Although we often think of the regimes that govern registrations made against personal property as a concern to lenders and their counsel, M&A lawyers and business people are unable to escape this area of the law… at least not completely. As part of the legal due diligence process in almost any M&A deal, registrations against the target’s assets will be uncovered. As such, the target and its counsel will want to ensure that any disclosure surrounding these registrations lines up with the representations made in the purchase agreement, and the buyer and its counsel will want comfort surrounding the scope of the registrations, and in particular, whether they attach to any of the assets being acquired as part of the M&A transaction.
U.S. counsel will be familiar with Article 9 of the UCC, but what about its Canadian equivalent? The good news here is that the Canadian equivalent of the UCC in common law provinces and territories, the Personal Property Security Act (or more commonly referred to as the “PPSA”), need not be a source of intimidation to U.S. counsel and business people in the context of a cross-border M&A deal. This is because the UCC and the PPSA are old friends, with the PPSA being based (at least loosely anyway) on the UCC and because there is a separate, yet comparable PPSA in each of the Canadian common law provinces and territories, the PPSA is not unlike the regime provided for by the UCC.
Personal property security searches will be performed at the diligence stage of an M&A transaction in order to determine whether there are any registered interests against the assets to be acquired. In Canada, these searches are not unlike those that would be performed in the U.S. However, unlike in the U.S. where “perfection” of a security interest in an asset is based on the jurisdiction of a company’s formation, under the PPSA, perfection is based on the location of a company’s chief executive office or the location of the asset, depending on the type of asset. This means that, in the context of an M&A transaction, in addition to searching the jurisdiction of formation, PPSA searches should also be conducted in the province or territory where the target’s chief executive office is located, and in the jurisdiction(s) in which the target’s assets are located.
When reviewing Ontario PPSA search results, it may be difficult to determine what assets a particular registration relates to. This is because in Ontario, a full collateral description is not required at the time of registration and instead secured parties have the option of only checking broad collateral descriptions. This means that buyers and their counsel will want to make use of estoppel letters in order to get comfortable with the scope of these “unknown” (and potentially far-reaching) registrations.
Although there are a number of additional distinctions between the UCC and the PPSA, we hope that this post provides a useful overview of the considerations likely to be of relevance to U.S. parties involved in the acquisition of a Canadian target. If you want to learn more about what to think about when considering the purchase of a Canadian business, check out our publication, Doing Business in Canada 2012.