i Deal activity2

Canada remains highly ranked by a number of sources as an attractive country for foreign financial actors to invest in, particularly US private equity investors.

Canada has competitive corporate tax rates, established public markets, an educated and diverse labour force, a need for significant infrastructure investment and a modern legal system. Those factors, coupled with the low Canadian dollar, should have created favourable conditions for private equity activity in Canada. However, it is often noted that the significant financial resources of a number of Canadian pension plans and their investment focus on major infrastructure projects outside Canada, has resulted in Canada being a 'net exporter' of investment capital.

While there have been a few Canadian private equity transactions exceeding C$1 billion in enterprise value in the first three quarters of 2018, most Canadian transactions were in the C$25 million–500 million range.

As of Q3 2018, the total private equity investment in Canada presents a 24 per cent decline from the 2017 level, with a year-to-date total of C$16.5 billion (over 415 deals) compared to C$26.4 billion (over 613 deals) in 2017.

As of Q3 2018, the small end of the market segment (deals of less than C$25 million) garnered 68 per cent of all deals for a total value of C$1.324 billion, up by 8 per cent from 2017, and deals of between C$25 million and C$100 million captured a 6 per cent share, for a total value of C$1.316 billion, down from 11 per cent in 2017. Deals in the C$100 million–500 million range produced a total value of C$3.282 billion, and there was one deal in the C$500 million to C$1 billion range (as opposed to 11 deals in 2017) for a value of C$509 million. It is worth noting that 2018 was marked by an important decline in the number of private equity (PE) transactions in the C$500 million to C$1 billion range.

There were two deals over C$1 billion in the first three quarters of 2018, which accounted for 61 per cent of the funds invested, the largest being the C$5.1 billion recapitalisation of Ontario-based GFL Environmental Inc by an investor consortium that included the Ontario Teachers' Pension Plan in Q2 2018. The other transaction was the C$5 billion secondary buyout of Husky Injection Molding Systems Ltd in Q1 2018.

As was the case in 2017, the most active sector of all transactions was the industrial and manufacturing sector (95 deals), which, as of Q3 2018, had seen almost one-fourth of all private equity transactions. This was followed by the information and communications technology sector with 15 per cent of all transactions (63 deals). The industrial and manufacturing sector also received the largest share of funds invested, with C$5.967 billion, followed by the clean technology sector, which received total investments of C$5.234 billion for the same period.

The pace of private equity exits slowed significantly, with only 61 exits as of Q3 2018, less than half the number of exits throughout 2017.

Trade sale

M&A continued to be the primary exit vehicle for PE firms in the first three quarters of 2018, with 53 exits totalling C$1.649 billion, a significant decrease from the 137 exit transactions by way of M&A in 2017, representing C$3.1 billion in exit value.

Secondary sale

As of Q3 2018, secondary sales represented nearly half of the total exit value of C$11.3 billion. The Canadian Venture Capital & Private Equity Association reported four exits by way of secondary sales by private equity investors for the first three quarters of 2018. representing approximately C$5.2 billion.

Initial public offering

Initial public offering (IPO) activity for private equity-backed companies, which had shown renewed activity in 2017, continued to grow in 2018, with four IPOs, including the US$153 milllion IPO of British Columbia-based Tilray on NASDAQ, and the C$709 million listing of Quebec-based IPL Inc on the TSX.

General comments

The year 2018 showed a strong decline compared to 2017, with, as of Q3 2018, a total of 415 deals for a total amount of C$16.5 billion. While the number of deals is consistent with the data recorded as of Q3 2017 (447 deals), there was a decline in total deal value in comparison to the investments made in the first three quarters of 2017 (C$21.7 billion). Only C$1.9 billion (the lowest amount since Q3 2013) was invested in private equity deals in Q3 2018.

By contrast, the total value of announced buyouts of Canadian companies by private equity firms amounted to C$65.5 billion in 2007, which remains Canada's tipping point. That said, this total was skewed by the mega C$46.8 billion buyout of BCE Inc (which never closed).

We are experiencing an increase in the number of family office and sovereign wealth funds participating in this sector, in addition to investors from China and the Middle East. Three of the most active Canadian sponsors in 2018 are from Quebec: Fonds de solidarité des travailleurs du Québec (127 deals), Capital régional et coopératif Desjardins (78 deals) and Caisse de dépôt et placement du Québec (27 deals). Other significant Canadian private equity funds include Onex Partners, Novacap Investments and Birch Hill Equity Partners.

