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Due diligence requirements
What due diligence is necessary for buyers?
Due diligence is an important part of any transaction. Although the nature and scope of due diligence review may vary depending on the characteristics of the particular transaction (including the identity of the target, the structure of the transaction and industry in which the target operates), certain aspects of the legal due diligence process are considered standard and form part of virtually every M&A transaction, including the following:
- review of the target's corporate minute book (not applicable for asset purchase);
- review of any material agreements of the target (what constitutes a material agreement can vary based on the transaction and is typically negotiated between the parties, but will generally include all material supplier and customer agreements, real property leases, equipment leases, financing agreements and agreements restricting activities including exclusivity, non-competition and non-solicitation agreements);
- review of employment and labour matters, including employment agreements, collective bargaining agreements, retention agreements, pension or benefit plans, stock incentive plans or profit sharing plans;
- review of environmental matters, if applicable, including the completion of environmental assessments;
- review of regulatory matters, including permits, authorisation and security clearances;
- review of owned and leased real property, including agreements relating to this property;
- review of liens and security interests, including relating to indebtedness; and
- review of all intellectual property, including any IP licence and the presence of assignments of IP rights in agreements between the target and its employees and independent contractors.
The financial and tax due diligence is typically completed by the external accounting and tax advisers of the purchaser and the purchaser is generally responsible for the operational and general business due diligence, including information technology.
What information is available to buyers?
A purchaser can conduct searches of certain publicly available filing systems maintained by public offices to verify or confirm certain things, including:
- corporate searches – search of online database maintained by Industry Canada or the relevant provincial equivalent to identify the directors, officers and, where applicable, shareholders of the target;
- ownership of registered intellectual property – search of the online databases maintained by the Canadian Intellectual Property Office;
- ownership of and liens on real property – search of the applicable provincial land registration systems;
- existence of security interests (liens) on personal property of the target of any of the sellers – search of all applicable provincial personal property security registration systems;
- existence of any pending litigation against the target or any of the sellers – search of the records of the applicable courts;
- existence of any writs of execution, orders or certificates of lien against the target – search of the database maintained by the sheriff of the applicable county or province;
- if the target or any of the sellers have been declared bankrupt, insolvent or are subject to any insolvency-related reorganisation proceedings – search of the records of the Office of the Superintendent of Bankruptcy;
- existence of any liens applicable to and registered against goods or inventory of the target under Section 247 of the Bank Act – search of the database maintained by the Bank of Canada; and
- previously completed sale of assets in bulk in compliance with the Bulk Sales Act (Ontario only) – search for filed affidavits at the records of the Superior Court of Justice in the applicable county or land registry office.
Additionally, a publicly available online database – the System for Electronic Document Analysis and Retrieval (www.sedar.com) – contains copies of documents filed by publicly traded companies and reporting issuers.
Some Canadian provinces (eg, Alberta, British Columbia and Quebec) have also enacted comprehensive private sector privacy legislation, entitled the Personal Information Protection Act in Alberta and British Columbia, and an act respecting the protection of personal information in the private sector (the Quebec Privacy Act) in Quebec. While these provincial laws are similar in principle to PIPEDA, there are important differences in the details. These laws apply generally to all private sector organisations with respect to the collection, use and disclosure of personal information – not just with respect to commercial activities – and to employees’ personal information. The Quebec Privacy Act also applies to private sector collection, use and disclosure of personal health information.
What information can and cannot be disclosed when dealing with a public company?
A public company cannot disclose any material non-public information unless in the necessary course of business. In a friendly transaction, disclosure of information about the public company is typically made under the terms of a confidentiality agreement which limits the use and disclosure of the information and may also impose standstill obligations. A potential purchaser of the public company will also be subject to securities laws that prohibit the disclosure of material non-public information about the public company, with limited exceptions.
How is stakebuilding regulated?
Stakebuilding in public companies is governed by provincial securities laws. These laws require any person acquiring beneficial ownership of, or control or direction over, 10% or more of the target’s voting or equity securities to publicly file an early warning report. In addition, persons owning or controlling more than 10% of the voting rights are considered insiders and must publicly file insider reports. The formal takeover bid rules generally apply once the acquirer seeks to own or control 20% or more of the target’s voting or equity securities, but exemptions are available. If a formal takeover bid is launched, any purchases made before the bid may include pricing restrictions (under the pre-bid integration rules) and may have other implications (eg, under the insider bid requirements).
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