Financing the Acquisition of a Canadian Business: Cross-Border Credit Transactions

The acquisition of a Canadian business by US-based purchasers is often financed by way of a cross-border credit transaction involving a Canadian borrower (such as when the US purchaser sets up a Canadian company to make the acquisition, often for tax reasons), possibly also a US borrower (or as is common when a new Canadian company is set up to make the acquisition, a US guarantor), and some combination of Canadian and foreign lenders. In cross-border credit transactions involving a Canadian borrower, certain particularities of Canadian law should be kept in mind when structuring and negotiating documentation:

  • Bank Act – Under the Bank Act (Canada), foreign banks are not authorized to “carry on business in Canada”, other than through a Canadian branch or a Canadian bank subsidiary. This issue arises when a foreign bank lends to a Canadian entity. Any cross-border transaction with a Canadian borrower will need to be structured to ensure Bank Act compliance.
  • Bankers’ Acceptances – LIBOR is only very rarely used in Canada for Canadian dollar-denominated loans (although it is frequently used for US dollar-denominated loans). The equivalent method of availment for Canadian dollar-denominated loans is bankers’ acceptances (for Canadian banks) or bankers’ acceptances equivalent notes (for lenders that are not Canadian banks). There are specific mechanics that are required to be included in agreements in connection with bankers’ acceptances and bankers’ acceptances equivalent notes.
  • Interest Act – As a consumer protection measure, the Interest Act (Canada) requires that the rate of interest be stated in an agreement as a yearly rate, or an annual rate of 5 per cent will apply. As a result, it is customary where there is interest charged to a Canadian borrower to provide for a statement as to how to calculate interest on a yearly basis. This is especially relevant where any of the interest is to be calculated on a 360-day basis.
  • Permitted Liens – In Canada, similar to other jurisdictions, there are customary types of standard permitted liens that should be considered and included in the credit documentation as applicable. In addition, further to the Ontario Superior Court of Justice case Engel Canada Inc. v. TCE Capital Corp., there is a risk of “unintentional subordination”, whereby a lender may unintentionally subordinate its interest as a result of listing permitted liens in credit documentation. It is typical in Canada to include protective language in credit agreements to avoid such a risk.
  • Bankruptcy Matters – The Canadian bankruptcy regime is quite distinct from the US regime. As a result, provisions dealing with bankruptcy matters, such as bankruptcy events of default and any agreement dealing with intercreditor arrangements, should be customized to reflect the Canadian bankruptcy regime.

One note of caution, the Quebec legal system is based on civil law, and accordingly, additional considerations are applicable if the transaction involves a Canadian entity that is a Quebec entity or if any of the documents are to be governed by Quebec law. To learn more about some of the key considerations when planning to acquire a Canadian business, see our publication Doing Business in Canada 2012.

Read the first post in our special series, Buying a Canadian Business, eh? An Introduction to a Special Series.

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