America’s Influence on M&A

To predict future deal practice, look to the US; Canadian lawyers are watching and adopting (some) trends

CANADIANS ARE DISTINCT from Americans. Just ask us. We live next door to the largest exporter of popular culture in the world. We love plenty of American movies, music and television but not all of it.

American offerings continually expand and accelerate, leaving Canadians to decide what to take or leave. Some aspects of American culture will never take hold here; they may conflict with our values, fail to find an audience, or be just plain bad.

The same should be said for US deal practice.

Having started my legal career in Toronto, I have now spent the past 14 years practising Canadian M&A in New York. The influence of the US mergers and acquisitions market on Canadian deals has arguably never been more acute.

Over the past 15 years, the US M&A environment has experienced a seismic shift: market players have been deluged by multiple market booms; sophisticated deal shops have changed the way deals are done; and the courts in the United States, most notably in Delaware, have issued a staggering number of decisions on M&A disputes, forcing parties to constantly reconsider agreements, clauses and processes south of the border. The US market has clearly tackled these new realities, while Canadian lawyers watch and learn, and decide whether to adopt.

Market statistics showing where Canada is an outlier have resulted in changes to purchase agreement “market” terms including indemnity caps, survival periods and deductibles to more closely mirror those in the US. One happy story is the decline in the frequency of the obligation to deliver a legal opinion at closing.

Another US import with targeted success in Canada is representation and warranty insurance, a product that shifts certain post-closing transaction risks from the parties to an insurer. The product is commonplace in the US, where it was originally imported from the UK. Private equity firms often love it. But in Canada, where we have a larger proportion of strategic parties and pension funds relative to term-limited private equity funds, insurance is not always the right option. Canada also continues to have far less post-closing deal litigation.

A tricky one is the incorporation of Delaware deal concepts into Canadian law purchase agreements. Proponents argue that the Delaware Bar may have discovered a particular risk first, but that risk could similarly be an issue for a Canadian court, so should be addressed. This approach is not without merit, but can ignore the realities of both legal risk in Canada, and our courts’ commitment to domestic precedent. The machinations Americans go through may never materialize in Canada, and could muddy the waters for a court hearing a dispute in future.

Going forward, the development I would argue as having the biggest impact on deal practice is the simultaneous commoditization of legal tasks and the customization of legal advice. It may be unfair to label this as a US export rather than a global development, but its outsize impact on US deal practice is undeniable.

Sophisticated clients are demanding efficiencies in labour-intensive but relatively less skilled legal work such as document review and routine closing mechanics, while seeking customized advice on the strategic aspects of a transaction. Alternative legal service providers, firms specializing in contract review and improving technologies, like Wortzmans, are successfully commoditizing simpler tasks. In contrast, the most successful corporate law firms are focusing on “high-value” advice, often highly technical or customized to the needs of the client in the context of an acquisition and that client’s business. This is bespoke, high-margin work. Fortunately, it is also the most challenging and fun.

Mark Adkins is the Managing Partner of McCarthy Tétrault LLP’s New York office. His practice is focused exclusively on the Canadian law aspects of M&A, private equity and inbound capital markets transactions.