Cross-border investors set sights on Canada

Never has the landscape for international trade been more uncertain, with evolving regulatory requirements and foreign investment laws, the ongoing U.S./China tariff dispute and political uncertainty south of the border — not to mention Brexit, threatening major disruption in the European supply chain. Ratification of the United States-Mexico-Canada Agreement has been delayed, leading to further uncertainties in North American trade deals and M&A. While change brings disruption and challenges, it also offers opportunities, and many businesses will be exploring new markets. With political turmoil in other countries, Canada is seen as a safe haven for many foreign investors. 

“I think that, in some ways, Canada having a relatively stable political climate is increasing the velocity in which non-Canadian companies are looking to invest here,” says David Kruse, a partner at Blake Cassels & Graydon LLP. “We’ve seen very steady private M&A transactions with non-Canadians investing in Canada over the past two or three years. Canadian assets are very attractive.” 

Marshall Pawar, a partner at boutique firm MEP Business Counsel, has also observed an increase in foreign investors looking to buy in Canada, which may be as a result of political uncertainty in the US. Whereas M&A used to be reserved for large billion-dollar deals, he now sees many smaller companies jumping into the cross-border M&A realm. With the upswing in foreign investors heading to Canada comes a rise in the number of investors entering unchartered territory, without knowledge of Canadian regulations. Seeking Canadian counsel is important to avoid complications with tax, securities, competition laws and foreign investment rules. 

One issue that often arises in M&A when a U.S. buyer is acquiring a Canadian company is the reluctance of American buyers to obtain Canadian counsel right from the outset to advise on country-specific laws and regulations, according to Alan Litwack, a partner at Dickinson Wright LLP.  

“Sometimes, people don’t recognize that, even though the companies are quite similar, there are significant differences in corporate laws and employment and HR laws. It’s important to engage local counsel on matters of the deal that relate to various aspects of local Canadian law because the underlying legal systems, while similar in many ways, are also different in many,” says Litwack. Firms dealing in cannabis trade between the U.S. and Canada, for example, must be mindful of laws and regulations in different states and provinces and on both sides of the border. 

In-house lawyers need to take on the role of project manager when dealing with cross-border transactions to keep on top of numerous regulations in different jurisdictions.  

“Any sort of cross-border transaction that involves one or more jurisdictions puts a lot of pressure on tax teams, legal teams, accounting teams and internal business groups to manage the claim for all contingencies,” says Robert Soccio, general counsel at Navistar Inc. “General counsel is the quarter-back, leading strategic negotiations with multi-jurisdictional parties and with multi-disciplinary teams, internally and externally. It’s a massive undertaking in project management.” Having contingency plans in place is key in all cross-border discussions, Soccio adds. 

Kruse advises in-house counsel to consider tax obligations in different jurisdictions at the outset and to determine if there is a requirement for foreign investors to seek approval under the Investment of Canada Act. 

“One challenge that in-house lawyers face is to make sure that they get out in front of things that might be gating issues that would be particular to cross-border transactions that they may not face in domestic transactions,” he says. 

Moreover, the role of in-house counsel does not end once the transaction is complete. The complex and challenging process of integrating the acquired business into the purchasing company is an important factor for in-house counsel to consider at the outset. 

“Integration planning starts well before closing and a large internal team is responsible for ensuring that the acquired business is Day 1 ready,” says Kathleen Orysiuk, assistant general counsel at Siemens Canada. “An in-house M&A lawyer can add real value to the integration team by helping to identify Day 1 risks, understanding workstream interdependencies and planning mitigating strategies.”  

Pawar concurs. “Where I often see problems for GCs is after all the external counsel has gone home and the dust has settled,” he says. “They need to take time to plan for what the new world is going to look like after they close, and that should be reflected in the transaction document.” 

One deal that Pawar recently handled was the purchase of a company operating a casino in Vietnam by a large international private equity firm. With shareholders located in New York, California and Asia, there were multiple jurisdictions and time zones to deal with so considerable care had to be taken in the preparation of reps of warranties. Pawar and his team now continue to represent the client in the post-acquisition world.  

Representational warranty insurance has become increasingly popular as a tool to deal with liabilities that can otherwise seem overwhelming, Kruse notes. This can be a useful tool for determining who is going to be liable for preclosing issues. Blakes recently oversaw the sale of a large Caribbean-based gas retailer, Sol Ltd, to a Canadian public company, Parkland Fuel in a $1.6-billion transaction. The project presented challenges due to the fact that Sol operated in 23 different countries, so numerous jurisdictions were involved.  

“A lot of co-ordination was required to stay on top of the different regulations,” says Kruse. 

Earlier this year, Bombardier completed the acquisition of Triumph Group’s Global 7500 wing manufacturing operations in a relatively straightforward transaction.  

“We were mindful of and well advised on some jurisdictional particularities, so there didn’t end up being hurdles,” says Nicholas Cerminaro, associate general counsel at Bombardier. In any cross-border M&A, Cerminaro advises getting educated on the particularities as early as possible to avoid complications. 

In a more challenging transaction, Dickinson Wright recently represented a Canadian firm that was the target of an acquisition by a U.S.-based family office. The buyer’s California-based lawyer wanted to use Californian acquisition documents that were not acceptable in Canada. 

“We had a struggle to get them away from those documents. Even when you have a fully backed transaction on a large deal, you can still face wrinkles,” says Mark Redinger, a partner at Dickinson Wright LLP. “It’s really a marathon, not a sprint. There are going to be ups and downs.” In another transaction handled by Dickinson Wright, during the sale of a Canadian manufacturer to a U.S. private equity firm, the U.S. bank that was funding a portion of the purchase requested a clearance document that was not accessible from the Canadian bank, presenting another obstacle that the team overcame. 

According to Orysiuk, the detail in transitional service agreements is every bit as important as the terms of the agreement itself.  

“I think it’s important for legal to work closely with the internal team that is preparing the service schedules to ensure that they capture the appropriate level of detail and accurately reflect expectations,” she says. 

Lawyers agree that the volume of foreign investors setting their sights on Canada shows no sign of slowing. 

“We are seeing significant cross-border M&A work and I see it continuing. That’s just the way of the world,” says Redinger.