SkyLaw’s Annual M&A Guide Published in Chambers

What Should Potential Acquirors Consider in 2024?

• Soaring inflation and rising interest rates made companies whose profits lie in the distant future look less attractive, pushing down valuations and slowing the rate of investment, particularly in tech companies and start-ups. With the surge in stock market valuations and the expectation that interest rates are likely to fall (or, at least, will not rise further), the valuation gap between buyers and sellers is likely to shrink.
• The importance of planning and assessing risk will continue to be a focus in corporate transactions. Buyers are expected to continue to proceed cautiously, with longer and more complex pre-announcement steps being taken as compared to the heady days of 2021.
• Who bears the risk of a pandemic or war? The relevant transaction document should make clear how the risk of a future shock should be allocated. Canadian courts have generally found that buyers cannot escape their obligations by pointing to the impact of COVID-19 on the target business, but in each case, it turns on the language used in the purchase agreement.
• Foreign acquirors need to carefully consider the recent changes to the Investment Canada Act and determine whether the new voluntary pre-closing filing mechanism should be used. The March 2024 amendments to the Investment Canada Act could significantly impact the timetable for closing an acquisition of a prescribed business. The expanded scope of the national security provisions could impact a greater number of transactions.
• Recent changes to the taxation of capital gains may add uncertainty and increased complexity.
• Earn-out provisions continue to grow in popularity to bridge the valuation gap and mitigate against the economic risks post-closing.
• Parties should take time to perform detailed due diligence on counterparties to ensure compliance with the evolving list of sanctions and anti-money laundering legislation.
• Canada’s move to “friend-shoring” will impact acquisitions and trade. Many Canadian businesses are dependent on cross-border trade. Rising protectionism in the United States and other trading parties, exacerbated by geopolitical tensions, can limit the growth potential of Canadian businesses. There may be greater political risk to transactions in politically sensitive industries.
• Insolvencies are expected to continue to rise, making buyers more cautious but also creating an opportunity to acquire attractive distressed assets.
• Canadian businesses are increasingly restructuring under the arrangement provisions of corporate statutes instead of the traditional insolvency proceedings, providing more flexibility to recapitalise at an earlier stage in the process.