What are the substantive clauses that comprise an acquisition agreement?

Generally speaking, the substantive clauses that are included in a purchase agreement are the following:

  • purchase and sale – what is being purchased, being either the shares of the target or the assets of the selling corporation. For an asset transaction, the agreement can include a list of specific purchased assets and assumed liabilities or a general statement that the purchaser is acquiring all of the assets and assuming all of the liabilities of the seller, except for a list of specific excluded assets and liabilities;
  • purchase price, including any adjustment mechanisms (eg, working capital, cash/debt or other) and method and timing of payment;
  • earnouts;
  • representations and warranties of the sellers, the target and the purchaser;
  • covenants relating to the interim period between signing and closing and the period subsequent to closing;
  • closing conditions for the benefit of the purchaser and seller;
  • indemnification, including (if applicable) survival of covenants, representations and warranties, limitation on indemnification, time limits for notice of claim, tipping basket or deductible and rights of set-off; 
  • closing arrangements and deliverables;
  • dispute resolution procedures; and
  • deal protection provisions. 

What provisions are made for deal protection?

The key forms of deal protection are break fees, lock-up agreements and non-solicitation and no-shop provisions. 

Closing documentation

What documents are normally executed at signing and closing?

The documents that must be executed on signing and closing of a transaction vary according to the type of acquisition, the manner of payment and the other characteristics of the transaction. The definitive acquisition agreement can be executed either prior to or on closing. The other closing documents are signed on or released from escrow on closing and will include the documents noted above, as well as all documentation required to evidence effective transfer of title of the purchased shares or assets, including the endorsed share certificates evidencing the purchased shares for a share transaction or the execution of a general conveyance or bill of sale for the purchase of assets. In addition, a number of other ancillary documents (eg, payment directions, receipts and statutory declaration) may be executed and delivered on closing. Beyond the acquisition and closing documents, the parties may be responsible for delivering documents executed by third parties as a condition for closing (eg, consent from third parties to the assignment of a contract, to a change of control or the subordination of a security interest in personal property).  

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

Generally speaking, there is no difference between the execution of documents by foreign companies and domestic entities, other than as may be required by the laws governing such companies in their foreign jurisdiction. However, since Canada is not a member of the 1961 Hague Convention Abolishing the Requirement for Legalisation for Foreign Public Documents, documents issued by a government in a foreign jurisdiction or any agreement executed by a party outside of Canada must be authenticated and legalised by the appropriate authorities in order to be recognised in Canada.  

Are digital signatures binding and enforceable?

Generally speaking, digital signatures are binding and enforceable. The following are documents for which electronic or digital signatures will not be binding or enforceable:

  • wills and codicils;
  • trusts created by wills or codicils;
  • powers of attorney, to the extent that they are in respect of an individual’s financial affairs or personal care; and
  • negotiable instruments.

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