There are hundreds of US private equity funds investing in Canada in any given year, including some of the largest US funds, such as Bain, TPG and Oaktree.

We are not aware of any sponsors who have left the jurisdiction.

ii Operation of the market

Many equity incentive tools are available in Canada to compensate management, including stock options, stock purchase plans, stock appreciation rights and deferred stock units. Traditional stock options are the most popular incentives as they are not subject to taxation until exercised and, subject to complying with certain rules available to employees, are eligible for a capital-gains equivalent tax rate.

Often, management sellers will be offered the opportunity to maintain a minority equity interest in the acquired entity. The terms and conditions of the minority interest will often require extensive negotiations between the parties. In these circumstances, private equity sponsors typically favour structures involving dual classes of equity with one reserved for themselves and having priority over the class intended for the continuing management. Depending on the terms surrounding the issue of the equity to continuing management, the return enjoyed by management may be conditioned on a minimum threshold return to the private equity sponsor. Both commercial and personal tax considerations impact the preferred equity structure for any particular transaction.

Options granted under a Canadian stock option plan will generally vest during the continued employment over a period, or upon the fulfilment of certain performance conditions such as revenue growth or bottom line financial returns. Also, any 'in-the-money' options will usually vest automatically in the event of a change of control transaction involving the company.

In most cases, securities issued to management will be subject to repurchase rights in favour of the company upon termination of employment. The repurchase price will sometimes vary depending on the circumstances surrounding the employee's departure.

To effect a direct acquisition of a Canadian target company, a private equity sponsor will almost always incorporate a Canadian acquisition vehicle, which will then acquire the target company by way of an acquisition of the securities or assets. In situations involving a large number of shareholders, either an amalgamation (similar to a US merger) or a court-approved plan of arrangement may be used.

The acquisition method (securities, assets, amalgamation or plan of arrangement) is determined on the basis of various factors, including tax and legacy liability considerations, in addition to the parties' ability to leverage their positions in the negotiations. Usually, tax and legacy liability considerations will dictate a seller to favour a share sale whereas a purchaser would prefer an asset transaction for the same reasons. However, there are other considerations such as the ability to obtain all assignment consents required in connection with an asset transaction, which can sometimes be challenging in large transactions. We are seeing an increase in the number of hybrid transactions that involve the acquisition of both shares and assets of a target entity, providing tax advantages to both buyer and seller.

Most sell-side transactions are run by way of auctions. An auction process usually takes three months from launch to reach terms with a preferred bidder. Transactions will then generally complete within 30–45 days if no regulatory approvals are required and within 60–90 days if regulatory approvals are required.

In terms of public market transactions, Canadian takeover bids require adequate arrangements (an interpreted statement) to be made, with the effect that a bid cannot be conditional on financing. Statutory plans of arrangement, on the other hand, can be conditional in nature and allow for more flexibility to provide collateral benefits to managements, etc. Because of this flexibility, most Canadian privatisation transactions involving private equity sponsors are completed by way of a plan of arrangement.

We often see break fees used in connection with 'no-shop' conditions and, in public markets M&A transactions, a no-shop provision will be subject to a 'fiduciary' qualification.

Canada has two main stock exchanges: (1) the Toronto Stock Exchange (TSX) (senior market); and (2) the TSX Venture Exchange (junior market). In addition to being subject to rules of applicable stock exchanges, Canadian publicly traded companies are also regulated by provincial securities laws, which legislate, among other things, securities offerings, continuous disclosure obligations, insider trading and takeover bids.

Certain of the provinces have additional rules (including approval by a majority of the minority shareholders and independent valuations of the subject matter of the transaction) designed to ensure fair dealing in the treatment of minority shareholders of publicly traded companies in certain types of transactions involving controlling shareholders or 'related parties' (which include shareholders owning 10 per cent or more of the voting securities of a corporation). The fair dealing rules also apply to 'going private' transactions.


i Acquisition of control and minority interests

Private equity sponsors will usually leverage their majority stake in negotiating the governance regime for the acquired entity. If a private equity sponsor has acquired a controlling stake in a Canadian company, it will typically appoint its principals or nominees to oversee the management of the company for the period of the investment. However, it is common to grant minority shareholder rights by way of a unanimous shareholder agreement (as discussed further below) that usually supplement minimum statutory requirements. There may even be a grant of board representation to the minority shareholders. A number of Canadian jurisdictions still require that 25 per cent of the board of directors be comprised of resident Canadians. Often, that requirement can be fulfilled by having a management representative from the minority interest on the board.

