The American Bar Association (“ABA”) recently published its updated Canadian Private Target M&A Deal Points Study. This is the ABA’s first release since 2018. The new study analyzes 83 acquisition agreements from 2020 to 2022 involving Canadian private targets purchased or sold by public companies. The authors of this article contributed to this study.
For M&A practitioners, the study serves as a strategic benchmark, shedding light on key provisions such as representations, warranties, indemnification, and closing conditions. Comparing the findings to those from 2018 helps show how evolving market conditions, including the impact of COVID-19, have influenced Canadian private M&A.
M&A landscape: A market transformed by the COVID-19 pandemic
The COVID-19 pandemic accelerated several changes in private M&A activity. The healthcare (17%) and technology (15%) sectors topped deal volume, reflecting an appetite for digital solutions and life sciences innovation. Oil & Gas transactions dropped from 21% in 2018 to just 2% in this current study, largely due to market volatility and a push for ESG-focused investments.
Most transactions fell within the C$5 million–C$50 million range (67%), while only 5% exceeded C$200 million. Within these smaller deals, parties favoured share-based or mixed consideration (36% each) over all-cash offers (28%), reflecting a shift toward risk-sharing. Founder-led exits more than doubled from the 2018 study to 40%.
Financial provisions
Decline in purchase price adjustments
A major finding is the drop in purchase price adjustment provisions, from 79% in 2018 down to 54%. While adjustments remain significant when included, they are primarily based on working capital (87%). Buyers typically prepare the first draft of the closing balance sheet, providing them initial control over the financial reconciliation. GAAP-consistent accounting methods are on the rise (36%), likely aiming to reduce disputes around post-closing calculations.
Earnouts and escrows
Earnouts have increased to 31% (from 18%), emphasizing a shared valuation approach to mitigate risk in uncertain market conditions. Where post-closing purchase price adjustments are used, separate escrows are more common (56%), indicating a preference for segregating funds to handle post-closing purchase price adjustments.
Pervasive qualifiers
Material Adverse Effect (“MAE”)
MAE definitions are now present in 95% of deals, often including forward-looking standards (89%). Although MAE carveouts have increased, the frequency of specific carveout types (e.g., changes in law or in economic conditions) have dropped, suggesting that while MAE clauses remain central, buyers and sellers are negotiating more nuanced carveouts.
Knowledge qualifiers
Constructive knowledge qualifiers have surged to 80% (up from 56%), while actual knowledge qualifiers have declined. This means sellers are often responsible for what they “should have known,” widening their disclosure obligations and exposing them to greater risk if they fail to identify potential liabilities.
Representations and warranties
Fair presentation and “No Undisclosed Liability”
The “Fair Presentation” representation – requiring that financial statements fairly reflect the target’s financial position – remains near-universal (97%), typically without a GAAP qualifier. The “No Undisclosed Liability” representation covers all liabilities in 74% of cases, not just GAAP liabilities, broadening the protection afforded to buyers.
10b-5 and other emerging areas
Use of 10b-5 disclosure representations increased to 42%, though, often knowledge-qualified (42%), shifting some risk back to buyers. Meanwhile, cybersecurity (32%) and privacy (55%) representations appeared for the first time, reflecting growing concern over data breaches and regulatory compliance. A new “Me Too” representation, though still rare (13%), signals growing awareness of cultural and reputational risks linked to workplace misconduct.
Disclosure schedule updates
In 43% of the reviewed deals, interim disclosures automatically amend the agreement, preventing buyers from terminating based on newly revealed information. Alternatively, some agreements allow the buyer to walk away if updates materially alter the deal, or to close while preserving indemnification rights for newly disclosed issues.
Covenants
Pre-closing conduct
Most agreements require the target to operate in the ordinary course (91%) and to notify the buyer of any breaches during the interim period (80%). However, these notifications seldom trigger automatic termination rights; instead, parties typically rely on indemnification to handle such issues post-closing.
Regulatory approvals
Guided by the Investment Canada Act and the Competition Act, 16% of deals contained provisions for required regulatory approvals, typically subject to a “commercially reasonable efforts” standard (67%). This balanced approach underscores the need for parties to coordinate on securing approvals while maintaining flexibility if unforeseen regulatory hurdles emerge.
