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Mergers and Acquisitions in Canada

A change in ownership of share equity does not change the identity of the employer. The acquired corporation, despite the change in ownership, continues to be the employer under any employment agreements and any collective agreement with a trade union.

Because there is no termination of employment, there is no break in service or seniority of the employees. The purchaser inherits all of the past service and the associated termination obligations.

In the case of a unionized workplace, the collective agreement remains in place and continues to govern all terms and conditions of employment and to bind the corporation.

Due Diligence

As the new owner acquires all of the liabilities of the corporation in a share acquisition comprehensive due diligence is critical. The potential buyer should assess the cost of any outstanding employee-related liabilities. For example, there may be outstanding wrongful dismissal lawsuits, complaints under human rights legislation, workers’ compensation penalties and unpaid premiums, occupational health and safety charges, complaints under employment standards legislation or grievances in a unionized workplace. It is also prudent to obtain a history of recent reductions in workforce and individual terminations.

Canadian employees are fairly litigious in dismissal situations. It would be wise for a new owner to determine if there are any outstanding severance claims where a signed release has not yet been obtained from the employee and where the dismissal occurred within the last two years. Limitation periods for wrongful dismissal claims vary from two to six years.

During due diligence, a potential buyer should review all employment agreements, severance agreements and change of control agreements. This is especially important where the buyer plans to downsize the workforce in the future. The current cost of administering the payroll, benefits, pension plan and workers’ compensation premiums should be reviewed. But, equally important, the buyer should look for agreements that increase any of these costs in the near future.

Workers’ compensation coverage in Canada is not administered through private insurance. Rather, employers pay premiums to a provincial fund based on the size of the payroll and type of industry. A provincial government body makes all claims decisions.

The usual payroll taxes include income tax, Canada Pension Plan (or Quebec Pension Plan) contributions (there is an employee and an employer contribution toward this government-run pension scheme) and Employment Insurance premiums (there is an employee and an employer component to the government-run insurance plan which provides benefits during periods of unemployment, maternity/parental leave, disability and compassionate care leave). Some provinces have payroll taxes to pay for healthcare, while others have premiums paid to the provincial government medicare plan. Workers’ compensation premiums are paid to the applicable provincial workers’ compensation board.

Any collective agreements should be reviewed carefully. Depending on the future plans of the purchaser, the following issues should be addressed: Are there any restrictions on contracting out, subcontracting or plant closures? Are there any severance terms? (Severance clauses are not overly common in collective agreements as all unionized employees are protected by the provincial employment standards legislation.) What is the scope of the union’s bargaining rights? (For example, do they cover all employees, including office employees, production employees, part-time employees and students? Do the bargaining rights extend to one particular street address, to the entire municipality or even the entire province? Could they apply to other operations already owned by the buyer?)

As well, a collective agreement can reveal future costs in terms of scheduled pay and benefit increases. The manner in which the pension and benefits are structured can restrict the buyer’s flexibility in changing plans. If, for example, the carrier and type of coverage is specifically set out in the collective agreement, it would be a breach of the contract to change carriers or plans.

The term of the collective agreement will reveal when the contract expires and when labour unrest or a strike could next occur.

Depending on the type of business conducted by the target company, a review of any non-competition, non-solicitation, non-disclosure and intellectual property rights agreements can be helpful.

Representations And Warranties

In addition to conducting thorough due diligence, the buyer of shares should require certain representations and warranties from the seller. Typical representations and warranties include the following statements: that all payroll taxes and premiums are current; vacation pay has been accrued; there is compliance with applicable employment, labour and health and safety laws; there are no outstanding grievances, arbitrations, complaints or employee claims; there are no outstanding occupational health and safety charges or orders; and that there is compliance with pay equity laws (there is pay equity legislation in the private sector in the provinces of Ontario and Quebec, and in the federal sector). There should also be a representation and warranty as to whether there is any known union or employee association organizing activity, contemplated work stoppages or pending applications for certification by a union.

It is also possible to obtain certificates from certain government agencies as to whether workers’ compensation premiums have been paid in full, or if there are any outstanding statutory complaints or charges. However, the procedure can be time consuming and typically the seller must authorize the disclosure in writing. Accordingly, the purchaser should be prepared to clarify these matters through due diligence and/or require appropriate representations and warranties.

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