Except in certain jurisdictions such as Quebec, where the names of the three largest shareholders are publicly available, the names of the shareholders of a Canadian company are not publicly available. However, the names and residential addresses of directors are available to the public. Notwithstanding the foregoing, private corporations governed by the Canada Business Corporations Act (CBCA) will soon be required to keep a detailed register of information about individuals who, directly or indirectly, have an interest in more than 25 per cent of the shares of the corporation. This would include registered holders and beneficial owners of (1) shares representing 25 per cent or more of a corporation's voting rights, and (2) any number of shares that is equal to 25 per cent or more of all the corporation's issued and outstanding shares measured by fair market value, as well as individuals who have direct or indirect control or direction over such shares. The register must contain the name, date of birth, address, residence for tax purposes and other prescribed information for each relevant individual. The CBCA further provides for fines and penalties for non-compliance. That being said, it is important to note that this new register will not be available to the public. However, shareholders and creditors can request access to the register and obtain an extract of it. These CBCA amendments are set to come into force on 13 June 2019.

As referenced above, typically, a unanimous shareholder agreement (USA) will be put in place at the closing of a private equity acquisition to supplement the shareholder rights provided in the relevant corporate legislation and, in the context of an acquisition of control, will ensure that the private equity sponsor controls the Canadian portfolio company, or, in the context of a minority investment, will ensure that the sponsor enjoys minority shareholder rights, including board representation rights and veto rights over material business matters such as acquisition and dispositions, board representation, hiring or dismissal of senior managers, changes to articles of incorporation and by-laws, the issuance of securities and contracting debt.

For a shareholder agreement that sets out veto arrangements to be enforceable against a subsequent shareholder, to fetter the discretion of the directors or to supplant the default provisions of corporate legislation where permitted, the relevant provision must either be incorporated in the articles of incorporation or in a USA (signed by all shareholders). At the director level, only certain director discretion can be fettered by a USA and, most notably, the fiduciary duty directors of Canadian portfolio companies owe to the company cannot be restrained, waived or delegated.

The USA is the typical instrument whereby minority shareholder rights are available to a private equity sponsor taking a minority position in a portfolio company. Usually, in this situation, the USA would ensure that the private equity sponsor has veto power (or at least significant influence) over critical business decisions. Likewise, put and drag-along provisions are key to providing visibility with respect to an exit.

A private equity sponsor will often take a minority interest in the form of a convertible debt instrument. Upon conversion, it would require a USA to be entered into.

Whereas a USA is treated under Canadian law like a constating document (and therefore binding on all current and future shareholders), a shareholder agreement that is not signed by all the shareholders of a company is treated as a regular commercial contract and only binding on the signatories to the agreement.

Where a USA withdraws the powers of directors to manage the business and affairs of the corporation, at least to some extent, shareholders who are given that power inherit the same duties and liabilities imposed on a director under applicable laws.

If a USA or shareholder agreement contains restrictive covenants, it should be noted that Canadian courts will generally not enforce covenants that would prevent an individual from earning a livelihood. What is reasonably necessary depends on the nature of the business, the geographical scope and the duration of the restriction and the functions that the concerned individual used to perform in the Canadian portfolio company.

The following Canadian income tax rules will be relevant to all foreign private equity investors:

Capital gains on sale of equity interest

In general, foreign investors are not subject to Canadian tax on capital gains realised on a sale or other disposition of shares of a Canadian company unless the shares have at any time in the 60 months preceding the sale derived their value principally (i.e., more than 50 per cent) from real property situated in Canada. Many of Canada's income tax treaties, including the Canada–United States Income Tax Convention (the US Treaty), operate to narrow the scope of the above-noted test to the point in time that the subject shares are sold. Certain tax reporting and compliance requirements may apply to the sale.

