Private mergers & acquisitions: Key differences between Canadian and US based deal studies

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Corporate Update


The M&A Market Trends Subcommittee, Mergers & Acquisitions Committee of the American Bar Association regularly conducts and publishes deal studies in respect of North American private M&A transactions. This article focuses on the two most recently published studies:

  • 2019 Private Target M&A Deal Points Study (the “US Study”)‎1‎; and
  • 2018 Canadian Private Target Mergers & Acquisitions Deal Point Study (the “Canadian Study”)‎2‎.

The US Study and the Canadian Study (together, the “Studies”) analyzed publicly available acquisition agreements. These agreements involved private targets being acquired by public companies, (1) for which definitive agreements were executed and/or completed in 2018 and the first quarter of 2019, in respect of the US Study, and (2) for transactions signed in 2016 and 2017, in respect of the Canadian Study.

While Canadian transactions are generally consistent with, or similar to, US trends, the Studies indicate a number of variances between the jurisdictions. This article will highlight six key differences and is not intended to be an exhaustive review of the Studies or their differences.

1. Frequency and basis of earn-out provisions

Earn-outs appear more frequently in US transactions (27%) than in Canadian transactions (16%). While the past several years have shown that Canadian deals are increasingly basing earn-out value on revenue, as opposed to earnings, the opposite trend is occurring in the US.‎3

Earn-outs are a contractual provision whereby a portion of the purchase price is contingent on the target’s future performance after closing. The amount subject to the earn-out provision can be determined by different financial targets including revenue, earning, and net income, among others. Earn-outs allow a buyer and seller to bridge the gap in their perceived value of a business, and can incentivise management to maximize the target’s financial performance after closing.

2. Legal opinion as a condition of closing

Canadian transactions are more likely to require a legal opinion from target’s counsel as a closing condition (18%), as opposed to the US (3%), although this practice is becoming less frequent in Canada (down from 34%, as reported previously). While parties typically conduct due diligence and rely on representations and warranties contained in the acquisition agreement, legal counsel to the target is sometimes best positioned to opine on a legal issue, such as authorized and issued capital or enforceability of the transaction documents on the target. In these situations, a legal opinion from target’s counsel can be a condition of closing.

One cause, among others, for the decline in legal opinions in Canada may be the rise in popularity of representation and warranty insurance (“R&W Insurance”). R&W Insurance allows a buyer to look to the insurer, rather than the seller, in the event of a breached representation. This is an established practice in both the US and the United Kingdom.

3. Prevalence, structure and size of indemnity baskets

The prevalence, structure, size, and carve-outs included in an indemnity provision differ between the jurisdictions. An indemnity basket, typically either a deductible basket or a first-dollar basket, shields one party from having to pay for an otherwise covered claim, unless and until the losses exceed a specified amount. While a deductible indemnity basket requires a party to indemnify only the losses that exceed the specified amount, a first-dollar indemnity basket provides that once the losses meet or exceed the specified amount, the party must indemnify all losses, including those which contributed to reaching the threshold.

  • Prevalence: Canadian transactions are less likely to include indemnity baskets (81%), whereas in the US, an indemnity basket is included in nearly every transaction (97%).
  • Structure: A majority of US transactions contain a deductible basket (74%), whereas Canadian transactions are more likely to include a first-dollar basket (44%). Some reported transactions in the Canadian Study contained a combination (7%).
  • Size: Canadian transactions included larger baskets than the US transactions. While 63% of baskets in the US represented less than 0.5% of the transaction price, only 39% of the baskets in Canadian transactions represented the same figure.
  • Carve-outs: US transactions were far more likely to include carve-outs than Canadian transactions. While nearly all US transactions with indemnity baskets included carve-outs for fraud (96%), this carve-out was only found in 44% of Canadian transactions. In addition, while 86% of US baskets included a carve-out for capitalization, this was only the case in 38% of Canadian baskets.

4. Use of material adverse effect qualifiers and inclusion of carve-outs

While virtually all US transactions contained a material adverse effect (“MAE”) qualifier, only 92% of Canadian transactions included an MAE.

