Recent Developments in Private Company M&A

Transcription

1 Recent Developments in Private Company M&A Jason (Jake) Bullen August 16, 2016 Cassels Academy of Continuing Professional Development

2 AGENDA Introduction Recent Developments A. Legal Project Management / Legal Lean Sigma TM B. Trends in the ABA Deal Points Study C. Due Diligence D. Good Faith in the Transactional Context E. Rep & Warranty Insurance Questions slide 2

3 Introduction Jake Bullen, Partner Cassels Brock slide 3

4 A. Legal Project Management / Lean Sigma TM Legal Project Management Process Improvement Ensure that lawyers use best process appropriately actively manage schedules, staff and deliverables Legal Lean Sigma TM Look for and eliminate waste to create simpler, faster processes Understand relationships between inputs and outputs More appropriate for processes that are repetitive, routine and require a high degree of accuracy (e.g. document review) slide 4

5 A. Legal Project Management / Lean Sigma TM slide 5

6 A. Legal Project Management / Lean Sigma TM Project Timeline slide 6

7 B. ABA Study: Purchase Agreement Post-Closing Purchase Price Adjustments slide 7

8 B. ABA Study: Purchase Agreement Post-Closing Purchase Price Adjustments * Source: ABA 2014 Canadian Private Target Mergers & Acquisitions Deal Points Study * Source: ABA 2014 Canadian Private Target Mergers & Acquisitions Deal Points Study slide 8

9 Earnouts * Source: ABA 2014 Canadian Private Target Mergers & Acquisitions Deal Points Study slide 9

10 B. ABA Study: Purchase Agreement Private Target M&A Deals * Source: ABA 2014 Canadian Private Target Mergers & Acquisitions Deal Points Study slide 10

11 B. ABA Study: Purchase Agreement 10b-5 / Full Disclosure Representation 10b-5 Formulation No representation or warranty or other statement made by [Target] in this Agreement, the Disclosure Letter, any supplement to the Disclosure Letter, the certificates delivered pursuant to Section 8.3, or otherwise in connection with the Contemplated Transactions contains any untrue statement of material fact or omits to state a material fact necessary to make the statements in this Agreement or therein, in light of the circumstances in which they were made, not misleading. (ABA Model Stock Purchase Agreement, Second Edition) Full Disclosure Formulation Seller does not have Knowledge of any fact that has specific application to Seller (other than general economic or industry conditions) and that may materially adversely affect the assets, business, prospects, financial condition or results of operations of Seller that has not been set forth in this Agreement or the Disclosure Letter. slide 11

12 B. ABA Study: Purchase Agreement 10b-5 / Full Disclosure Representation * Source: ABA 2014 Canadian Private Target Mergers & Acquisitions Deal Points Study slide 12

13 B. ABA Study: Purchase Agreement Baskets and Caps: Overview Most deals have a deductible or tipping basket to limit the seller s liability under a Purchase Agreement Baskets provide a threshold that aggregate losses must hit before the seller is liable to the buyer to eliminate indemnification for relatively small claims Caps provide a ceiling on a seller s liability to the buyer slide 13

14 B. ABA Study: Purchase Agreement Baskets Deductible (36% of transactions*) Sellers shall not be required to indemnify Buyer for Losses until the aggregate amount of all such Losses exceeds $300,000 (the "Deductible") in which event Sellers shall be responsible only for Losses exceeding the Deductible. First Dollar or Tipping Basket (50% of transactions*) Sellers shall not be required to indemnify Buyer for Losses until the aggregate amount of all such Losses exceeds $500,000 (the "Threshold") in which event Sellers shall be responsible for the aggregate amount of all Losses, regardless of the Threshold. Combination (6% of transactions*) Sellers shall not be required to indemnify Buyer for Losses until the aggregate amount of all such Losses exceeds $500,000 (the "Threshold") in which event Sellers shall be responsible only for Losses in excess of $300,000 (the "Deductible"). * Source: ABA 2014 Canadian Private Target Mergers & Acquisitions Deal Points Study slide 14