Withholding tax

Dividend payments made by a Canadian portfolio company to a foreign equity investor are generally subject to a 25 per cent withholding tax while most interest payments between arm's length parties are exempt. Withholding taxes (where applicable) may be reduced by virtue of an income tax treaty. Under most of Canada's income tax treaties, the withholding tax rate on interest otherwise subject to withholding tax is reduced to 10 per cent (a complete exemption is available in most cases under the US Treaty to qualifying recipients). The withholding tax rate on dividends is generally reduced to 15 per cent, subject to a further reduction to 5 per cent or 10 per cent if certain share ownership (or similar thresholds) are satisfied. For example, under the US Treaty, the dividend withholding tax rate is 5 per cent if the eligible US resident shareholder owns at least 10 per cent of the voting stock of the Canadian company.

Management and administration fees

If paid in the normal course of business, management and administration fees paid by a Canadian portfolio company to an arm's-length non-resident for services are not subject to Canadian withholding tax. Otherwise, a 25 per cent withholding tax applies. However, exemptions are available under most of Canada's tax treaties (including the US Treaty) provided the treaty country resident does not render the services through a permanent establishment in Canada.

Thin capitalisation rules

Thin capitalisation rules prohibit Canadian companies from deducting interest on the portion of interest-bearing loans from specified non-residents that exceeds one-and-a-half times the 'tax equity' of the specified non-residents in the Canadian company (generally, unconsolidated retained earnings plus outstanding share capital and contributed surplus attributable to the specified non-residents). For this purpose, a 'specified non-resident' is any non-resident that holds shares representing 25 per cent or more of the votes attached to, or the fair market value of, the outstanding shares of the Canadian company or that does not deal at arm's length with any such shareholder.

Use of foreign intermediaries

It is important to be aware that the base erosion and profit shifting (also known as BEPS) initiative of the Organisation for Economic Co-operation and Development may impact the ability of non-Canadian private equity investors to use favourable intermediary jurisdictions (such as Luxembourg and Netherlands) to channel their investments in Canada. Foreign tax advice should be obtained.

ii Fiduciary duties and liabilities

In contrast to some American jurisdictions, controlling shareholders in Canada do not owe a fiduciary duty to minority shareholders. However, as in most Commonwealth jurisdictions, the corporate laws in Canada generally provide for an oppression remedy – a statutory remedy available to a complainant where a corporation, a board or a corporation's affiliate acts in a manner oppressive or unfairly prejudicial to, or that unfairly disregards, that complainant's individual interests.

Whether or not designated by a particular shareholder, all directors of the corporation are subject to the same fiduciary duties, which are owed to the corporation (not the shareholder who nominated him or her, as applicable).

The potential liabilities of directors in default of observing their fiduciary duties can be extensive. Directors may be personally liable for breaching the duties of loyalty and of care, or, in other instances, held personally liable for wrongdoing by the corporation. In addition to fiduciary duties, over 100 federal and provincial statutes impose personal liability on directors of Canadian companies, including the corporate legislation governing the Canadian portfolio company, securities laws, environmental laws, employment, labour and pension laws, tax laws and bankruptcy and insolvency laws.

Under applicable Canadian corporate statutes, directors are required to disclose their interest (whether personal or via a related person's interest) in any proposed material contract or transaction with the corporation. As such, it is intended that all conflicts or potential conflicts of directors as a result of their relationship with the nominating party or other portfolio companies, be disclosed. Subject to limited and narrow exceptions, conflicted directors must refrain from voting on any resolution to approve the contract or transaction giving rise to the conflict.

As a general rule, a Canadian corporation is a distinct legal entity separate from its officers, directors and shareholders. In some limited situations, a court will disregard the separate legal personality and 'pierce the corporate veil'. This has occurred where the corporation has been completely dominated by a single actor or if the corporation has been used as a shield for fraudulent or improper conduct. Fortunately, Canadian courts have been very reluctant to lift the corporate veil and hold the guiding minds of the corporation liable for the corporation's actions. There is no single situation or test applied by the Canadian courts for when a court will lift or pierce the corporate veil. There are a number of factors to be considered to determine whether the degree of control is so high that the corporation is a 'sham, cloak or alter ego' and those include: where the shareholder intermingles the corporation's affairs with their own personal affairs; where the corporation is not independent from its shareholders; where the corporation does not have its own assets, skills or employees; and where the corporation does not have its own bank account, books or records.

