Facing an M&A? Know the legal risks

Despite continued uncertainty with the economic upheaval of the U.S. tariffs, business deals keep cropping up in Canada.

Sunoco, for example, recently announced that it plans to pay $9.1 billion for convenience-store operator Parkland Corp., which has 650 retail outlets and 1,830 dealer sites in Canada.

Mutual insurer Beneva and property and casualty mutual insurer Gore Mutual also announced their intent to merge operations by 2026, bringing together more than 6,000 employees. Meanwhile, Calgary-based companies Whitecap Resources and Veren are on track to merge in a $15-billion deal.

But what often goes underreported are the employment challenges that follow such high-stakes integrations. Two employment lawyers, Andrew Bratt and Marni Outerbridge, shared their insights on the fundamental differences between share and asset deals — and why understanding the legal distinctions of M&As is critical for HR leaders.

M&As: Asset purchases

In Canada, there are two types of transactions for this type of purchase: an asset purchase and share purchase.

“From a labour and employment perspective, it's night and day,” says Bratt, partner at Gowling in Toronto.

“The way to look at it is: asset deal, you're basically starting afresh; share deal, you're literally just stepping into the shoes of the seller.”

In the former, the buyer acquires certain assets of a business, such as equipment, intellectual property or real property, but leaves the legal structure, liabilities and shares behind.

“You're buying the assets,” he says. “You don't have the right to unilaterally transfer employment contracts absent consent, so it's not like the seller can say, ‘Sure, we will sell you all of our employment contracts.’ Usually, these are physical assets that are being transferred, and then the buyer will make offers of new employment to some or all of the existing staff.”

M&As: Share deals

In a share purchase, the buyer acquires the shares of the company being sold, meaning the buyer takes control of the entire business, including its assets and liabilities.

With a share sale, the company doesn’t change, says Outerbridge, a lawyer at SV Law in Guelph, Ont.

“The sale of a corporation’s shares does not change the corporation's relationship to its employees, and that's whether they're unionized or not unionized,” she says. ‘Its ownership changes, but the legal identity remains the same, and that goes for the employer-employee relationship as well.”

While there are different rules for Quebec, in an asset sale, the purchaser is not automatically required to take any of the vendor’s employees — unless there’s a requirement by way of a union or another statute, she says.

“[It] can have the effect of terminating the employees’ employment with the vendor, and the employment relationship does not automatically transfer to the purchaser. In many cases it will, but it's something that we need to do intentionally, and the terms of which are usually negotiated.”

Due diligence for ongoing liabilities

With a share deal, it’s “incredibly important” to do your diligence in advance so you know exactly what you're signing up for, says Bratt.

“If there are vacation accruals or wage and hour compliance issues, those are things you want to know in advance, because you're not starting afresh, you're acquiring whatever is already there.”

The same is true for employment contracts, he says.

“If there's an unenforceable termination clause or a poorly drafted restrictive covenant in an employment agreement, if it's an asset deal, you don't care, because you're going to give them a brand new one anyway. If it's a share deal, you want to know that, because you're going to be left holding the bag, and you're not going to be able to rely on that termination provision or the restrictive covenant later into the future.”

Sometimes employers are caught off guard by a “hidden” liability, says Outerbridge.

“It could be, for example, if the company or the vendor has some workers that they have engaged as independent contractors, rather than employees. And we always want to… make sure that those folks are properly characterized as independent contractors. Because if they are, by chance, misclassified, we need to know so that we can assess the risk associated with taking on that liability and perhaps evaluate whether there's anything proactive we can do to get that relationship properly defined.”

Negotiating employment contracts

If employees are going to be offered positions of employment with the buyer, they'll want those terms to be substantially similar, so there’s no liability being triggered, with respect to termination or constructive dismissal, she says.

“The goal is to have the employee remain whole. So... the granular details of what that looks like is a little bit different, but... their contract and their compensation is substantially similar, not necessarily identical.”

Vacation pay, for example, is a core benefit that employees really care about, she says, “and I'd say that goes to the fundamental terms of an employment agreement for most employees.”

Constructive dismissal is a definite concern if you're moving people and  reducing their benefits, says Bratt. Where it gets “a bit dicey” is not so much on the financial terms, which are pretty easy to compare, but other areas, he says.

“If [for example] you have an offer letter with the current company that has a non-enforceable termination clause, and now all of a sudden, the buyer is trying to throw in a much better and enforceable and valid termination clause, one could argue that that is not a comparable term.”

Employee selection and discrimination risks

Unlike share deals where employees remain with the company, asset transactions allow greater discretion. But there are important legal considerations that can be “confusing” to employers, says Outerbridge.

“The sale of a company's asset does not provide the employer with the ability to dismiss with cause or does not relieve them of their notice obligations if the employment relationship is going to be ending,” she says.