15 B. ABA Study: Purchase Agreement Caps* ** * Source: ABA 2014 Canadian Private Target Mergers & Acquisitions Deal Points Study ** Caps generally applicable to contractual indemnification obligations; does not take into account different caps for specific items; see Cap Carve Outs slide 15

16 B. ABA Study: Purchase Agreement Cap Amounts as % of Transaction Value* ** Subset: deals with determinable caps <10% 3% 8% 14% 15% 10% to 15% 7% 3% Deals in % > 15% to 25% 18% Deals in % Deals in % > 25% to 50% 18% 7% > 50% to < Purchase Price Purchase Price 14% 17% 17% 25% 40% 45% * Source: ABA 2014 Canadian Private Target Mergers & Acquisitions Deal Points Study ** Caps generally applicable to contractual indemnification obligations; does not take into account different caps for specific items; see Cap Carve Outs slide 16

17 B. ABA Study: Purchase Agreement Cap Carve Outs Subset: deals with caps ** * Source: ABA 2014 Canadian Private Target Mergers & Acquisitions Deal Points Study ** Only those categories appearing more than 10% of the time for deals in 2014 are shown *** Prior data not presented as the previous studies did not report this deal point slide 17

18 C. Due Diligence What is Due Diligence? Such a measure of prudence, activity or assiduity, as is properly to be expected from, and ordinarily exercised by, a reasonable and prudent [person] under the particular circumstances; not measured by any absolute standard, but depending on the relative facts of the special case. slide 18

19 C. Due Diligence Compliance Due Diligence Integrity Check Increased enforcement of anti-corruption legislation globally Corruption of Foreign Public Officials Act (Canada), Foreign Corrupt Practices Act (U.S.) and similar legislation Be aware of extra-territorial reach of legislation, including nationality- based jurisdiction to cover activities of Canadian companies, citizens and permanent residents regardless of where the alleged bribery has taken place Consideration of potential red flags Does Target use agents/intermediaries? Where does Target carry on business? Review completeness of Target s anti-corruption / anti-bribery policies & procedures, and assess adequacy of compliance controls to prevent and detect potential foreign corrupt practices slide 19

20 C. Due Diligence Compliance Due Diligence Engage third party advisors Local counsel, accountants and forensic investigators Bill S-14 (June 2013) created a new books and records criminal offence of making, falsifying or concealing records and payments related to the bribery of a foreign public official Obtain and review information relating to internal systems for approving, recording and monitoring various items including gifts, travel and entertainment of agents and consultants e.g. General ledger accounts for Gifts, Entertainment & Hospitality and Petty Cash Ask for/conduct internal/external reviews, audits and examinations Interview key personnel slide 20

21 C. Due Diligence Cybersecurity Due Diligence Cyber risk can be mitigated by appropriate cyber due diligence which should include: Do the Target s data security systems, cybersecurity governance and risk assessment protocols meet industry standards? Does the Target have a robust cyber incident response plan? Buyer should assess the Target s cyber exposure based on the existing management systems and protocols Modify due diligence based on the types of information handled and the relative importance of information security to the deal Use cyber expert(s) to assess cyber readiness and liabilities Assess Target s IT network against industry benchmarks (e.g. ISO/IEC 27032) slide 21

22 C. Due Diligence CASL / Privacy Perspective Business Transaction Exemption On June 28, 2015, the Digital Privacy Act (S.C. 2015, c. 32) came into force, amending the Personal Information Protection and Electronic Documents Act (S.C. 2000, c. 5) ( PIPEDA ) to include a business transaction exemption Organizations now permitted to use and disclose personal information (PI) without consent of the applicable individuals in the context of a business transaction if it is necessary to determine whether to proceed with the transaction and to complete the transaction Parties must agree in writing to: Only use and disclose PI for purposes related to the proposed transaction Protect the PI with appropriate security safeguards Return or destroy the PI if the transaction does not proceed Exception in section 7.2(4) slide 22

