Mergers & Acquisitions Transactions – Provisions to be Considered (Part 2)
In a previous blog post we looked at a few of the structures and provisions typically considered for inclusion in the deal such as shares versus assets, indemnities and transition planning. There is also the negotiation and drafting of the documentation including with respect to the following:
- Off-Balance Sheet Matters – such as contingent employee termination and severance obligations and actual/potential information or data breaches should not be left to chance. Information or data breaches can occur in any company – no business is immune from external threats or internal errors, intentional or otherwise. PIPEDA (the federal Personal Information Protection and Electronic Documents Act) applies to businesses in Ontario. It sets out the rules for collecting, using or disclosing personal information in business. Recent changes, when made effective in law, will require that not only must the individuals be notified of a breach involving their personal information, a reporting of that breach to the Office of the Privacy Commissioner (Canada) is required, all if the breach creates a real risk of significant harm to the individual plus notifying third party organizations if doing so may reduce that risk of harm. Record keeping of the breach (24 months) is also required. Consequently, a target’s compliance strategies are scrutinized as part of the due diligence exercise; such strategies should typically include: (i) designating a privacy officer within the business with regular reporting to senior management and the board of directors; (ii) education and compliance protocols including obtaining consent to the collection of the information; (iii) minimizing the extent/scope of the information collected; (iv) restraints on use including timely destruction or rendering it anonymous; (v) physical safeguards and controls; and (vi) procedures to deal with a breach.
- Survival Periods – for covenants, representations and warranties given by the parties, the general range in both the USA and Canada is 18 – 24 months (i.e. more than one business cycle) but the trend is to include carve-outs for those relating to title/ownership, authority to sell, taxes, environment and fraud. It is anticipated that matters relating to cybersecurity and information/data breaches will also become “standard” carve-outs.
- Dispute Resolution – is more common in Canada than in the USA particularly in jurisdictions lacking dedicated “commercial” courts but as arbitration costs keep increasing and arbitration continues to increase in popularity (thereby increasing “wait times”), some matters are being carved out entirely and left for formal litigation proceedings; alternatively, separate protocols are negotiated depending upon the subject matter of the dispute with separate “classes” of arbitrators identified for each protocol.
- Preparation/Readiness – buyers are typically better prepared for the process than are sellers, which is to be expected as far too often sellers do not address matters until contacted by a prospective buyer. Having said that, it should be part of the mandate of the prospective seller’s board of directors and senior management to satisfy themselves, periodically, that matters are “in hand”, all with the help of their professional advisers, as this will not only save time and money in the long run, it will minimize the “mystery”, emotions, delays and other “risks” that will naturally occur during the process. Poor/inadequate preparation can yield less than desirable results. Needless to say, such a periodic review should also be beneficial to an ongoing business regardless of whether or not a sale transaction is pending or even contemplated.
Each business has similarities with and differences from others in its sector and beyond. No “one size fits all” works; instead numerous factors will influence including available resources, time constraints and pressures and risk/liability allocation.
A successful acquisition/disposition transaction requires care and attention in preparation and execution including in the analysis of trends and customs in structuring and creating the principal documentation.