Having a strong legal team that focuses on M&A transactions is essential (https://open.spotify.com/episode/2LKUE9a33zP5vixfybMypD?si=K75OevURSSu1Z7M2g38uzw), but that team extends further than the M&A lawyers themselves. Working with a team that can provide a full range of services (or who also can integrate well with specialized legal counsel where required or existing advisors, such as chartered business valuators and accountants) can help ensure that a transaction remains on track and closes smoothly. Below are a few examples of how in our experience at FREEDIN & ROWELL that integration plays out over the course of an M&A transaction:

1. Employment – All M&A transactions have an element of employment law to address. Be it preparing new or revised offers of employment, ensuring that offers of employment are being made on the same or substantially similar terms as employees currently enjoy, termination matters or addressing labour items, lawyers who focus only on these areas can help to provide tailored advice and solutions to manage the transition process effectively.
   
   
2. Intellectual Property – Intellectual property matters often arise during transactions. Be it ensuring that moral rights are appropriately with the target business, conducting Canadian, US or initial intellectual property title searches to ensure that the target business inventories and retains its assets or ensuring that sufficient licensing is addressed, strong intellectual property lawyers can help address these items early to ensure a smooth closing process.
   
   
3. Pre-Closing Reorganization – Often vendors undertake a pre-closing reorganization of their corporate structure to ensure optimal tax treatment of sale proceeds. Lawyers that are able to quickly maneuver to review, advise and implement such structures, working closely with the client’s advisors, can ensure that closing is kept well on track.
   
   
4. Real Estate / Leasing / Secured Lending – Often real property is involved as part of a transaction either as an asset of the target business or a leasehold from which the target business operates. Real estate counsel can help ensure that those interests are protected to ensure business continuity post-closing, by transferring title to real property not being retained post-closing, negotiating with landlords, drafting leases for a lease back of property by the purchaser from the vendor post-closing as well as addressing lending requirements, be it on behalf of the purchaser with their secured acquisition financing or addressing bank subordination requirements on behalf of the vendor, in a specialized way that helps to keep closing expectations aligned.

The examples above are but a few of the ways that our M&A team integrates well with the full team at the firm to ensure that the transaction is well managed. The M&A lawyer is similar to a quarterback on a transaction – addressing the key legal steps and materials required to effect the acquisition or sale of a business – while involving such specialists as required to get the transaction closed for you, the client. If you have any questions regarding this or any aspect of your business, please do not hesitate to get in touch with me at 905.276.0431 or kfernandes@freedinrowell.com. We are here to help.

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An increasingly popular method of addressing the risk allocation issue has been representations and warranties insurance (“RWI”), which gives Purchasers the ability to claim against an insurance policy if there has been a demonstrable breach by a Vendor of the representations and warranties in a purchase agreement. RWI facilitates easier negotiation of representations and warranties and considerably reduces the parties’ risk in M&A transactions.

Traditionally, RWI has almost exclusively been used on large transactions because insurance companies charge a minimum premium that makes the cost unaffordable on smaller transactions. However, new simplified RWI policies (“SRWI”) specifically designed for lower mid-market transactions (from $250,000 in purchase price and up) are increasing the uptake in the market for RWI.

SRWI products may not be right for all transactions, but it does allow for a Vendor to, in many senses, “walk-away” after closing and give a Purchaser certainty and comfort on the state of the target company going forward. SRWI is so much cheaper than the traditional RWI product because it does not require an underwriting call and has a simplified diligence process for the insurers – resulting in a policy cost in the thousands or tens of thousands, rather than hundreds of thousands of dollars.

In practical terms, SWRI may help a Purchaser stand out during a competitive M&A bid process and may help a Vendor achieve the certainty of exit (onto the next phase of their lives) they intended when agreeing to sell their business. This tends to result in a simplified negotiation and closing process for both parties, predictable closing proceeds for Vendors and an insurer to turn to in the event of a claim post-closing. Given these benefits, together with the popularity of RWI south of the border, interest in SRWI continues to grow even as early as the marketing document, term sheet or letter of intent stage.

