What are the laws governing cross-border M&A in Canada?

High-speed internet and round-the-clock flights opened the doors wide open to cross-border M&A. Suddenly, companies have the technological tools necessary to seamlessly support an expansion to other countries. 

Before actual operations, however, companies must deal with cross-border M&A laws.  Like most countries, Canada takes its economic security seriously. This is why laws governing cross-border business deals must comply with strict guidelines. Let’s talk about this a bit more in this article. 

How does cross-border M&A in Canada work? 

Cross-border M&A refers to mergers and acquisitions that involve two different businesses from two different countries. In mergers, two companies generally combine to create a new company. With acquisitions, however, a company absorbs or acquires control of another company. 

The process of acquiring or merging means there will be two different sources of applicable law. Sometimes, there are existing treaties or foreign trade agreements that could also be used. In any case, there’s a need to harmonize these laws. This is where cross-border M&A lawyers come in. 

What key Canadian laws govern cross-border M&A? 

The primary laws regulating cross-border M&A in Canada is the Investment Canada Act (ICA) and the Competition Act. Here’s an overview of the scope of each law: 

Investment Canada Act 

Its primary purpose is to protect national security through the review of significant investments by non-Canadians in Canada. This covers any type of business entity such as partnerships, sole proprietorships, and corporations. 

For corporations, full acquisition isn’t always necessary. Review under the ICA is already possible if the foreign entity bought enough to get voting interests. Even minority shares may be subject to review through a voluntary filing mechanism. 

Competition Act 

The Competition Act is meant to encourage competition. One of its primary goals is to ensure that small and medium-sized businesses have equal opportunities to take part in the economy. 

Under this Act, the Commissioner of Competition can review all mergers and acquisitions. The review usually considers how M&A impacts competition through changes in output or quality. 

Here’s a great explanation about the Competition Act: 

What is “net benefit to Canada”? 

The term “net benefit to Canada” comes out often when it comes to cross-border M&A. Here, the Minister must decide if allowing foreign investment would ultimately help the country. It’s a tough decision and the Minister often considers the following factors: 

• how the new business will change economic activity, specifically employment, resources, and exports 

• the extent of participation of Canadians in the new business 

• how the investment would affect the country’s productivity, technology, product variety, and industrial efficiency 

• how this would affect competition in the same industry 

• whether the investment is compatible with economic, cultural, and national policies 

• how the investment would affect Canada’s competitiveness in the global market 

Find out more about cross-border M&A through Lexpert-ranked best cross-border lawyers in Canada. 

Can regulatory bodies deny cross-border M&A deals?  

Yes. If the ICA decides that there’s no “net benefit” to Canada, they can deny the deal completely. Businesses are given the opportunity to present their case again, but ultimately the Minister has the final say. 

These stronger rules on investment means many foreign investors may be denied access to Canada businesses. With the right preparation, however, hopeful investors could get the nod in key industries. 

What are the legal implications for cross-border M&A? 

Regardless of the size, cross-border M&A in Canada requires the input of several regulatory bodies. The legal implications are extensive and do not always guarantee approval. Here are just some of the concerns cross-border M&A lawyers deal with: 

Compliance with regulatory bodies 

Implementing bodies of laws concerning M&A includes the Competition Bureau, which is an independent law enforcement agency. For the ICA, there’s the Innovation, Science, and Economic Development Canada (ISED). 

If any investment is related to culture industries, the Department of Canadian Heritage steps in as a regulatory body. Of course, these bodies are distinct from industry-specific regulations that may be imposed. Certain territories may also have their own requirements on top of those mentioned. 

Harmonizing taxation 

Acts prior to a successful cross-border M&A are subject to tax. However, the type of tax depends entirely on the manner of merger or acquisition. For example, most M&As are done through the purchase of shares. However, some buyers prefer to buy assets of a company for the higher tax shield.  

Tangible assets bought through M&A may also be depreciated at a set rate which changes the payable tax. The province can also impose transfer taxes on the sale of land inside its territory. Payment of indirect taxes like added tax and sales tax may also be required depending on the local laws. 

Conduct of due diligence 

Due diligence is where the best cross-border M&A lawyers really shine. This refers to the lawyer's duty to make sure that everything is in order. Due diligence can take a long time. This is because lawyers look through every single matter affecting the merger and acquisition.  

