This bulletin is current up to close of business on March 23, 2020. As circumstances remain fluid, please check with in with your usual Blakes contact for any updates.
The uncharted waters of the current COVID-19 pandemic raise a number of unique and critical considerations for merger and acquisition activity, whether a deal was signed prior to the unfolding crisis and has yet to close or parties are looking to enter into a new transaction in the coming weeks and months as the crisis evolves. In all cases, buyers and sellers will need to be flexible, nimble and cooperative in order to get deals done on mutually agreeable terms. In the below article, lawyers from our offices across Canada identify and consider those key elements of a deal that we expect will be impacted by ongoing events.
MATERIAL ADVERSE EFFECTS/CHANGES
Buyers and sellers who have already signed a purchase agreement but have not yet closed their transaction will be looking at their material adverse effects/changes (MAE/MAC) provisions closely. However, the law with respect to these provisions is generally not well-developed in Canada and while themes have emerged in North American caselaw, judgments are generally very fact-specific in terms of the exact wording of the clause in question, the expectations of the parties at the time of entering into the agreement and the impact of the events under review. The uniqueness and potential severity of the current COVID-19 pandemic make it very difficult to draw any strong inferences from existing jurisprudence.
New buyers negotiating a purchase agreement in the current climate will want to make sure that the MAE/MAC provisions address, as much as possible, risks relating to the shifting economic and market landscape that they are prepared to accept, and will want to pay particular attention to the appropriateness of the normal carve-outs for wide-reaching events that do not disproportionately affect the target business.
PURCHASE PRICE CONSIDERATIONS
Buyers and sellers who are signed up to a purchase agreement will want to carefully consider the impact of ongoing circumstances on negotiated purchase price adjustments, such as adjustments tied to working capital or customer attrition. Moreover, events surrounding the pandemic may give rise to discussions between buyers and sellers around the recasting of the transaction consideration as a result of walk rights that may have otherwise emerged.
In connection with both existing deals and new deals, we expect that there will be critical questions around target valuations, which will require the parties to be flexible about purchase price and structure. Parties may seek to bridge gaps in valuations by adopting traditional contingent purchase price mechanics such as earn outs. While earn outs were much less common in the recent mergers and acquisitions (M&A) sellers’ market that we experienced in Canada, they may once again become popular.
REGULATORY APPROVALS AND THIRD-PARTY CONSENTS
Parties can expect COVID-19 to impact timing of satisfying closing conditions relating to obtaining regulatory approvals and third-party consents.
Regulators such as the Competition Bureau and the Office of the Superintendent of Financial Institutions (OSFI) have staff working remotely and, accordingly, there may be delays in obtaining approvals required to close a transaction. The Competition Bureau has advised that although statutory timelines remain in place, limitations resulting from COVID-19 may result in longer than normal reviews. To mitigate the risk of delays, early engagement with the agencies is essential. Parties should review the terms of their transaction agreements to ensure they are appropriately protected considering the current environment. For more information, please see our March 2020 Blakes Bulletin: Competition Law Considerations in Current Circumstances.
Obtaining required consents from third parties such as landlords, lenders and significant suppliers and customers could also be challenging as third parties prioritize addressing the shifting requirements of their own businesses and may not have sufficient resources or bandwidth to address requests for consent.
Careful consideration should be given to ensuring that any outside date established for completing a transaction takes into account the expected delays in obtaining these approvals.
Whether a deal has already been signed or not, buyers should be talking regularly and openly with their lenders to identify at an early stage any barriers to funding, and they should be communicating to lenders any adjustments to business plans relating to changing circumstances. Deliverables requiring government offices (such as registrations and searches) or third parties (such as estoppels, insurance or releases) should be prioritized early in the deal process.
Most deals typically involve one or more parties taking various corporate actions prior to or in connection with the closing of the transaction, whether it is completing an amalgamation of the target and the buyer on closing, carrying out a tax-driven pre-closing reorganization, or incorporating and capitalizing an acquisition vehicle. Many of these steps require making filings with one or more applicable government ministries or registrars.
Corporate registries in both Alberta and Ontario are still requiring original executed copies of a number of filing documents, including articles of amendment, amalgamation and continuation, as well as limited partnership declarations and extra-provincial registrations. Parties should check regularly as to whether there are any changes to applicable requirements going forward. In Quebec, the Quebec Enterprise Registrar does not require any originally executed copies of documents.
At the present time, filings that do not require agent review continue to be processed very quickly—for example, obtaining a certificate of attestation or incorporating a numbered Quebec corporation; however, those that do require an agent—for example, filings to reflect a change of name—are currently significantly delayed. In both Ontario and Quebec, the provincial governments announced on March 23, 2020, that all non-essential stores and services would be closed, which may include the corporate registries in those provinces. Parties should check regularly to see if corporate registries are open. The Northwest Territories Corporate Registry, for example, has announced it will be closed until further notice. To be prudent, parties should plan for filing delays or disruptions while circumstances remain fluid.
