Earlier this month, the American Bar Association (the “ABA“) released its Study (the “Study“) analyzing publicly available acquisition agreements for transactions that were signed in 2020, 2021 and 2022 that involved Canadian private targets that were either acquired or sold by public companies. The acquisition agreements were filed on SEDAR+ (the “System for Electronic Documents and Analysis and Retrieval +” maintained by the Canadian Securities Administrators.)
The Study sample covered 83 acquisition agreements and excluded agreements having a transaction value of less than CAD $5 million, transactions where the target was in bankruptcy, transactions involving non-arm’s length parties and transactions not governed by Canadian law, among others.
The last such deal points study issued by the ABA was in 2019, reporting on deals that were signed in 2016 and 2017. There were also deal point studies issued by the ABA in 2014, 2012 and 2010. The Study included a significant number of data points not covered in the previous deal point studies.
Study Highlights:
- Canadian deals generally tend to be smaller than US deals. 67% of the deals studied were in the CAD $5 million to CAD $50 million range, whereas in the U.S., 18.5% were in the US $30 million to US $50 million range. The most recent Study is weighted more toward smaller transaction sizes than the previous deal point studies. A smaller deal size can impact upon a number of deal points, such as the decision to not use a representations and warranties insurance policy in 76% of the transactions. Due to the smaller deal size, there were more transactions that involved TSXV issuers rather than TSX issuers.
- 40% of the sellers were “entrepreneurial” sellers, where the founders appeared to dominate management and ownership, as opposed to 17% in the 2018 deal point study.
- 80% of the transactions included in the Study were signed in 2020 and 2021, during the Covid-19 pandemic. It would not be unreasonable to expect that the restrictions imposed on travel and the imposition of lockdowns during this period would have inhibited a buyer’s ability to conduct typical due diligence investigations, and the inherent uncertainty of anticipating the extent of consequences of the pandemic on a target’s future operations and profitability, and thus would have impacted upon a number of deal points negotiated during this period.
- It was noted that a “Material Adverse Effect” provision that was forward-looking (e.g defined to mean “any result, occurrence, fact, change, event or effect that has, or could reasonably be expected to have (emphasis added), a materially adverse effect on the business, assets, liabilities, capitalization, condition (financial or other), results of operations or prospects of Target”), was contained in 89% of the transactions included in the Study, compared to 69% in the 2018 deal points study.
- 19% of transactions provided that the seller’s covenant to continue to operate the business in the ordinary course excluded violations of law, COVID-related measures, and breaches of contract, and 19% expressly provided the seller with flexibility to respond to COVID-19.
- Another interesting development related to “sandbagging”, namely, whether or not a party could rely on a breach of a representation, warranty or covenant where it had knowledge of the breach. 82% of the deals were silent on sandbagging, compared to 66% in the 2018 deal points study, only 10% had an express pro-sandbagging clause, down from 22% in the 2018 deal point study, and 8% had an express anti-sandbagging clause, down from 12% in the 2018 deal points study.
Conclusion:
The Study is a useful resource to determine what is “market” in the context of Canadian private M&A. However, it is not determinative. The Study, by its nature, is only reflective of minimum CAD $5 million transactions publicly disclosed, where the buyer or seller was a public entity, and reflects deals done up to 2022. The Study does not encompass the universe of Canadian private transactions.
The majority of the transactions reported were signed during the COVID-19 pandemic. While it is reasonable to expect that the uncertainties and difficulties that were encountered during that period would have been the reflected in the negotiation of various deal terms, the Canadian environment has since changed and there is a new and unanticipated threat that has arisen. Today, the Canadian economy and its businesses are facing the threat of an impending trade war, with the imposition of a broad range of tariffs by its largest trading partner. It should be anticipated that these concerns will necessarily impact upon the negotiation of numerous deal points. The ultimate parameters and extent of the impending trade war, coupled with the respective negotiating strengths of the parties to the proposed transaction, the particular facts of the transaction, and the abilities of the respective deal professional teams, will ultimately determine the resolution of various deal points.
The Securities & Capital Markets group at Fogler, Rubinoff LLP will continue to monitor developments in the Canadian public M&A space. Please contact the author if you have questions about or require assistance in executing Canadian public M&A transactions.
This publication is intended for general information purposes only and should not be relied upon as legal advice.
