Lexpert US Guides

www.lexpert.ca | LEXPERT • June 2014 | 37 PRIVATE-EQUITY FUNDS » in the 2010 Canadian study. In 2012, 9 percent of Canadian agree- ments included anti-sandbagging provisions, down from 21 percent in 2010 but still almost double the corresponding statistic in the 2011 US study. " e remaining 67 percent of Canadian private M&A agree- ments were silent on the point, compared with 54 percent in the US. A contributing factor to the greater prevalence of these provisions in US agreements may be the greater volume and the continuing evo- lution of American jurisprudence on the subject. Under applicable Delaware and New York state case law, for example, a buyer is gener- ally not required to demonstrate reliance in order to maintain a breach of representation claim. By contrast, California courts have taken the view that a buyer must be able to demonstrate reliance in order to sup- port such a claim. Even within the leading commercial jurisdictions of New York and Delaware, the case law is not completely settled and there have been a number of exceptions to these general principles over the last two decades. Accordingly, a substantial percentage of Ameri- can transactions have sought to provide greater clarity and certainty for the buyer and the seller with respect to sandbagging by including specifi c provisions in the purchase agreement. " ere is no established case law on sandbagging in Canada and the law in the area is unsettled. It seems clear that a buyer could sue and win if a contractual warranty proved false, with or without reliance (see, for example, John McCamus, e Law of Contracts, 2d ed. (To- ronto: Irwin Law Inc., 2012) at 736). However, a seller in such a situation may be able to claim that the buyer lacked good faith if it had knowledge of the breach prior to closing and failed to warn the seller. Pleadings to this eff ect were struck by the motions judge in Transamerica Life Canada Inc. v. ING Canada Inc., [2003] 68 O.R. (3d) 457 (C.A.), fi nding that the parties – two sophisticated insurance companies both represented by major Toronto law fi rms – did not intend to imply a duty of good faith in their contract. " e motion judgment, however, was overturned by the Ontario Court of Appeal fi nding that the unsettled state of the law warranted inquiry by a trial judge. Ultimately, this case was resolved by the parties prior to trial, so the law of implied duties of good faith continues to remain unclear in Canada. WAIVER OF CORPORATE OPPORTUNITIES DOCTRINE " e doctrine of corporate opportunities is well-established in both Canada and the US. " e doctrine provides that directors and offi cers cannot personally profi t from an opportunity presented to them in their role on the board of a corporation. If a director or offi cer is found to have improperly taken an opportunity that rightly belonged to the corporation, he or she must disgorge to the corporation any profi t re- ceived as a result. For the PE investor whose employees typically sit as directors on boards of its portfolio companies, this doctrine is potentially prob- lematic for a number of reasons. In the course of its business, a PE fund could be presented with business opportunities that may be at- tractive to one or more of its portfolio companies engaging in similar businesses. If the PE investor has investments in more than one such portfolio company, it could quickly fi nd itself in the untenable posi- tion of having to disclose and present the same opportunity to all such portfolio companies. Delaware sought to address this concern in 2000 by amending its General Corporation Law to permit Delaware corpo- rations to renounce, in their certifi cate of incorporation or by action of its board of directors, their interest or expectancy in specifi ed classes of business opportunities presented to them or to one or more of their offi cers, directors or stockholders. Since Delaware adopted this amendment, it has become common- place for US PE funds to include an advance waiver of the corporate opportunities doctrine as a condition to the closing of their invest- ments. US funds are also increasingly requesting advance waivers when making investments into Canadian corporations. It is not clear whether such waivers would be enforceable under Canadian law ab- sent an equivalent amendment to Canadian corporate statutes. While PE investors may be insisting on, and receiving, these waivers from their Canadian portfolio companies more frequently, there remains risk that the corporate opportunities doctrine will nonetheless con- tinue to apply to them. "The volume of private M&A activity in the United States dwarfs that in Canada, with the result that certain deal points often take longer to become 'market' in Canada." » John Conno n is a partner specializing in private equity, public and private mergers and acquisitions, corporate fi nance and securities law. From 1998 to 2004, John was an associate in the New York, Hong Kong and London offi ces of Paul, Weiss, Ri ind, Wharton & Garrison LLP. John was named one of Lexpert® 's "Rising Stars: Leading Lawyers Under 40" in 2008. Admitted to the Ontario Bar in 2005 and to the New York Bar in 1999. John Connon Goodmans LLP Tel: (416) 597-5499 Fax: (416) 979-1234 jconnon@goodmans.ca

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