The following concerns in integration planning should be part of due diligence: 

• Corporate structure and governance – this confirms who legally owns or controls the business. Additionally, it shows who has authority to enter cross-border transactions 

• Regulatory compliance – this guarantees that all business operations prior to the M&A meet legal requirements. It can also help avoid penalties carried over to the new business 

• Existing obligations – cross-border M&A lawyers will need to know what obligations the business currently holds and how it will impact future operations 

• Commitment of key players – are suppliers still open to transacting with the business after the M&A? Failure to verify this before the deal could halt operations 

• Financial due diligence – lawyers will need to inventory all the assets and liabilities of a business to determine if the M&A is worth it 

• Tax status – pre-existing liabilities to the government need to be disclosed and may change the overall value of the company 

• Employment matters – foreign investors will need to know what labor laws govern a territory, especially if they intend to bring in foreign talent 

Ultimately, the goal of every merger and acquisition is to expand. Cross-border deals with problematic companies will prevent this from happening. This is why the bulk of conducting due diligence starts with confirming that the target business could be the source of growth. 

What are the issues in cross-border M&A? 

Cross-border M&A trend experienced an upward trajectory in recent years. Does that mean it has grown easier since then? 

Not necessarily. The ICA is constantly evolving with the new Bill C-34 given royal assent on March 22, 2024.  Also known as “an Act to amend the Investment Canada Act”, this law significantly expanded the power of the Minister. 

The changes being rolled out make it critical for cross-border M&A lawyers to stay up to date with regulatory developments. This means keeping watch of tax laws, labor laws, changes to the investment act, and possible amendments to existing treaties. 

Why are cross-border M&A more difficult to integrate? 

One of the difficulties of cross-border M&A is the need to harmonize all applicable laws. Canadian lawyers would need to work with their foreign counterparts to find a unified approach acceptable in both areas. This requires a high degree of coordination and specialization from everyone. 

Global M&A is also vulnerable to international challenges. For example, policy changes in other countries could impact how foreign investors decide.There are also possible cultural differences that must also be considered. Not to mention bigger corporations tend to suffer from communication problems due to overlaps in the organization. 

There is no telling how global challenges, like the COVID-19 pandemic, could change the trend of M&A. All of these lends to the difficulty of M&A transactions. 

Why do firms engage in cross-border M&A? 

So, if cross-border M&A is so difficult, why do firms do it? Expansion is just one and the most obvious reason. Others include: 

Gain advantageous position in the market 

Instead of building operations from zero, companies choose mergers and acquisitions to skip the startup. Instead, these foreign businesses gain access to an existing customer base and local skills. This helps grow revenue by stepping into the goodwill of another. 

Access to strategic assets 

Sometimes, firms will target companies for valuable assets. These include real estate, patents, advanced technology, and even valuable employees. Acquiring these assets is often more cost-effective than developing them from scratch. 

Diversification of risks 

Cross-border mergers and acquisitions help spread risk. The acquired company often has access to an audience while the acquiring company does not. This helps prevent dependency on a single market, especially for industries that change quickly. 

Supply chain integration 

Acquiring key players in the supply chain helps secure a company’s position. This can improve reliable sources of raw materials while reducing costs. For example, acquiring a manufacturing company close to the source of raw materials can reduce delivery costs. 

Leverage on tax agreements 

This is where bilateral agreements come in. Merging or acquiring companies in countries with favorable tax rates can significantly reduce the tax costs. However, this requires extensive study on the part of lawyers. 

Have more questions? Visit our Legal FAQs page if you want to find answers to common legal queries. Bookmark this page for easy access.   

What agreement does Canada have with other countries impacting cross-border M&A? 

The tax laws of the host country apply when it comes to cross-border M&A deals. In some cases, however, there are additional agreements in place governing how transactions are treated. 

For example, there are Foreign Trade Agreements between Canada and other countries like US, Chile, and the European Union. These agreements could include provisions about investments of Canada in another country or vice versa. 

Here’s a simple explanation about foreign trade agreements: 

Cross-border agreements are constantly being changed, updated, or terminated. Lawyers focusing on international M&A typically have their pulse on the most recent changes. This guarantees that they can quickly place clients at an advantage during international transactions. 

What are the best practices of lawyers in cross-border deals? 

• Cross-border due diligence should be a priority. While Canada laws will govern as the home country, this does not discount the impact of the foreign laws to the trade. 

• Reaching out to local lawyers ensures compliance with foreign laws and customs. These lawyers can provide insight into country-specific matters such as timelines, procedures, and government bodies. 

• Contracts concerning M&A transactions should be customized down to the footnote. Lawyers must tailor warranties, dispute resolutions, and conflict of laws into the contract. 

• Legal support should extend beyond the closing stage. Once the merger or acquisition is completed, lawyers should maintain contact until integration is complete. 

• Delays in the timeline should be part of the preparation process. This will prevent last-minute panic and keep the process on track, especially for time-sensitive deals. 

Cross-border M&A activity: a national concern 

International mergers and acquisitions offer excellent opportunities for growth. However, they also come with complicated legal and operational challenges. Careful due diligence helps identify and manage these risks so that international deals benefit everyone involved. 

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