//US and Canadian Private Company M&A Differences

US and Canadian Private Company M&A Differences

By |2018-10-24T16:43:11+00:00April 24th, 2018|Selling Your Business|

The American Bar Association recently published its Deal Point Studies, which analyze publicly available acquisition agreements. Based on both the XXXX study and the XXX study Osler Partner  Marc Kushner and Associates Michael Budabin McQuown and Jillian Mulroy penned an excellent synopsis which we have summarized as follows:

Deal terms in the Canadian M&A market generally offer more protection to acquirers, specifically with regards to the terms of indemnifications clauses. Indemnification allows buyers to pursue claims against the seller of a business in the event that the seller breaches its representations and warranties made in the purchase agreement. Canadian sellers generally provide more generous indemnifications terms than their U.S. counterparts. However, “due to the successful history of US-Canada cross-border transactions and U.S. influences, these differences are converging and narrowing.”

The five major trends:

  1. Survival periods (set period of time in which the buyer may pursue claims against the seller in the event of a breach of representations and warranties) in Canada tend to be longer on average compared to U.S.
  2. Canadian M&A indemnification obligation caps are less strict than that of U.S: While 81% of deals capped the indemnification obligations at 15% of the purchase price or less, 26% of deals in Canada had a similar cap.
  3. Canadian M&A deals favor tipping indemnification basket over a deductible basket.
    • a tipping basket is one where the seller pays the TOTAL amount of an indemnity claim once the limit it reached, whereas a deductible basket is one where the seller pays the excess amount beyond the limit

There were also some contrary trends:

  1. Materiality scrape: this is a pro-buyer provision found more commonly in U.S. transactions that can impact the buyer’s indemnification amount in two major ways:
    • materiality qualification is to be disregarded for the purpose of calculating a party’s losses, and
    • materiality qualification is to be disregarded for the purpose of determining whether a breach of any representation and warranty has occurred
  2. Escrows represent an amount agreed upon in the Share or Asset Purchase Agreement where payment of part of the purchase price is deferred and the buyer will have a right of set-off against the deferred consideration for any warranty or indemnity claims.
    • escrows are more commonly used in U.S. in comparison to Canadian counterparts, however, the study believes that the differences will converge.
Survival Period of Indemnifications provisions

The survival period of indemnifications clauses tend to be longer, but the trend is converging

Indemnification caps

The comparison of indemnification caps between Canada and US

Deductible vs. Tipping Indemnification

The comparison of US and Canada indemnifications baskets

Materiality provision Canada vs. U.S.

This pro-buyer provision is less commonly used in Canada, however given the influence of U.S., it will likely become more prevalent according to the study

The study mentions other differences, such as the use of representation and warranties insurance, the prevalence of “Sun Guard” provisions, and etc. As a business owner in the process of planning an exit, or has been thinking about exiting your business, it’s important to understand the implications of these deal points.

For starters – knowledge is power. Osler mentions that “all else being equal, a seller should prefer U.S. norms, and a buyer should favour Canadian ones.” Given these differences, a Canadian seller has the option to perhaps “pick and choose” certain clauses. An important implication is to work with an advisor with extensive cross-border experiences because a sophisticated advisor with a thorough understanding of the process will help you navigate the complications of negotiations and will increase the chances of obtaining a contract that works towards your advantage.

But that’s not enough, preparedness is the key to gaining advantages on the negotiation table. There are certain things buyers require for a successful transaction that can be done prior to the conversation. For example, thoroughly organized financial statements, reviews of current business operations, healthy working capital, and etc. As we have talked about before, being prepared can actually help you increase the value of your business (10 Initiatives to take to increase the Sale Value of your business).

Any company that’s strategizing for the future would benefit from being prepared ahead of time. (Tips For Selling Your Company) At the end of the day, preparing ahead of time will help you gain a better understanding of your business from the buyer’s perspective, and all too often, underprepared sellers fail to maximize their value.

Original Study: Mergers and Acquisitions: Market Trends Subcommittee

Original Article: Private M&A transactions: Five cross-border indemnification tips dealmakers need to know

For more tips on selling your company: Exit Topics