An MAE qualifier typically sets out a threshold by which the parties can measure any negative impact of a change or effect on a target. A seller will generally wish to include MAE qualifiers on certain representations and warranties, so as to limit the changes which may entitle the buyer to certain remedies. MAE qualifiers are often defined‎4‎ in both jurisdictions, while a US transaction is more likely to include a buyer-friendly, forward-looking standard, such as “could reasonably be expected”, than a Canadian transaction (97% versus 69%, respectively).

A fewer number of Canadian transactions (78%) contained carve-outs from an MAE qualifier - factors which are not included when determining whether an MAE has occurred - than US transactions (97%). Common carve-outs identified in the Canadian transactions included actions required by agreement (53%), financial market downturn (58%) and war and terrorism (66%).‎5‎ MAE qualifiers can be a heavily negotiated item in the acquisition agreement, which may contribute to the difference in carve-outs seen in the jurisdictions.

5. Inclusion of double materiality scrapes

Transactions are also increasingly incorporating a double materiality scrape. These are a buyer-friendly provision that excludes any MAE, or other materiality qualifier set out in a seller’s representations or warranties, when determining whether a breach has occurred, and in calculating any losses.

Double materiality scrapes are far more common in US transactions (93%) than in Canadian transactions (42%). In addition, 65% of the materiality scrapes in Canadian transactions are limited to only the calculation of losses, whereas only 26% in the US are limited in this manner.

6. New representations in US study

The US Study introduced several new representations that are gaining popularity.

  • #metoo: A target may represent that no allegations of sexual harassment or misconduct were made against any current or former officer of a target or its affiliates. This representation was included in 13% of the reported transactions, with 50% of those included being qualified by knowledge.
  • Data Privacy: A target may represent that it has complied with all the laws and fiduciary duties relating to the protection and security of personal data, has not been subject to any audit or proceeding by any governmental authority, nor any legal proceeding alleging that the company had materially violated anyone’s privacy rights, and/or has not been threatened with any unauthorized access, use, or disclosure of personal data. This representation was included in 68% of the reported transactions, however may include carve-outs for specific information, such as medical records.
  • Cybersecurity: A target may represent that its information technology and related equipment are reasonably sufficient for the business’ immediate needs and/or that there has been no unauthorized access, use, intrusion, or breach of security, material failure, breakdown, performance reduction, or other adverse effect in a specified time period that would reasonably cause any substantial disruption to the target or its assets. This representation was included in 70% of the reported transactions.


Overall, while Canadian transactions continue to be influenced by our US counterparts, there remain several practice differences between the jurisdictions. In addition, the Studies have different sample sizes and surveyed deals in different years. Care should therefore be taken when drawing generalized conclusions between the two markets with ‎‎respect to specific deal points.  While the Studies provide helpful information about deal points, they are ‎‎not necessarily an authoritative statement on what is “market” today when negotiating private M&A ‎‎transactions.‎

This update is intended as a summary only and should not be regarded or relied upon as an opinion or ‎‎advice to any specific client, or regarding any specific situation.

This article provides only general information about legal issues and developments, and is not intended to provide specific legal advice. Please see our disclaimer for more details.

[1]‎ The US Study analyzed 151 acquisition agreements, excluding certain transactions which were deemed ‎inappropriate for inclusion (such as bankruptcy, reverse mergers and divisional sales). Asset deals ‎comprised 5.3% of the US Study sample, and the transaction value range was between US$30M and ‎US$750M. 63% of the target study sample transactions had transaction values of US$100 million or more.

[2]‎ The Canadian Study analyzed 90 acquisition agreements, excluding certain transactions which were ‎deemed ‎inappropriate for inclusion (such as bankruptcy, ‎non-arm’s length party transactions, ‎transactions valued at less than C$5M). The transaction value range was between ‎C$5M and C$2.65B, ‎however only 40% of the target study sample transactions had transaction values ‎of C$100 million or more.‎

[3]‎ Canada - 25% were determined by revenue, as reported previously, versus 36% in the Canadian Study. US - 32% were determined by revenue, as reported previously, versus 29% in the US Study.

[4]‎ 100% of the US transactions and 82% of the Canadian transactions‎.

[5]‎ The percentage of US transactions containing the same carve-outs were 72%, 84% and 97%, respectively.