Canada: M&A Trends In Western Canada During The COVID-19 Pandemic: Part Three — Closing Mechanics And Purchase Price Adjustments

The emergence of the COVID-19 pandemic (hereinafter, the "pandemic") has forced buyers, sellers, and their advisers to adapt to the rapidly changing environment in which M&A transactions are now being pursued, evaluated, negotiated, and closed. The ensuing post is the third in a three-part series intended to provide a focused review of certain fundamental considerations applicable to M&A transactions in Western Canada - as impacted by the pandemic.

M&A Trends in Western Canada During COVID-19: Part One - Acquisition Financing

M&A Trends in Western Canada During COVID-19: Part Two - Closing Risks and the Interim Period

Closing Mechanics

The prevalence of virtual closings which has seen near complete adoption for M&A transactions in Western Canada has left transacting parties well-positioned to continue to close transactions during the pandemic in a largely unchanged manner. With that said, the adoption of work-from-home policies and the implementation of social distancing measures will require certain transacting parties to adjust their practices around document execution and delivery. We are seeing various practices from signatories, ranging from electronic signatures with digital verification stamps to less sophisticated digital work-arounds. While transacting parties and their advisers need to remain flexible in light of the circumstances, added diligence is required to avoid enforceability issues down the road.

To mitigate potential issues arising from document execution, standard boilerplate "electronic signature" and "counterpart execution" provisions must be revisited to ensure the PSA (and other ancillary transaction documents) clearly allow for execution and delivery in the manner that is being adopted/implemented in practice. Second, where signatories are providing electronic signatures (to be distinguished from an ink signature delivered via an electronic scan), the electronic signature should be produced through an application that allows for verification (such as Adobe Sign or DocuSign®). Third, in combination with the foregoing, transacting parties may also wish to consider obtaining "due execution and delivery" opinions from legal counsel where economical to do so, to ensure appropriate diligence is done with respect to any potential irregularities in the execution and delivery process.

In addition to document delivery, the pandemic has resulted in an increased reliance on the electronic transfer of funds. While most transacting parties already predominantly rely on electronic fund transfers ("EFTs") as part of their closing process, transferors will be inevitably required by their financial institutions to comply with certain protocols in order to initiate such EFTs. In our experience, financial institutions have retained fairly rigid protocols in this regard notwithstanding the challenges placed on their clients as a result of the pandemic. As such, we are reminding transferors (typically purchasers) to ensure that they are in a position to adhere to any applicable funding protocols - notwithstanding any reduced access to administrative assistance, signatories, scanning equipment, etc. In our experience, this has required clients to undertake additional steps to ensure they have appropriate signatories available, and staff in place, to execute funding commands on a remote basis.

Purchase Price Adjustments / Earn-Outs

While transacting parties are facing obvious challenges bridging the valuation gap on deals which have not gone firm, we are also seeing increased challenges with respect to purchase price adjustments. While the underlying rationale for purchase price adjustments remains applicable in the current environment, with an argument to be made that such adjustments have taken on added relevance, the uncertainty caused by the pandemic has made it challenging for transacting parties to reach alignment on the specifics of the adjustment(s).

Whether the relevant adjustment anchors off of working capital levels at closing or post-closing accounts receivable collections, etc., these concepts now require an added degree of refinement to address the current operating environment. This creates novel issues for transacting parties, with the likely result being significantly more nuanced adjustment mechanisms to address the current uncertainty.

For transactions that are able to move forward amidst the pandemic, we expect to see earn-outs become more commonplace, both in terms of usage and the proportionate value they represent in terms of the overall consideration paid to the seller. Earn-outs are typically designed to protect a purchaser by providing added correlation between the purchase price and future performance of the business. As such, we see the current uncertainty around the pandemic being conducive to the increased use of earn-outs by purchasers.