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Documentation

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.

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