navigating the m&a landscape

Dentons Canada LLP

Navigating the M&A Landscape

29 April 2015

Jonathan CummingsAssociate

Leanne KrawchukPartner

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Agenda

29 April 2015

1. Preparing for an M&A Transaction

2. Share Purchase/Sale vs. Asset Purchase/Sale

3. Due Diligence

4. Risk Protection

5. Working with External Counsel

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PREPARING FOR AN M&A TRANSACTION

29 April 2015

Assembling the Right Team• M&A lawyer

• Other specialized legal counsel (employment/labour, tax, banking, real estate)

• Financial experts/investment bankers

• Special committees

• Internal resources (HR, Accounting, Operations, etc.)

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PREPARING FOR AN M&A TRANSACTION

29 April 2015

Setting Action Items and Establishing the Process• Defining management’s role and responsibilities

• Weekly or other regular calls/meetings

• Transaction agenda/realistic timelines

• Reporting timelines

• Ensuring proper supervision of management

• Ensuring confidentiality agreement in place

• Creation and control of access to the data room

• Blackout periods

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PREPARING FOR AN M&A TRANSACTION

29 April 2015

Setting Action Items and Establishing the Process (continued)• Seminars about insider trading/tipping re: material information

• Retention bonuses

• Understanding key approvals and timelines:• Investment Canada Act

• Competition Act

• Third party consents (i.e. banks, counterparties, SHs, other regulators)

• Exchange/Commissions

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PREPARING FOR AN M&A TRANSACTION

29 April 2015

Traps to Consider• Inappropriate or premature disclosure

• Inappropriate staffing

• Failure to appreciate timing

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SHARE PURCHASE VS ASSET PURCHASE

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Major Differences

• Share Purchase• Everything owned by the target corporation remains owned by the same corporation

• What this means: purchaser gets everything (e.g. liabilities known and unknown, debts, company names, kitchen sink…)

• Asset Purchase• Only the assets specifically included in the purchase agreement are transferred• Non-transferred assets and liabilities remain with the seller

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SHARE PURCHASE VS ASSET PURCHASE

29 April 2015

Why Choose a Share Purchase/Sale?• Capital Gains

• Sales of qualifying shares may be eligible for lifetime capital gains exemption

• Straightforward – only one thing sold

• Sale proceeds go to shareholders

• No GST/PST

Why Choose an Asset Purchase/Sale?• Choose what you want to buy/sell greater flexibility

• (Potentially) less due diligence

• Avoid buying unknown liabilities

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DUE DILIGENCE

29 April 2015

Introduction• Objectives

• To transact or not to transact?

• Determine value and risk of a transaction

• When to begin?• The earlier the better

• May depend on terms of LOI or NDA

• Scope of Due Diligence – Factors:• Type of transaction

• Nature of the business or the assets being acquired

• Parties to the transaction

• Value of the transaction/fee sensitivity

• Who Conducts?• Purchaser – ensure smooth transfer of assets and/or shares

• Seller – on itself and on the purchaser to ensure it is capable of completing the transaction

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DUE DILIGENCE

29 April 2015

Share Purchase Due Diligence• Ownership of shares

• Shares properly issued/transferred

• Rights and Interests in the Shares• Any third party interests?

• Free and Clear• Liens or encumbrances impacting transfer?

• Notices and Consents to transfer

• Adverse Effects• eg. “change of control” provisions, termination/contingent payments, employee/supplier issues

• Assets and Liabilities of the Target• “stepping into the shoes” of the seller

• Any warts? (eg. Litigation, environmental issues, debts, etc.

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DUE DILIGENCE

29 April 2015

Share Purchase Due Diligence (continued)• Power to carry on Business post-transfer

• Right to sell the shares

• Recourse against vendor on default• It is the transaction sufficiently financed? Are guarantees necessary?

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DUE DILIGENCE

29 April 2015

Asset Purchase Due Diligence• Assets being acquired/sold

• Any additional assets/licenses/permits required?

• Third party interests• eg. Security interests, liens, joint ownership, registrations

• Notices and consents

• Condition of the assets

• Liabilities attached to the assets• eg. Environmental liabilities attached to land

• Ownership/authority to deal the assets

• Recourse against vendor on default• Substantially all assets being sold? Are guarantees necessary?

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DUE DILIGENCE

29 April 2015

Common Due Diligence Tasks• Review minute books and constating documents (share transaction)

• Ensures authority to enter the transaction and perform its obligations

• Review corporate agreements/data site• Level of materiality may matter

• Analyze relevant terms:• Assignment/change of control

• Confidentiality

• Termination

• Default provisions

• Etc.