23 C. Due Diligence CASL / Privacy Perspective Best Practices: Reviewing Privacy Law Compliance Assess whether/how privacy laws apply to the Target s business operations Request and review: any specific privacy policies that apply internal privacy protocols of the Target any contractual obligations of the Target re: privacy laws and PI Consider how PI was acquired and whether appropriate consents were obtained Purchaser should seek evidence of consents (records) Purchaser should document inquiries relating to privacy obligations of the Target during diligence slide 23

24 D. Good Faith in the Transactional Context Sandbagging What is it? Sandbagging refers to the ability of a purchaser to seek indemnification, payment, reimbursement or another remedy notwithstanding any due diligence previously conducted, or knowledge previously acquired, by or on behalf of the purchaser slide 24

25 D. Good Faith in the Transactional Context Sandbagging Pro-Sandbagging provision: Neither any information or knowledge of the Buyer, nor the results of any due diligence or investigation by the Buyer, shall affect, waive, modify, limit or diminish the right to indemnification or any other remedy of the Buyer contained in this Agreement or any transaction document notwithstanding (i) the Closing or (ii) any investigation or knowledge of the Buyer acquired prior to the Closing. Anti-Sandbagging provisions: No party shall be liable under this Article for any Losses resulting from or relating to any inaccuracy in or breach of any representation or warranty in this Agreement if the party seeking indemnification for such Loss had knowledge of such breach before Closing. slide 25

26 D. Good Faith in the Transactional Context Sandbagging Sandbagging / Transamerica Prevalence in Canada Provisions are used in agreements less frequently in Canada than in the U.S.: 29% and 51% respectively* Where included in Canadian transaction agreements, more likely to be pro-sandbagging than antisandbagging (15% to 14%)* Implied duty of good faith? *Source: ABA 2014 Canadian Private Target Mergers & Acquisitions Deal Points Study slide 26

27 D. Good Faith in the Transactional Context A Cautionary Decision Transamerica Life Canada Inc. v. ING Canada Inc. (2003), 68 O.R. (3d) 457 (Court of Appeal for Ontario): Transamerica purchased all of the shares of NN Life Insurance Company from ING Transamerica performed due diligence on all aspects of the business and operations of NN Life Transamerica brought a claim to recover substantial damages for misrepresentation and breach of warranties and covenants contained in the Share Purchase Agreement slide 27

28 D. Good Faith in the Transactional Context A Cautionary Decision Transamerica Life Canada Inc. v. ING Canada Inc. (2003), 68 O.R. (3d) 457 (Court of Appeal for Ontario): ING argued that Transamerica was aware of, or willfully blind to, the errors alleged and that it did not reveal to ING certain information within its knowledge; further ING argued that Transamerica s failure to disclose such errors before closing (and failure to consult with ING after closing) breached implied duties of good faith slide 28

29 D. Good Faith in the Transactional Context SCC Decision in Bhasin Bhasin v. Hryniew, 2014 SCC 71 recognized 1. good faith as a general organizing principle requires parties to perform their contractual duties honestly and reasonably, and not capriciously or arbitrarily not a free-standing rule, but highly context-specific standard 2. a duty of honest performance which requires parties to be honest with each other in relation to the performance of contractual obligations precludes contracting parties from lying or otherwise misleading each other about matters directly linked to the performance of the contract parties are not free to exclude the duty, but the scope of the duty may be relaxed in certain contexts by express terms, so long as minimum core requirements and language chosen is not manifestly unreasonable slide 29

30 D. Good Faith in the Transactional Context The Big Picture Commercial Agreement Discussion Term Sheet Honest Performance (Bhasin) Х Х Х Х Х Х Negotiate Negotiate (Molson) M & A Agreement Agreement Termination Due Diligence (Transamerica and Bhasin) Closing slide 30