The use of a partnership or flow-through ownership structure could result in liabilities flowing up to a fund. It would be very unusual to see such a structure without blocker entities being inserted to insulate the fund from liability.

In the case of acquisitions by US private equity funds into Canada, an unlimited liability company (ULC) is often used as the ultimate Canadian company in the acquisition structure. ULCs act as flow-through vehicles for US tax purposes (but not for Canadian tax purposes) allowing US private equity funds to minimise tax at the portfolio entity level in favour of a structure that results in income for tax purposes being realised at the holding level.


i Recent deal activity

Recently, Canada has seen more evergreen and ultra-long-term funds being formed as opposed to the typically time-constrained private equity fund. More importantly, we have seen increased activities related to co-investments by private equity funds, and to direct investments by Canadian pension funds both locally and abroad.

While the IPO market has remained consistent in 2018, M&A exits continue to be more prevalent (about 90 per cent of the number of exits in the first three quarters of 2018). Secondary sales did, however, represent nearly half of the overall value of the exits.

According to Mergermarket, disruptive sectors such as technology were in the spotlight in Canada in 2018, while activity in historically dominant and more traditional sectors, such as energy mining and utilities, and industrials and chemicals, declined. Overall, 2018 showed a decline in deal value and count, with a total of 596 deals worth a combined US$91.4 billion, compared to 628 deals worth US$97.5 billion in 2017. While the year started on a strong note, Q4 2018 saw a significant decrease in activity, with 135 deals valued at US$12.9 billion, which was down 52.4 per cent from Q4 2017.

ii Financing

The most common source of debt financing in a Canadian private equity acquisition remains the traditional senior secured debt obtained from a domestic Canadian bank. However, we see more financing being provided directly by US banks.

Sometimes, a senior facility will be supplemented by mezzanine financing (most of the time provided by way of subordinated debt) provided by banks or other financial institutions.

In the past few years, the high-yield bond market has not been very active in Canada in connection with private equity acquisitions. High weighting in energy companies and the lack of liquidity are mentioned as reasons for this slow market.

In many transactions in which we have been involved, the private equity investor provided a bridge loan with respect to a portion of the debt financing required for the acquisition and raised that portion of the debt post-closing.

Sources of finance

Sources of finance include traditional commercial banks (either individually or in syndicates) and specialised lenders like Antares Capital and NorthLeaf Capital Partners.

Key financial terms (relative amount of leverage pricing)

While these ranges may vary materially from one industry to another and from one target to another, it would be typical to see debt leverage in this marketplace ranging from 3.5x to 5x EBITDA with a mix of senior debt of 3x to 4x and subordinated debt of 0.5x to 1x. We have seen transactions in which the debt leverage was pushed to 6x EBITDA.

Key legal terms for financing

Typical legal terms and conditions associated with debt facilities used in connection with a private equity-backed acquisition include:

  1. type of facility;
  2. security interest (usually first lien over the assets in the case of a senior facility);
  3. borrowing base and funds available under the facility;
  4. repayment of capital;
  5. interest rate and interest payment;
  6. restrictive covenants, including with respect to debt, liens, dividends or acquisitions: the senior facility will provide for detailed covenants whereas any subordinated-debt facility would be expected to be covenant-light;
  7. conditions precedent to disbursement; and
  8. maturity date.

Comfort letters from the third-party lender or bank are typically tabled as part of a bid to provide comfort with respect to the debt financing.

US private equity investors often have the ability to use US banks to finance their Canadian acquisitions as opposed to using Canadian financial institutions. In these circumstances, hedging strategies and their costs to protect against currency fluctuations become important considerations in the selection of the debt provider.

iii Key terms of recent control transactions

Canadian deal terms are gradually merging with those prevailing in the American market, mainly because of the influence resulting from the increased investment activities of US private equity investors in Canada.

Private equity buyers often require purchase price adjustments to reflect the financial condition of the target. Typically, these are based on a net working capital and debt adjustment. Private equity buyers often seek to negotiate earn out provisions to align a portion of the consideration payable as part of the acquisition to the post-closing financial success of the target company.

Private equity sellers and management teams will limit as much as they can both the scope of the representations and warranties and the duration of their survival period. They will typically push back on the inclusion of full disclosure (10b-5 type) representations and warranties, and will insist on the inclusion of materiality qualifiers and anti-sandbagging provisions.

