The gaps are narrowing for how American and Canadian companies acquire each other. But our American cousins still use substantially different deal points to get to a closing handshake. So says the American Bar Association’s 2014 Canadian Private Target Mergers & Acquisition Deal Points Study.
Covering deals in 2012 and 2013, the study reveals American buying trends of private Canadian targets during the past nine years. Prime differences south of the border include the use of shorter representation and warranty periods, and for sellers, much smaller liability caps than typically found in all-Canadian deals. And when it comes to all-Canadian M&A, buyers and sellers north of the 49th parallel have greater tolerance for risk because, unlike companies in the litigious US, they fret less about getting sued after a deal.
In general, says André Perey, a Toronto partner with Blake, Cassels & Graydon LLP, US sellers enjoy more seller-friendly terms than Canadian targets. Perey was Vice-Chair and Group Leader in the ABA study. Sellers in all-Canadian deals, for instance, often agree to liability caps after a deal closes that could see a buyer claim 40 per cent or more of the purchase price should something go wrong with an acquired business. In the US, sellers can get liability caps of 10 per cent or less.
Cameron Rusaw, at Davies Ward Phillips & Vineberg LLP, also worked on the ABA study. Rusaw, who acted for Burger King in its US$12.5-billion acquisition of Tim Hortons last year, gets lots of questions from clients and fellow lawyers about how acquisitive American companies approach sellers’ indemnity caps. “That’s a heavily negotiated part of any M&A deal.”
The ABA numbers reveal that 89 per cent of sellers’ caps in the US are less than the purchase price in an acquisition, while in Canada just 6o per cent are. In US private-target deals, 48 per cent of deals entailed liability caps of less than 10 per cent of purchase price. In Canada, meanwhile, just eight per cent of sellers were able to negotiate such a low indemnity.
Then there are escrows. Though the study’s data on this subject is incomplete, it indicates that escrow or holdbacks in the range of three to five per cent of transaction value has declined — from 30 per cent for deals in 2010 to just seven per cent in 2014.
Neville Jugnauth, a Calgary partner with Torys LLP, has noticed escrows decline in his practice. “I think one of the reasons for that is, we’re seeing a lot more transacting parties, particularly on the private side, looking to rep and warranty insurance …” Such insurance, Jugnauth says, achieves the same risk-allocation objectives for buyers and sellers after close, but without tying up money for extended periods and without incurring escrow agent fees.
Rusaw says US trends may be putting pressure on Canadian buyers in M&A transactions to lower their expectations in such areas as indemnity caps and material adverse effect (MAE) carve-outs when cutting deals. He recently advised a Canadian company that was hoping to sell itself to US private-equity fund bidders. Rusaw told the company that in their auction draft they could set their indemnity caps and baskets much lower than they might otherwise have done if seeking a Canadian buyer. Americans, he noted, “won’t be at all surprised, for instance, to see a 10-per-cent liability cap in your draft.”