31 D. Good Faith in the Transactional Context Active non-disclosure may constitute intentional misrepresentation Lavrijsen Campgrounds v. Eileen Reville, 2015 ONSC 103, 248 A.C.W.S. (3d) 710: Parties entered into share purchase agreement for sale of campground property and operation Purchase agreement did not include warranty re: prepaid rentals Purchaser did not receive appropriate credit for prepaid deposits and rentals in an amount exceeding $70,000 slide 31

32 D. Good Faith in the Transactional Context Lavrijsen Campgrounds (continued): Court found that: Information concerning prepaid rentals was requested Information provided by vendors was inadequate to allow purchaser to establish the amount of prepaid rentals Vendor would have provided customer balance details if [Buyer] had specifically asked for it Neither solicitor directly discussed the prepaid rentals with their client slide 32

33 D. Good Faith in the Transactional Context Lavrijsen Campgrounds (continued): Court found that: Bhasin eliminated distinction between active non-disclosure and intentional misrepresentation sellers active non-disclosure constituted intentional misrepresentation and sellers were not entitled to the limitation period provided by the agreement while the vendors did not initially set out to defraud the purchasers or intentionally misrepresent the facts to them, when the opportunity arose, they selectively disclosed partial information and actively withheld important information. slide 33

34 D. Good Faith in the Transactional Context Lavrijsen Campgrounds (continued): Take-aways: Confirm the business deal with your client Request and review appropriate information (including statement of adjustments) Forward to your client and notify them if information is inadequate to confirm a material point Ensure that deal is addressed in purchase agreement, including any adjustments based on late closing date Consider possible expansion of duty to disclose Use sandbagging language (pro- or anti-) slide 34

35 E. Reps & Warranty Insurance (RWI) What is RWI? Protects a party from financial losses resulting from inaccuracies in the representations and warranties made about the target company or business in connection with transactions, including mergers, acquisitions and divestitures. slide 35

36 E. Reps & Warranty Insurance (RWI) Market Overview (Source: HUB International) Market for Reps & Warranties (R&W) Insurance estimated at $12 billion in policy limits in 2014* Significant increase from $3 billion in 2012 High utilization across the globe: US (5-10% of deals) UK (5-10% of deals) Australia (85-90% of PE deals) Sweden (90-95% of PE deals) Canada (2% of deals) Reasons for more recent product adoption in Canada? Lower premium rates as well as minimum premiums per deal Pressure from cross-border deals Product familiarity / comfort from repeat usage * Law 360, January 26, 2015 slide 36

37 E. Reps & Warranty Insurance (RWI) Policy Types (Source: HUB International) Buyer-Side Policy Pays the buyer directly for such losses and can be used to supplement the seller s escrow / indemnification cap Seller-Side Policy Reimburses the seller for such losses and can be used to backstop the seller s escrow / indemnification cap. Structure will depend on objectives of parties slide 37

38 E. Reps & Warranty Insurance (RWI) Process / Timeline (Source: HUB International) slide 38

39 E. Reps & Warranty Insurance (RWI) Examples of Use (Source: HUB International) slide 39

40 Questions? slide 40

41 Cassels Brock & Blackwell LLP Recent Developments in Private Company M&A Suite 2100, Scotia Plaza 40 King Street West Toronto, ON Canada M5H 3C2 Suite 2200, HSBC Building 885 West Georgia Street Vancouver, BC Canada V6C 3E8 Suite 1250, Millennium Tower 440 2nd Avenue SW Calgary, AB Canada T2P 5E9 Tel: Fax: Tel: Fax: Tel: Fax: CASSELS BROCK & BLACKWELL LLP. ALL RIGHTS RESERVED. This document and the information in it is for illustration only and does not constitute legal advice. The information is subject to changes in the law and the interpretation thereof. This document is not a substitute for legal or other professional advice. Users should consult legal counsel for advice regarding the matters discussed herein.