• Conduct public registry searches

• Valuations of assets/shares (by valuation/financial experts like CBVs/appraisers)

• Environmental assessments

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DUE DILIGENCE

29 April 2015

Common Due Diligence Pitfalls• Failing to conduct timely and sufficient due diligence

• Failing to adequately verify information provided by other party

• Failing to act on identified red flags

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RISK PROTECTION

29 April 2015

Allocating Risks in Purchase Agreement• Representations/warranties

• Indemnity clauses

• Holdbacks

• Adjustments to the purchase price

• Break fees or deposits (could also be in LOI as a binding provision)

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RISK PROTECTION

29 April 2015

Reps & Warranties – Balancing Needs of Vendor and Purchaser• Representation – statement of past or existing fact

• Warranty- a promise that a fact is or will be true• If a representation or warranty proves not to be true, a party will seek compensation for its losses

• Reps/warranties become meaningful when tied to indemnity provisions

• Purchaser• Wants exhaustive representations on all known liabilities

• Hopes to extract vendor representations on unknown liabilities

• Vendor• Motivated to reduce its potential liabilities for a breach of a representation/warranty

• Will introduce exceptions such as:• Knowledge qualifier

• Materiality

• Other exceptions to disclosure – the Schedules

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RISK PROTECTION

29 April 2015

Indemnity Clauses• An obligation on one party to indemnify the other party for losses

• Note: the purchaser may still wish to preserve its common law right to sue for breach of contract

• Provides protection against losses during the survival period

• Should include both direct losses/claims and third party claims

• Indemnification baskets or caps may be negotiated

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RISK PROTECTION

29 April 2015

Negotiating a Cap• Vendor wants to negotiate a cap on indemnity

• i.e. a percentage of the purchase price or a fixed dollar amount

• Vendor may also want to negotiate indemnification baskets:• i.e. the minimum loss/damage that must be suffered by a purchaser for a breach of a vendor’s representations and warranties

• Types of Baskets:• Deductible baskets

• Dollar-one baskets

• Combination baskets

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RISK PROTECTION

29 April 2015

Holdbacks and Adjustments• Holdback – A portion of the purchase price being held back to secure the indemnity obligation

(or other covenants) of the vendor/guarantor

• Adjustments to the Purchase Price Post-Closing• Working capital adjustment

• Earn-out – purchase price dependent on future earnings of the purchased business

• Not too large or small

• Held in a solicitor’s escrow account

• Holdback security

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RISK PROTECTION

29 April 2015

Break Fees• Essentially termination fees

• Allow purchaser to ensure that a transaction closes as planned

• Purpose is to cover expenses incurred by purchaser up to termination date/breach by vendor

• Details are important• Amount

• Triggering event(s)

Deposits• Secure exclusivity in favour of purchaser for a period of time

• Payable upon execution of LOI

• Set out if refundable or not

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WORKING WITH EXTERNAL COUNSEL

29 April 2015

Knowing the Client (Our Knowledge of You)• Effective counsel needs to:

• Know what you do• Be interested in your business

• Know what you want to do• Company vision, goals and objectives, business plan

• Be proactive in providing relevant information and advice

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WORKING WITH EXTERNAL COUNSEL

29 April 2015

The Importance of Partnership

If we are together nothing is impossible. If we are divided all will fail.

– Winston Churchill

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WORKING WITH EXTERNAL COUNSEL

29 April 2015

The Importance of Partnership• Clear instruction

• Expectations, timelines, roles and assignments, reporting

• Joint formation of strategy

• Research on unexpected issues• Is research required? Who should perform the research and under what cost/time parameters?

• Managing your internal client relationship

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WORKING WITH EXTERNAL COUNSEL

29 April 2015

Your Communication With Us• Timelines, timelines, timelines

• Keep us apprised of internal changes• Keep us in the loop as much as possible

• Communications with the other side • Helps to present a unified front

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WORKING WITH EXTERNAL COUNSEL

29 April 2015

Our Communication With You• No (billing) surprises

• Keeping you apprised of changes

• Who does what?

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WORKING WITH EXTERNAL COUNSEL

29 April 2015

Billing and Invoicing – Best Practices• Helping you control costs

• Regular invoicing

• Detailed invoicing• Helps you track: work performed, resource allocation, efficiency

• Transparency• Communication is key

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WORKING WITH EXTERNAL COUNSEL

29 April 2015

Our Job – Giving You What You Need• Efficiency

• The truth

• Concise analysis

• Real life answers

• Added value

• Consistency and predictability

• Project management

• Knowing our limitations

• Financial integrity

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WORKING WITH EXTERNAL COUNSEL

29 April 2015

Questions that should consistently be asked• Is any given task requisite for the completion of the transaction?

• Are the resources being used to complete a given task in the most efficient and cost effective?

• Do you know what external counsel is doing and are they being transparent with you?

• Is your external counsel communicating with you in a manner that meets your needs?

Thank you!Leanne C. KrawchukPartnerD +1 780 423 7198leanne.krawchuk@dentons.com

Thanks to Wes Fairbanks, Associate

Jonathan CummingsAssociateD +1 780 423 7394jonathan.cummings@dentons.com

Website: www.dentons.com