Private equity sellers generally insist on limiting post-closing exposure as much as possible. They typically limit the length and scope of indemnity provisions as much as possible, as well as other post-closing covenants and undertakings.

Representation and warranty insurance is increasingly utilised as a competitive tool in deal negotiation by private equity firms. Typical carve-outs to these policies include pending litigation, environmental liabilities, future adverse tax rulings, criminal matters, fraud, underfunded benefit plans and bribery and anti-corruption matters. Policies worth up to C$50 million are available from a single insurer.

Usually, private equity investors will seek to have the acquired companies or the shareholders that are related to members of the management provide representations and warranties regarding the acquired companies. However, they usually agree, as sellers, to provide indemnification on a several basis pro rata their entitlement to the sale price and they would seek customary limits to their liability such as baskets and liability caps. Typically, time limits for the exercise of indemnification rights after closing would range between 12 and 24 months, with longer periods for 'fundamental representations', and limitations on the amount of liability available for indemnification often vary between 10 and 50 per cent of the sale price. It should be noted that these ranges have been trending down recently. Also, we would generally see a portion of the sale price set aside as a holdback or an escrow as a source of indemnification in case of a breach. If an earn-out is negotiated between the purchaser and the sellers, it would be typical in Canada that the purchase agreement include set-off rights between claimable losses and any earn-out payment. That being said, it should be mentioned that the use of representation and warranty insurance in Canada is on the rise and this has a material impact on the foregoing.

Deal certainty is always a consideration, particularly in an auction process. Financing conditions in a transaction worth less than C$100 million would be unusual. A 'hell-or-high-water' approach to regulatory conditions is also becoming more prevalent from the sell side perspective.

While still not usual, reverse break fees are trending up in Canadian private equity transactions. They will usually be contemplated in purchase agreements in a fixed dollar amount. Owing to the increased exposure of the target entity to potential damage from a failed deal, reverse break fees are often higher than the negotiated break fee on a transaction.

iv Exits

There were significantly fewer private equity exits in Canada in 2018. Indeed, as of Q3 2018, the number of exits was less than half the total number of exits in 2017. Almost all exits were by negotiated sales, with only four IPOs.

Two notable exits from 2018 were:

  1. the C$4.964-billion sale of Husky Injection Molding Systems Ltd by Berkshire Partners LLC and Omers Private Equity Inc to Platinum Equity, LLC, one of the largest reported private equity transactions in the first three quarters of 2018; and
  2. the C$2.973-billion sale of Atrium Innovations Inc by Permira, Fonds de Solidarité and Caisse de Dépôt et Placement to Nestlé SA.


There are no other regulatory bodies that have specific oversight over PE transactions or PE sponsors' activities in Canada, unless the PE sponsor is otherwise regulated, such as in the case of a Canadian pension fund. However, much legislation of general application has an impact on the activities of private equity sponsors in Canada.

i Corporate statutes

In Canada, corporations may be constituted under the federal regime or under the regimes of the various provinces or territories of Canada. While there are differences between these regimes, most of them provide for a fairly similar framework legislating the conduct of business from a corporate standpoint, including amalgamations, the declaration and payment of dividends, the return of capital, directors' liability, the amendment to the articles of incorporation, the sale of all or substantially all the assets and other material operations outside the ordinary course and provided for in the relevant corporate legislation.

ii Securities regulation

Canadian publicly traded companies are also regulated under provincial securities laws that regulate, among other things, public securities offerings, continuous disclosure requirements, insider trading and tender offer transactions. Certain provinces have additional fair dealing rules designed to ensure the fair treatment of minority shareholders of publicly traded companies in certain types of transactions involving controlling shareholders or related parties.

iii Foreign ownership

Canada imposes certain restrictions on foreign ownership, including the following.

Investment Canada Act

The acquisition by a non-Canadian of 'control' of a Canadian business that exceeds certain prescribed monetary thresholds is reviewable under the Investment Canada Act (ICA) and subject to approval by the federal Minister of Industry or the Minister of Heritage (depending on the nature of the business of the Canadian company). Transactions below the applicable threshold are subject to a notification process. It should be noted that the ICA presumes that the acquisition of one-third or more of the voting shares of a Canadian corporation is an acquisition of control unless it can be established that, on the acquisition, the corporation is not controlled in fact by the acquirer through the ownership of voting shares. In addition, under the ICA, the federal Ministers of Industry and of Public Safety and Emergency Preparedness have the discretionary power to review any investment by a non-Canadian (including investments below the control threshold) where there are reasonable grounds to believe that the investment could be injurious to national security.