Deal protection
“No-Shop” clauses are now found in 82% of deals, an uptake from 64%, highlighting a stronger emphasis on locking in definitive terms and reducing the likelihood of competing offers. Non-solicitation or non-competition clauses appeared in 47% of transactions studied, indicating that buyers increasingly seek to protect themselves from post-closing competition by the seller.
Conditions to closing
Accuracy of representations & Materiality scrapes
Buyer demands for the target’s representations and warranties to be accurate at both signing and closing increased to 51%. This reassurance helps guard against unfavourable changes to the target’s condition over the life cycle of the deal. Additionally, “materiality scrapes” in bring-down provisions – removing materiality qualifiers for purposes of determining breaches – rose to 62%, limiting a seller’s ability to argue that certain breaches are too minor to trigger remedies.
Standalone MAE Conditions
Standalone MAE conditions increased from 19% to 58%. By contrast, “No Legal Proceedings” conditions dropped to 57% (from 86%), suggesting that parties are gravitating toward more targeted deal certainty provisions and balancing the risk of litigation with the need to finalize deals without broad termination options.
Legal opinions
Non-tax legal opinions from target counsel remain comparatively rare at 18%. The prevailing preference continues to favour thorough diligence and contractual representations over formal counsel opinions.
Indemnification
Sandbagging and non-reliance
Silence on sandbagging remains the predominant stance (82%), meaning that most deals do not explicitly address whether buyers can seek indemnification for breaches they were aware of pre-closing. When included, pro-sandbagging clauses appeared in 10% of the agreements, while anti-sandbagging clauses were found in 8% of the deals. “Express Non-Reliance” provisions also decreased, down to 18% from 30%, meaning sellers have less contractual leverage to limit buyer claims strictly to stated representations.
Survival periods and materiality scrapes
The most common survival period for general indemnification is now 24 months (from 18 months in the previous study). Materiality scrapes related to indemnification have slightly increased to 45%, while “double materiality” scrapes – eliminating materiality qualifiers for both the existence of and calculation of damages – rose considerably to 56% (from 35%).
Baskets and caps
Deductible baskets are the most prevalent (46%), indicating that sellers are not liable for claims below the agreed threshold, while first-dollar baskets remain fairly common (33%). Indemnity caps spanning the entire purchase price jumped to 49%, suggesting greater buyer protection for significant liabilities. Escrows or holdbacks for indemnification have decreased to 38% (from 60%), and their average size also shrunk, dropping from 10.85% to 4.56% of deal value. Notwithstanding, when used, a relevant portion (43%) are under 3% of a transaction’s value.
Setoffs
Setoffs for insurance proceeds, tax benefits, or other mitigating factors remain a feature in many deals. Buyers often must reduce their indemnification claims by any insurance proceeds recovered (64%), underscoring a balance between seller liability and insurance solutions.
Dispute Resolution
The use of alternative dispute resolution mechanisms remains limited, but when included, arbitration remains the favoured method. Consistent with the 2018 findings, the allocation of arbitration expenses often remains silent or determined by the arbitrator.
Representation & Warranty Insurance (“RWI”)
RWI usage is relatively low (13%), largely because the sampled deals are in the smaller or mid-market range where RWI is historically less common. Where RWI is present, buyers and sellers tend to share the policy’s cost (62%). In higher-value or more complex transactions, however, RWI is often a standard tool to allocate risk.
Looking forward
This study highlights an M&A environment redefined by economic pressures, shifting regulatory landscapes, and an ongoing appetite for growth through acquisitions. While deal structures continue to evolve, this study shows that practitioners are paying closer attention to:
- Risk Allocation: There is increasing reliance on forward-looking MAE clauses and knowledge qualifiers to address unforeseen market shifts.
- Deal Certainty: The expansion of no-shop clauses and specific closing conditions reflect a drive to secure finality, even as parties remain cautious about potential changes in market or target conditions.
- Regulatory Focus: With only a minority of deals referencing the Investment Canada Act or Competition Act, there may be room for heightened scrutiny in the future, especially as cross-border transactions grow.
- New Protections: Cybersecurity, privacy, and reputational considerations (i.e., “Me Too” representations) underscore how these risks are no longer secondary concerns.
From inflation and supply chain constraints to global political tensions, the external forces shaping valuation and structuring appear poised to continue influencing Canadian M&A for the foreseeable future. By closely monitoring data from the ABA deal point studies and comparable resources, practitioners can adapt to emerging trends and negotiate deals that remain resilient amid immediate uncertainties and longer-term strategic concerns.