In British Columbia, corporate filings do not, with few exceptions, require originally-executed documents, with the key exception relating to limited partnership filings. Like other provincial corporate registries, BC Registry Services is experiencing delays in name reservations and actions requiring agent review, but many corporate actions—for example, incorporation and obtaining certificates of good standing—can be effected online and processed instantaneously.
Restrictions on physical interactions are also impacting how documents are being filed and new filing mechanics and coordination requirements need to be carefully considered to ensure corporate actions are completed on time.
TRANSITION SERVICES CONSIDERATIONS
Sellers rendering services under an operative transition service agreement (TSA) may seek to avail themselves of force majeure clauses to excuse their inability to perform. The ability to rely on such clauses will depend on whether they were drafted in a way that covers public health emergencies such as COVID-19, or otherwise contain adequate catch-all provisions, and the specific facts surrounding the non-performance at hand. For more information on the applicability of force majeure, please see our March 2020 Blakes Bulletin: COVID-19 and Your Contracts.
With respect to any TSAs that have yet to be negotiated, parties will want to consider how best to address the future consequences of COVID-19. Given that a force majeure clause will only cover events that are unforeseeable at the time of contracting, it is unlikely that service providers will be able to rely on such a clause to excuse future performance issues specifically caused by COVID-19.
Instead, parties will want to address the consequences of COVID-19 through other means. For example, service providers may push to explicitly carve out any increased responsibility that may otherwise result from the COVID-19 pandemic, on the basis of its uncertain medium- and long-term impact on market participants. Service providers should also be careful about committing to too high a standard of performance, especially where such standard is tied to historical pre-COVID-19 practices. Finally, while service providers typically try to negotiate a shorter term for their TSA, existing circumstances may leave them open to considering longer initial terms and more flexible renewal arrangements to provide the parties with more time to implement transition and reasonably manage unforeseen delays/service disruptions.
OTHER INTERIM PERIOD CONSIDERATIONS
Standard interim period covenants require sellers to operate the target business in the ordinary course, typically in accordance with past practice and a seller navigating an interim period will no doubt face challenges in complying with this general obligation. Similarly, sellers will also need to be thoughtful about how interim period restrictive covenants affect their flexibility to address current conditions, including through out of the ordinary course measures to reduce costs and preserve cash. While buyers should generally be aligned with target management’s approach to preserving the condition of the business through turbulent times, sellers will need to engage and work collaboratively with buyers to get to the closing and will need to remember that they will not necessarily be able to act unilaterally in making key decisions, even though some of these may need to be made very quickly.
A seller’s ability to bring down its representations and warranties to a materially correct standard may be put under severe pressure given current circumstances. Accordingly, sellers should regularly monitor those representations and warranties to identify any possible breaches and their implications for closing. Sellers should also carefully consider any opportunity to expedite closing to mitigate against this bring down risk. From the buyer’s perspective, the implications of any breaches of representations and warranties during the interim period will have an impact on coverage under any representation and warranty insurance policy, with known breaches having to be disclosed as part of the no-claim process and typically being excluded from the coverage.
Generally, we expect that those buyers that have obtained representation and warranty coverage will have to go through more robust no-claims declaration processes, as carriers stress test representations and warranties for impacts of the COVID-19 pandemic (e.g., representations and warranties related to material contracts or the target’s supply chain). Buyers who are looking to secure representation and warranty insurance for new deals may run into specific policy exclusions for breaches tied directly or even indirectly to the crisis. Buyers should work with their advisers to seek to narrow and tailor any pandemic exclusions so that they are not overly broad.
SIGNATURES AND OTHER CLOSING CONSIDERATIONS
Parties will also want to think practically and creatively to ensure that closings proceed smoothly in the current environment. While we are not aware of any delays in electronic transfers of funds at this point, parties should involve their banks well in advance of closing and check in regularly to ensure that wire transfers will be processed efficiently when the closing day arrives.
Social distancing means that physical closings will be difficult to implement. Public health recommendations discourage or prohibit parties to be physically present in the same closing room. Parties may also not wish to sign or exchange original signature pages. Remote closings via the exchange of electronic signature pages should be considered to allow parties to safely close transactions in the new environment. Blakes can implement fully virtual closings through products like Closing Folders and by obtaining electronic signatures using DocuSign®.
The Ontario and Quebec governments have suspended limitation periods for the duration of the emergency. Both the survival periods of representations, warranties and covenants and the time limits for commencing litigation in the event indemnification claims arise could be extended as a result of the suspensions. Sellers may therefore push to limit indemnification to set time periods in the transaction agreement, rather than rely on limitation periods more generally. At the time of publication, the Alberta government has not announced a similar suspension of limitation periods or procedural time periods. Similarly, the British Columbia government has not suspended limitation periods, although British Columbia courts have extended all filing deadlines under the applicable rules of court.