Due diligence

Key areas

What are the most critical areas of due diligence in a distressed M&A transaction?

This will depend on the nature of the business. Environmental issues should be considered for extractive businesses. There should be a review of corporate status regarding jurisdiction of incorporation and the location of assets and existing litigation. These searches in Canada are generally available online, although specific inquiries must be made in each provincial jurisdiction.


What searches of public records should be conducted as part of a due diligence exercise in distressed M&A transactions in your jurisdiction?

The searches undertaken in the distressed M&A context will depend on the nature of the enterprise and its assets but would typically include, at a minimum, searches of:

  • the relevant corporate registry of the jurisdiction of incorporation or establishment of the entity to confirm corporate status and good standing and the identity of directors and officers;
  • Personal Property Registry in provinces where personal property is located to determine the status of security interests and the identities of secured parties;
  • land title offices in provinces where real property is owned to determine registered mortgages or other encumbrances on real property;
  • court registries in jurisdictions where the entity carries on business or has a presence to identify filed claims; in practice, this can be difficult depending on the relevant jurisdiction as not all Canadian jurisdictions enable centralised registry searches and searches may need to be undertaken at local courthouse registries; and
  • Federal Bankruptcy Office searches to determine whether bankruptcy proceedings have been undertaken.
Contractual protections and risk mitigation

What contractual protections and other strategies are commonly used to mitigate diligence gaps in a distressed M&A transaction?

Typically, there is no recourse as assets are presented and negotiated upon the basis of ‘as is where is’ and conveyed under court order. Contractual matters are procedural only to get to the closing.