Mergers and Acquisitions, in Ontario: What Business Owners Need to Know

Mergers and Acquisitions are significant milestones for any business.

Whether you’re looking to expand, exit, or reposition your company, understanding the legal framework and strategic considerations for these transactions is essential. For businesses in Ontario, these processes are governed by provincial and federal laws, which must be carefully navigated to ensure success.

Understanding Mergers and Acquisitions

• Mergers: A merger generally involves combining two or more businesses into one entity. Most often a merger falls under the legal concept of an amalgamation which is governed by the Ontario Business Corporations Act (“OBCA”) or Canadian Business Corporations Act (“CBCA”).
• Acquisitions: An acquisition usually involves one business or individual taking control of a business by by acquiring its assets or its shares,

Each of these transactions involves unique processes and legal considerations, and choosing the right approach depends on your goals and the nature of your business.

Why Businesses Consider a Merger or Acquisition

• Expansion: Acquiring a competitor can result in a increase in the company’s existing market share while also eliminating the competition and acquiring their expertise with it. Merging with a complementary business can also create synergies.
• Innovation: These types of transactions can provide the acquiring business with additional valuable resources and talent which can create innovation in the busines
• Increased Efficiency: Combining resources and expertise can also contribute to cost savings and efficiencies within the business.  Two Merging businesses or acquiring another business can create this as it may allow for certain cost savings through bulk ordering and streamlining operations to eliminate duplicate functions. Economies of scope can arise from leveraging combined resources to develop new products or enter new markets. The efficiencies and growth potential gained through mergers and acquisitions can also lead to higher profits and increased shareholder value.
• Diversification and Risk Reduction: Acquiring companies in different geographical locations can help spread risk of any one business and make the the new entity or structure less vulnerable to economic downturns or market fluctuations that may occur from time to time.

Key Legal Considerations in Ontario

1. Due Diligence

Due diligence is the foundation of any successful merger, acquisition, or business sale. It involves a thorough review of:

• Official Corporate Records
• Financial statements and tax records.
• Intellectual property assets.
• Employment contracts and liabilities.
• Regulatory compliance and permits.
• Pending or ongoing legal disputes.

Due Diligence is a vital step in the process for any merger or acquisition. In the acquisition context, Buyers should ensure they understand the full scope of the target business they’re acquiring, while sellers will need to ensure their are accurate and transparent records to facilitate the process and avoid a dispute later on. In the merger context both businesses will want to have a good understanding of the other to determine if the transaction makes sense for their business.

2. Transaction Structure

• Amalgamation: An amalgamation takes place when two or more corporations, known as predecessor corporations, combine their businesses to form a new successor corporation. In an amalgamation both predecessor corporations do not disappear, instead the corporate history, and all assets & liabilities, continue to exist through the newly formed entity.
• Asset Purchase: The buyer acquires specific assets of the business, such as inventory, equipment, or intellectual property, or a specific part of a target business. This structure is usually what is wanted by buyers of a target business as it allows them to pick and choose what to acquire and exclude certain assets and liabilities from the transaction they do not wish to assume.
• Share Purchase: The buyer acquires all or a majority of the shares of the company, assuming ownership of its operations and liabilities. This structure is usually wanted by sellers as there can be significant tax advantages and they are selling the whole of the business to the buyer

The structure of the transaction can significantly impact what a persons tax obligations, employer obligations, and regulatory compliance under Ontario or Canadian law.

3. Employment Considerations

In Ontario, the Employment Standards Act, 2000 (ESA) governs employee rights during the sale of a business. Issues surrounding employers obligations to its employees related to a change in ownership  form a key part of the deal making process in any sale of a business. If employees are to be terminated as part of the deal, accounting for the obligations of the employees should form part of the agreement.

4. Regulatory Compliance

Depending on the type of businesses that are contemplating a transaction, there can be specific section regulatory compliance attached to the transaction. In general,transactions must comply with:

• The Competition Act, ensuring fair competition and market practices.
• The Ontario Business Corporations Act (OBCA) or the Canada Business Corporations Act (CBCA) for governance and procedural requirements.
• Tax laws at the federal and provincial levels, which may affect how the transaction is structured.

5. Agreements and Documentation

Well-drafted agreements are critical to protecting your interests. Key documents include:

• Letter of Intent: a non binding agreement outling the broad concept of the transaction and communicating to the other party the initial proposal. Document is usually used to lock the other party into negotiations with you and ensuring information and the transaction stays confidential.
• Purchase agreements outlining the final terms and conditions of the proposed
• Closing Documents: specific ancillary documents to the purchase agreement to put the deal to writing and ensuring it is a valid and enforceable.
• Non Solicitation and Competition Agreements: An agreement protecting the buyer from the selling business or individual competing with the new business or obtaining their old clients.
• Employment agreements: potentially needed depending on the on type of transaction and what is being acquired

Steps in Mergers, Acquisitions, and Business Sales

1. Preparation:
   Sellers should prepare financial records, contracts, and other documentation to present the business in the best light. Buyers should define clear objectives for the transaction. Both parties should obtain their teams of professionals to advise them through the transaction.
2. Valuation: Both parties must determine the business’s value, using methods such as asset-based valuation, business valuations, market comparisons, or income-based approaches.
3. Initial Agreement: Initial negotiations resulting in the Letter of Intent being signed outlining the general terms and conditions serving as a summary of the proposed deal
4. Due Diligence: An important step in a merger and acquisition transaction where target company information is evulated to identify risks in the transaction. This period of time is usually set in the Letter of Intent.
5. Approval from the Competition Bureau (If Applicable) Under the Competition Act, when certain financial and shareholder thresholds are met, parties to a transaction are required to notify the Competition Bureau. This will kick off a review process by the Bureau, which will determine whether to allow the completion of the the transaction or contest it.
6. Negotiation: Negotiating the final terms, including purchase price, payment structure, and post-transaction obligations if any, resulting in the final purchase agreement
7. Closing the Deal: Finalizing the transaction involves signing closing agreements and documentations, transferring assets or shares, and ensuring all legal and regulatory requirements are met.

Common Challenges and How to Address Them

1. Valuation Disputes: Disagreements over the value of the business can delay or derail a transaction. Working with professional appraisers, chartered accountants and other financial advisors can help bridge gaps.
2. Regulatory Approvals: Transactions that significantly impact market competition may require approval from regulators like the Competition Bureau. Planning ahead is essential to avoid delays.
3. Employee Integration: In mergers and acquisitions, aligning organizational cultures and managing employee transitions can be challenging. Clear communication and thoughtful planning are key.
4. Unforeseen Liabilities: Due diligence helps uncover hidden liabilities, but if issues arise after closing, indemnity clauses in the agreement can provide protection.

Why Choose Nelligan Law for Your Transaction?

We understand the complexities of mergers and acquisitions, for Ontario or Canadian businesses. Our experienced business law team provides comprehensive support at every stage of the transaction, including:

• Conducting due diligence.
• Structuring the deal to align with your goals.
• Drafting and negotiating agreements.
• Ensuring regulatory compliance and managing risks.

Whether you’re buying, selling, or merging a business, we’re here to help you navigate the legal landscape with confidence.

Get in touch today to discuss your needs and learn how we can support your success.