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Ten Takeaways for Buyers and Sellers in Private M&A Transactions

A private M&A purchase agreement customarily includes extensive representations and warranties, and indemnification provisions. Post-closing, if the buyer alleges a breach of those provisions claiming significant damages, and the seller disputes that allegation, the dispute could end up before the courts. Serious consequences may follow.

The recent Alberta case of NEP Canada ULC v MEC OP LLC provides useful lessons for participants in private M&A transactions. The Court found that the private equity-backed seller had purposefully lied, or told half-truths, and in doing so committed fraud.

The transaction closed in 2011. In 2021, the Court awarded almost $200 million in damages, including more than $120 million for loss of opportunity. 

The following are ten key takeaways from this case for buyers and sellers involved in private M&A transactions in Canada.

1. Court Litigation Takes Time

Although the buyer was successful at trial, nearly 10 years passed from the closing date of the transaction until the Court’s decision (which was appealed, causing further delays in payment). Arbitration can be an alternative for a speedier and definitive resolution.

2. Unwelcome Publicity

Court decisions are public and their findings can be harmful to a seller’s reputation — especially where fraud is proven. Arbitrations are generally private and allow the parties to ensure the dispute (and in this case, the determination of seller fraud) remains confidential.

3. Discovery Reveals All

Emails have a tendency, as they did in this case, to reveal telling and unhelpful dialogue between executives of the seller as they negotiated the transaction. There is not much that can be done to protect emails from discovery in Canadian courts, other than privileged communications with legal counsel in certain circumstances. Be careful with email and other document distribution and retention practices. For example, if an executive does not intend to read the emails they are copied on, they should ask to be removed from the circulation list to avoid imputed knowledge.

4. Seller’s Limited Access to Records and Personnel

As most of the records and personnel of the acquired business are obtained by the buyer on completion of the acquisition, the seller will have difficulty accessing them. Typically, there are provisions in the purchase agreement dealing with seller’s access to records post-closing, but the seller will not control the records and be able to access these records conveniently and fully. As well, accessing former seller personnel will be more difficult and may require them to be called as witnesses, which has its own hazards.

5. Executives of Seller Become Executives of Buyer

Seller executives frequently become buyer executives. They will often be required to act as witnesses in any transaction litigation, which is likely to be a time-consuming process and a distraction to the executives. Further, the buyer likely will not want to sue its key executives or make them testify in awkward situations that could potentially be publicly reported. As the Court wrote in its decision, it places executives, in the difficult position of having to admit to participating in the deception of their current employer.” However, such witnesses may have the best and most direct view of the pre-closing seller misconduct and their evidence may be essential.

The retention of former seller executives creates additional concerns if they were equity owners of the acquired business, as the executives will also potentially be liable for damages. Representation and warranties (R&W) insurance can be helpful in these situations as it will reduce the potential personal liability of the executives/​sellers. However, R&W insurance does not generally apply where there is fraud.

6. Legal Privilege Not Seller’s

Privilege is the right of a person to be able to speak freely with his or her lawyer without the risk of that discussion being disclosed in court or otherwise. It is easy to forget that the privilege belongs to the acquired company, which the buyer now controls, and therefore the seller cannot assert privilege in the communications between the acquired company and its legal counsel. Preserving seller privilege can be addressed through appropriate provisions in the purchase agreement.

7. Fraud Trumps Everything

The Court determined that the seller’s fraud rendered inapplicable the purchase agreement’s caps and limitations on types of damages available. The Court held that a party who makes fraudulent misrepresentations to induce the counterparty to enter into the contract cannot rely on exculpatory or limitation clauses to protect themselves from their wrongful conduct.

8. Scope of Potential Damages is Broad

In cases of fraud, the scope of damages can be very broad. The Court awarded the buyer damages to compensate for the purchased assets being worth less than represented due to associated undisclosed liabilities, and for the loss of opportunity to resell those assets while the price remained high as planned by the buyer.

9. Knowledge Can be Imputed

Through the use of documents discovered in the litigation process, the buyer established that persons of knowledge, including key, senior seller executives, had actual knowledge of the undisclosed liabilities or were reckless regarding the representations made in respect of those liabilities. This was despite express denials of knowledge by these executives during oral testimony.

10. Oral Conversations, Actions, and Other Extrinsic Evidence

Things parties say and do in the course of the negotiations may end up later harming them. In this case, oral representations made by the seller executives were used to prove the seller’s deceit and breach of its duty of good faith. In most cases, parties will use an entire agreement clause to oust the consideration of any oral representations. However, generally-worded clauses of this nature are not likely effective in the case of fraudulent misrepresentation, or where a party otherwise makes specific representation contrary to the party’s duty of good faith. As a result, it may be difficult to escape oral statements that are knowingly misleading, even if these oral representations are not reproduced in the purchase agreement.

About Bennett Jones’ Public & Private M&A Practice

Bennett Jones’ public and private M&A practice spans all industries, and particularly those that drive the Canadian economy, such as energy: oil and gas and renewables, mining, consumer products, technology, utilities, agribusiness, financial services and cannabis, among others.