Other restrictions

In certain industries, including broadcasting, telecommunications and financial services, Canadian legislation may limit the rights of non-Canadians to own securities of companies involved in these industries. For example, companies subject to the Telecommunications Act (Canada) and having market shares of 10 per cent or more may not be controlled by non-Canadians and their ability to own securities in such companies is limited by law.

Competition Act

A private equity investment that constitutes a merger may also be subject to regulation under the Competition Act (CA). Under this legislation, the term 'merger' is broadly defined to include the acquisition or establishment, whether direct or indirect, and whether by purchase of shares or assets, by amalgamation or by combination or otherwise, of 'control over a significant interest' in the whole or a part of a business. Pursuant to the CA, parties to mergers that meet certain size thresholds must notify the Canadian Competition Bureau before completing the merger.


Financial sponsors from China, the Middle East and other emerging markets are increasing their investments in Canada. Sovereign wealth funds, family offices, pension plans, insurance companies and even some mutual funds are allocating money to make private investments and borrowing from the playbooks of the private equity funds. Increased pools of capital chasing a limited number of opportunities combined with a low level of leverage is putting pressure on returns for private equity players. Deal multiples have exceeded the peaks of 2006–2007 in transactions exceeding C$500 million. Many industry players believe that the indicators point to a favourable outlook as long as credit remains readily available and the general partners are able to create value during their hold periods.

i Other notable topics

Resident Canadian directors

The corporate statutes of many Canadian jurisdictions, including the federal regime and the province of Ontario, require that at least 25 per cent of the members on a board of directors must be resident Canadian directors. However, jurisdictions such as Quebec, British Columbia, New Brunswick and Nova Scotia have no such requirement.

Distressed M&A

Foreign private equity investors, particularly those interested in opportunities in the distressed M&A market, should also be familiar with Canada's insolvency laws.


Receivership can be initiated by creditors privately or via court appointment. A private receivership is initiated when a secured party exercises a contractual right to appoint a receiver pursuant to a security agreement. For secured creditors, a private receivership is usually quicker and less expensive.

Bankruptcy and Insolvency Act

Under the Bankruptcy and Insolvency Act (BIA), creditors may commence bankruptcy proceedings by filing a petition against the debtor corporation, who, among other things, has committed an act of bankruptcy (e.g., failing to meet its liabilities as they become due) in the six months preceding the date of the petition. If the debtor does not oppose the petition, the creditor may obtain a bankruptcy receiving order 10 days after the debtor is served with the petition. Once the receiving order is effective, the assets vest in the trustee of bankruptcy, subject to the rights of the secured creditors. Under the BIA, a debtor has the right to make a proposal to its creditors and each class of creditors will have to vote on the proposal to be accepted (majority in number and two-thirds in value). A secured creditor opposing a proposal will not be bound by the proposal.

Companies' Creditors Arrangement Act

The Companies' Creditors Arrangement Act (CCAA) allows an insolvent corporation with claims against it exceeding C$5 million to make a compromise or arrangement with some or all its secured and unsecured creditors while continuing to operate its business. To become effective, a plan of compromise or arrangement must be approved by each class of creditors by a majority in number and two-thirds in value. After the creditors' approval, the plan has to be sanctioned by the court. Once sanctioned, the plan is binding on all the creditors included in the plan. The proposal procedure under the BIA and proceedings initiated under the CCAA are primarily debtor-driven and are somewhat analogous to proceedings under Chapter 11 of the US Bankruptcy Code. Generally, the proposal procedures under the BIA are less costly and take less time to complete than proceedings under the CCAA. However, the rules and timelines for BIA proposals are more rigid and the courts have less discretion than the CCAA, which has very few procedural requirements.


1 Michael P Whitcombe and Charles Chevrette are partners at McMillan LLP.

2 Unless otherwise indicated, data provided here is sourced from S&P Capital IQ and the Canadian Venture Capital & Private Equity Association.