January 27, 2015

The Business Law Section of the American Bar Association rather helpfully tracks trends in deal terms in private company M&A in both the US and Canada. The 2014 year-end review for Canada was recently published and forms a useful basis for comparing and contrasting private company deal trends on either side of the 49th parallel.

The Canadian and US private M&A summaries certainly make every attempt to conduct these studies in a thoughtful and rigorous process (which seems to include peer review of data). That said the analyse rest on a foundation formed entirely of transactions wherein deal documentation was made available on SEDAR or EDGAR. As such this produces some obvious limitations. For example the Canadian survey examines five dozen deals over two years and seems to overweight the resources sector.

The Canadian data also over-represents smaller deals: roughly 2/3 of the deals reviewed in the U.S. exceeded $100 million in enterprise value whilst only 1/3 of Canadian deals surmounted that hurdle.

Some of the most relevant compare/contrast features in private company M&A are:

  • The notion of post-closing adjustments to the purchase price is thoroughly entrenched in the US (88% of deals). The percentage of deals reflecting this mechanism in Canada is 12% points lower – a number 3% points up from the level of the previous study (70% based on 2010-11 data). American deals are far more likely to see adjustments based on the closing balance sheet (88% versus 44%)
  • Both countries seem to have similar attitudes towards earn-out provisions, with this structure appearing in about ¼ of surveyed transactions.
  • The attitude toward representations and warranties is similar in both countries, with key items such as fair representation of financials and no undisclosed liabilities being seen in almost every deal that was examined. Likewise deals in both countries almost always include covenants to conduct business in the ordinary course as a matter of habit.
  • Material Adverse Change (MAC) clauses are somewhat more common in the US than Canada (100% versus 90% if the one lumps together MAC clauses that are both defined and undefined). In general American deals are much more likely to be specific in this regard.
  • Indemnities tend to be longer lasting in Canadian deals, with US indemnity periods generally being less than 18 months (85% of deals) . About 1/3 of Canadian deals had indemnity periods of more than 18 months: about 3x higher than the US rate.
  • So-called “no shop” provisions are roughly twice as common in the US as Canada (with roughly 85% of US deals in 2012/13 having such provisions).
  • American deals are less likely to require legal review of deal terms.

We expect that the Canadian data may change as the market adjusts to a relatively different oil & gas context in 2015. Private company mergers (a reaction to either stressed balance sheets and/or the imperative to gain critical mass) and private equity eyeing bargains (whether asset sales of entire companies) may have an impact on aggregate Canadian deal terms.