And the purchaser never wants to be in a situation where the employee selection is considered discriminatory if, for example, some people are on leave or modified duties or made harassment complaints, says Outerbridge.

“While it might sound tempting to not want to take on some of those more ‘complicated employees,’ we'll say, we do not ever want to find ourselves in a situation where who's staying and who's going is discriminatory or contrary to the obligations of the Human Rights Code

However, if it’s an asset purchase and none of the employees are going to be hired, those terminations will also apply to employees on leave, she says.

“We’re not really concerned about allegations of discrimination when we can say quite clearly that the employee's disability, for example, was not a factor in the decision to terminate — it was clearly evidenced by the sale and the fact that nobody is getting rehired.”

Declining offers and mitigation risks

If an employee rejects a comparable offer in an asset deal, the seller will have two options: reassign the individual to a different part of the business, if only certain parts of the business are being sold, or terminate their employment, says Bratt.

“In [that] case, it gets really interesting because what they'll say is, ‘You refuse this offer of alternative employment, you have failed to mitigate your damages,’” he says.

“If the offer was on totally comparable terms, then the seller would have a very good argument to exclude common law severance on the basis that the individual ought to have accepted that offer as a way of mitigating his or her damages.”

Generally speaking, the purchase agreement will require that the offers be on substantially similar terms, says Bratt.

“The reason why the seller would care about the terms is because if they're not on substantially similar terms, they're more likely to be rejected, and if the offer is rejected, they're then left holding the bag for severance.”

And that can be costly, he says: “I've done deals before where… the severance exposure is a big chunk of the purchase price, and so it has the potential to crater a deal.”

Recognizing prior service in M&As

What about length of service, when an employee shifts from one company to another?

Once an employee accepts the offer, there's a statutory requirement to recognize prior service, says Bratt, “but you are still starting afresh, you don't acquire all the existing liabilities that accrued up until that date.”

Under the Employment Standards Act in Ontario, if someone accepts a job with the buyer, their employment is not considered terminated, he says.

“So, you're deemed to have been employed by the buyer the entire time.”

In theory, that means that their length of service is recognized for any employment-related benefit that falls under the statute — so a three-month waiting period for benefits, for example, would be waived, says Bratt.

“What I've tried to do in some deals, and sometimes you get pushback from the seller, is we'll say that we're going to recognize prior service only for the purposes of the Employment Standards Act, but not for common law.

“But, generally speaking, to make things really simple, typically, you're recognizing prior service for any and all purpose.”

In Section 9 of Ontario’s ESA, an employee’s length of service is recognized going forward, says Outerbridge — and most people understand that with a share sale.

“But even in an asset sale, it's not a fresh slate, necessarily,” she says. “The legislation will always prevail, and employees are given the benefit of their full length of service with the previous employer, as long as the operation of the business is continuing, pre and post transaction.”

However, common law is a bit different, says Outerbridge, as there could be a contract with the employee that does not “stitch together” the two periods of service.

“While it's doable, I never give any guarantees, because it’s a contextual analysis, at the end of the day, and the court is going to consider things like the intention of the parties, if and when there's ever sort of a dispute with respect to the common law entitlement of that employee.”

Unionized workforces in an acquisition

And what about unionized workplaces? In a share deal, there’s no change, says Bratt, so the buyer essentially acquires the union and the collective bargaining agreement. In an asset deal, it depends, he says.

“Almost always, if you're buying the assets of a company, you're either going to voluntarily recognize the union, or if you don't, the union's going to file a successor-related employer application with the Labour Board — and they will almost always succeed.”

It makes sense that an employer cannot “skirt” the obligations or the bargaining certificate of the union just because it bought a business, says Bratt, otherwise, “every time somebody got unionized, they would create a shell company and they would sell the assets to the new company.”

The purchaser will be required, generally, to accept the union as the bargaining agent, and be bound to the obligations and the liabilities that are set out in that collective bargaining agreement, agrees Outerbridge.

“And the successor provisions do not necessarily rely on any distinction between a share or asset purchase so that successorship can flow through either way.”

Culture and integration also important

Aside from the many legal considerations in an acquisition or merger, one of the most important parts — and often most difficult to navigate — is the cultural and operational integration, says Bratt.

“You really have to think through how you’re going to integrate these two cultures… you have to figure out, ‘Well, how are we going to harmonize all of our benefits and policies? And we can't have an us-versus-them culture.’”

Communication is a key ingredient, he says.

“When you have two very, very large organizations merging, people are not stupid — they realize that there's going to be redundancies. And so then you're going to get into the whole mapping of positions. Say you have two VPS, for example, clearly only one of them is going to survive.

“And so the longer those decisions take for the organization to make... there's a lack of stability, and people feel very anxious.”