SRWI may be a valuable tool in the parties’ toolkits to get deals done, reduce transaction risk and build momentum between the parties for a productive ongoing relationship.

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Vendor Financing: Often a vendor may agree to finance the difference in perceived value by entering into a vendor financing arrangement, which can help close the goodwill gap and act as a capital buffer for the purchaser. Under a vendor financing arrangement, the vendor and purchaser enter into a loan agreement, where that loan is subordinated to bank financing, and the details of which (i.e. repayment period, interest rate, and loan amount) are negotiated between the parties. The benefit of this arrangement is the vendor has a continued interest in the business to ensure the loan is repaid, thus keeping their goodwill close to the business, and for both parties, the necessary capital is available to close the deal.

Retaining Equity: An equity roll serves as another method by which a purchaser and vendor can address a difference of opinion over the valuation of a business. Particularly in cases which require lender financing, an equity roll, where the vendor retains equity in the business being sold, is sometimes perceived by lenders (and purchasers) as a way to reduce the risk of a loss of goodwill by keeping the vendor involved with the business. Consequently, this arrangement allows the purchaser to be more flexible with regard to price/valuation. It also provides the vendor with a true up mechanism on value, and potential up-side in the event the business demonstrates strong performance.

Earn-Out: An earn-out mechanism is a practical strategy that allows a vendor to bet on the future success of the business and be compensated accordingly within the confines of the measurable targets for the business to achieve. An earn-out can be a win-win for both parties if the targets are reached with pre-determined risk that if the targets are not reached, the vendor will not receive additional compensation. The main benefit of an earn-out is that it is a low-risk strategy for a purchaser but a high-risk, high-reward strategy for a vendor that aligns the parties around the continued success of the business.

The above process can be simplified by engaging a mergers and acquisitions firm, including the services of a chartered business valuator. This is a typical method to produce an independent valuation of the business. When structuring a transaction, objective professionals can help close the gap between concepts of value of the vendor and purchaser, as well as provide real-time data and market information as it relates to industry and market trends. Such professionals may implement a number of methods to value the business including earnings-based, market-based, and asset-based methods. Hiring a professional can be a reliable strategy for small to medium-sized private businesses to resolve vendor and purchaser valuation disputes.

Finding common ground on the valuation of a business between a vendor and purchaser can make or break a deal. The above strategies are ways to achieve common ground on the valuation of the business and may help to move the parties toward the ultimate goal of closing the deal.

We at FREEDIN & ROWELL, LLP are experienced at drafting the appropriate legal documentation to structure the purchase or sale of the business. If you have any questions regarding this or any aspect of your business, please do not hesitate to get in touch with us at 905.276.0431 or kfernandes@freedinrowell.com. We are here to help. 

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Although ONCA is now in effect, there is a three year transition period for existing corporations to review and amend their governing documents to comply with the new legislation. During this transition period, corporation’s letters patent (and supplements thereof), by-laws and special resolutions remain valid and in effect until the end of the transition period. However, if these provisions still do not comply with ONCA after the transition period, the conflicting provisions will be deemed to be amended to conform to ONCA, subject to limited exceptions.

Notable Changes:

ONCA applies to not-for-profit corporations and charities incorporated under Ontario legislation and brings in a variety of changes to the governance of these entities, including:

• board of directors composition;
• new requirements for directors and officers to report conflicts of interest;
• enhanced member rights in respect of derivative actions, dissent and oppression remedies;
• increased flexibility for audits and reviews of financial statements; and
• distinction between “public benefit corporations” and other not-for-profit corporations.

Next Steps:

Not-for-profit corporations subject to ONCA should consider undertaking a review of their existing policies and governing documents (including by-laws, letters patent, and special resolutions) to determine whether amendments are necessary to comply with ONCA.

If you have questions about changes or transitioning under ONCA, please reach out to a member of FREEDIN & ROWELL LLP’s Corporate/Commercial team.   

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