The practice area of private equity lawyers includes equity and quasi-equity investment activity in non-public markets. This area of law has buy-out, mezzanine and venture capital segments. Buy-out refers to mid-market, private company investments in more traditional industries that are undergoing a fundamental change in ownership, expansion or acquisition. Mezzanine investments are made primarily through subordinated debt or preferred shares. Venture capital investments typically involve new or young companies in innovative industries (technology, life sciences, media/communications). Venture capital investments may also involve late-stage investments in companies with established technology or concepts that require capital to expand production, marketing and sales.
Private equity lawyers in this area may include assisting with the formation of investment funds, typically limited partnerships, which raise capital to invest in portfolio companies. Private equity lawyers tend to have significant tax, corporate finance and general corporate expertise. Similarly, there may be a role in this practice for assisting with the financing by private equity funds or investors in portfolio companies.
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Private equity is a new type of investment wherein investors primarily buy shares in non-public companies (or privately held companies). In here, usually with the assistance of private equity lawyers, investors in partnership with private equity firms invest in companies with goal of either to increase their net worth, or to withdraw such value before selling the same shares or investment after a certain period, usually after 7 to 10 years. Before such withdrawal, investment profits may be distributed to the investors after several years.
There are various types of private equities deals, and private equity lawyers are at the forefront in perfecting these deals. They prepare contracts, which may include provisions on profit-sharing, delineating the rights and obligations of both parties, the grounds for rescinding said contract, penal or civil damage clauses for any breach, and possible alternative dispute resolution clauses.
These types of private equities deals are:
Buy-outs, which may also be in a form of mergers or acquisitions, occur when investors acquire an entire – usually underperforming – company. Companies that may be subject to a buy-out are not limited to private or closely held companies, but also to publicly owned companies. When successful, private equity investors or firms tend to change management structures and operations to ensure the success of the invested business, while securing the growth of their investments.
In venture capital, investors provide capital financing to a startup, or to a small and medium enterprise (SME), when it is shown that such business has a potential for long-term growth and expansion. In turn, investors acquire equity and voting rights as shareholders in the supported company. When pursuing a venture capital, private equity firms may partner with other investors, such as banks and other financial institutions, to come up with the private equity funds to support these startup companies or SMEs.
Mezzanine financing is a mixture of debt restructuring and private equity, wherein venture capitals or other loans of a company are turned into equity interest in case the company defaults on its private equity or other loan payments.
It may also occur in a case where the company would want to expand its operations, thus, offering to its senior lenders a mezzanine financing deal to fund its expansion. Another way of doing mezzanine financing is paying the earlier venture capitals and other older loans, and to offer mezzanine financing to some other investors.
In sum, whenever a company would want to acquire additional capital, or when an investor through a private equity firm wishes to acquire new companies or lend them capital through any of these private equity deals, private equity lawyers can help either party to come up with a deal that is most beneficial for both.
Private equity lawyers ensure that either the private equity firms, or the investors, and the recipient companies comply with the regulations on investments made to Canadian companies.
Under the Competition Act, certain amounts of investments which reach or exceed the threshold amounts, which is yearly set by the Competition Bureau, will be reviewed by the concerned government agency. The review will commence through a pre-closing notification (or pre-M&A notification) to be filed before the Competition Bureau. This filing is required of the parties to do such investment and the investment will not be fully completed until the end of the review.
Aside from the review under the Competition Act, the Investment Canada Act also requires investment reviews in cases where non-Canadian or foreign companies or individuals invest in Canadian companies or corporations. The amount thresholds for this review are annually published in the Canada Gazette for public circulation.
In addition, the amount thresholds for review may depend on whether the Canadian business which accepts the investment is publicly or privately owned, and whether the investing foreign company’s country is one of those which has a trade agreement with Canada.
Under the two Acts, private equity lawyers can assist both the investing and the recipient company to become compliant with the law and prevent any legal brushes against the authorities. Having extensive knowledge of other investment laws and corporate laws, private equity lawyers can lend a hand both in dealing administratively with these agencies, and at the same time overseeing the investment transactions of these companies from the legal perspective.
The Investment Industry Regulatory Organization of Canada (IIROC) is the agency responsible for regulating investment deals in Canada, which includes private equity investment. Generally, the IIROC regulates deals and trading activities in the country’s debt and equity sector and operates under the Canadian Securities Administrators (CSA) which is the organisation of all security regulators from the provinces and territories.
Recent development in the IIROC is its merger with the Mutual Fund Dealers Association of Canada (MFDA) to form the New Self-Regulatory Organization of Canada (New SRO). The New SRO has assumed all regulatory powers of both the MFDA and the IIROC.
Taxation laws that apply to private equity in Canada may be divided into two – tax incentive schemes to encourage investments in unlisted companies in Canada under the Income Tax Act (ITA); and charging investment transactions with withholding and capital gains tax.
The following are some of the tax incentive schemes applied to private equities in Canada:
As for tax impositions, below are the tax rates applied to equity and debt financing, which can generally be reduced by a tax treaty when applicable:
The private equity industry in Canada has been growing over the past years, even after the onset of the COVID-19 pandemic. Private equity investments have expanded from the conventional markets of private companies to current ones such as pensions funds, banking sector, public entities, energy sector, and labour-sponsored funds.
Want to know more about private equities in Canada? Head down to see the list of the best private equity lawyers in Canada as ranked by Lexpert.