A Practical Guide to Mergers & Acquisitions in Canada

Introduction

Mergers and acquisitions (M&A) are a common way for businesses to expand, streamline operations, or gain a competitive advantage. Whether you’re acquiring a competitor, merging with another company, or selling your business, understanding the legal, financial, and operational aspects of M&A transactions is essential.

This guide covers key considerations for structuring and executing a domestic M&A transaction in Canada, including legal frameworks, tax implications, employment matters, and regulatory approvals.

1. Structuring a Private M&A Transaction

Share Purchase vs. Asset Purchase

Mergers and acquisitions typically follow two structures:

• Share Purchase – The buyer acquires ownership of the company by purchasing its shares from existing shareholders. This means assuming all assets, liabilities, and contracts as they stand.
• Asset Purchase – The buyer selects specific assets and liabilities to acquire, rather than taking over the entire company.

Key differences:

Factor	Share Purchase	Asset Purchase
Liabilities	Buyer assumes existing liabilities	Buyer can choose which liabilities to take on
Contracts & Agreements	Generally continue as is	May require consent to transfer
Tax Considerations	Seller may have tax advantages	Buyer benefits from higher depreciation on purchased assets
Complexity	Often simpler, fewer approvals required	Can be more complex, requiring more paperwork

The choice between a share or asset purchase depends on the nature of the business, tax considerations, and the level of risk both parties are willing to assume.

Due Diligence: Understanding the Risks

Due diligence is a critical step in any M&A transaction. The buyer thoroughly examines the business to identify any risks, liabilities, or legal issues before finalizing the deal.

Common Areas of Due Diligence:

• Corporate Structure & Governance – Reviewing company records, board meeting minutes, and shareholder agreements.
• Financials & Tax Compliance – Ensuring accurate financial reporting and reviewing any tax liabilities.
• Contracts & Agreements – Checking for supplier, customer, or lease agreements that may affect the business post-acquisition.
• Employment & Labour Matters – Reviewing employee contracts, severance obligations, and pension liabilities.
• Regulatory & Legal Compliance – Confirming compliance with laws governing the industry, competition, and privacy regulations.

A well-conducted due diligence process helps the buyer make informed decisions and negotiate favorable deal terms.

2. Regulatory Considerations

While Canada’s M&A environment is generally business-friendly, certain transactions require regulatory approvals.

Competition Act Considerations

The Competition Bureau reviews transactions that may significantly impact market competition. Large transactions may require pre-notification under the Competition Act.

Industry-Specific Regulations

Some industries—such as banking, telecommunications, and healthcare—are subject to additional regulatory approvals before a transaction can proceed. Consulting a legal professional early in the process can help navigate these requirements.

3. Tax Considerations in M&A Transactions

Tax implications play a crucial role in structuring M&A transactions. Both buyers and sellers must consider capital gains taxes, tax deductions, and corporate structuring when negotiating a deal.

Key Tax Considerations:

• Share Transactions: The seller may benefit from the lifetime capital gains deduction if selling shares of a qualified small business corporation.
• Asset Transactions: The buyer can depreciate acquired assets more efficiently, but the seller may face higher tax liabilities on the sale.
• Harmonized Sales Tax (HST): Asset sales are typically subject to HST, whereas share transactions are not. However, elections under tax law can sometimes eliminate this tax burden.

Proper tax planning can help optimize the transaction for both parties. Seeking accounting and legal advice early is highly recommended.

4. Employment & Labour Considerations

Employee Obligations in M&A Transactions

The impact on employees varies depending on whether the transaction is a share purchase or an asset purchase.

• In a share purchase, the employer remains the same, and employee contracts continue unchanged.
• In an asset purchase, the buyer must decide which employees to retain, and new employment contracts may be required.

Successor Employer Rules

If employment terms are changed after acquisition, there is a risk of constructive dismissal claims, where employees allege that their working conditions have been altered unfairly.

Pensions & Benefits

When acquiring a business, buyers must determine whether to:

• Maintain existing pension and benefit plans.
• Transition employees to new plans.
• Offer severance packages to employees not retained.

Legal and HR guidance is essential to ensure compliance with employment laws and seamless workforce integration.

5. Acquiring a Distressed Business (Distressed M&A)

When a company is facing financial difficulties, acquiring it can present both risks and opportunities.

Key Considerations in Distressed M&A:

• Time Sensitivity – Buyers must act quickly to secure assets before they lose value.
• Legal & Financial Liabilities – Understanding what obligations (debts, lawsuits, unpaid taxes) are being acquired.
• Court-Supervised Sales – Some distressed businesses are sold through receivership or bankruptcy proceedings, requiring legal oversight.

Distressed acquisitions require careful due diligence to ensure that the buyer does not inherit excessive liabilities.

Conclusion

Mergers and acquisitions are a powerful tool for business growth, but they require careful planning, due diligence, and expert guidance. Whether you are acquiring a competitor, selling your business, or restructuring operations, having legal and financial professionals involved from the start ensures a smooth and legally compliant transaction.

For personalized legal advice on your M&A transaction, contact us today.