The Latest on Private M&A Deal Points: Crossborder Edition on Financial Provisions and More

March 17, 2020

This is the second article in a two part series highlighting and comparing various deal points reported in the American Bar Association’s recently released edition of the Canadian Private Target M&A Deal Points Study for transactions signed in 2016 and 2017 (the Canadian Study) as well as the latest edition of Private Target M&A Deal Points Study including transactions from 2018 and Q1 2019 (the US Study, and together with the Canadian Study, the Studies). The first article in this series focused on study samples and indemnification matters, while this article focuses on financial provisions, pervasive qualifiers, representations and warranties, covenants and solicitor-client privilege. The trends revealed by these Studies are enlightening but it is important to bear in mind that referring to deal point studies is not a substitute for reasoned negotiations.

Financial Provisions

According to the Canadian Study, the percentage of transactions using post-closing purchase price adjustments in Canadian deals remains high and consistent with that reported in the 2016 Canadian Study[1] and the US Study. Also, according to the Studies, the vast majority of deals on both sides of the border, still adjust the purchase price using working capital as a metric. One notable cross-border difference is that, the US Study reports that most transactions used more than one metric whereas roughly only a third of the post-closing purchase price adjustments were based on more than one metric according to the Canadian Study. Another notable difference in the Studies is that buyers are responsible for the preparation of the closing balance sheet in Canada in roughly more than half of deals, whereas in the US that responsibility fall on buyers in virtually every case.


   US Study 2016
Canadian Study
 Includes Post-Closing Price Adjustment Provision  95% 72% 79%
 Adjustment Based on Working Capital  92% 83% 79%
 Adjustment Based on more than one Metric  87% 47% 32%
 Buyer is Responsible for Preparation of Closing Balance Sheet  99% 76% 59%

Pervasive Qualifiers

Pervasive qualifiers, such as material adverse effect (MAE) and knowledge, serve as a risk allocation tool.


The Canadian Study shows that most Canadian deals still include a definition of MAE that is forward looking and has carve-outs (of which at least one is qualified by disproportionate effect) but does not include prospects. According to the US Study, virtually every deal includes such a definition of MAE. Although most US and Canadian deals include some of the same carve-outs to MAE: economic conditions, industry conditions and changes in law, the Studies show there are some differences. Notably, Canadians deals are less likely to include carveouts on war and terrorism and changes in accounting. Finally, for the first time, the US Study considered whether the MAE definition includes a reference to a specific duration. It was found that there is no specified duration in 97% of all transactions, whereas only 3% included such a reference and considered short-term effects. 

   US Study 2016
MAE Defined 100% 87% 82%
MAE is Forward Looking 97% 83% 69%
Prospects Not Included 90% 70% 65%
MAE Definition Includes Crave Outs:      
Economic Conditions 98% 97% 95%
Industry Conditions 86% 87% 86%
Changes in Law 92% 85% 80%
War and Terrorism 97% 74% 66%
Changes in Accounting 88% 72% 53%
If MAE Defined and Includes Carve Outs, At Least One Carve Out Qualified by Disproportionate Effect 93% 74% 75%


The Canadian Study shows that there has been a change in defining knowledge. It reports that even though constructive knowledge is still the norm in Canadian deals, the use of actual knowledge and knowledge not being defined is on the rise. The percentages reported in the US Study resemble the 2016 Canadian Study, with knowledge being defined in virtually every case.

   US Study 2016
 Knowledge not Defined 1% 2% 22%
When Knowledge Defined, Actual Knowledge 13% 14% 22%
When Knowledge Defined, Constructive Knowledge 86% 84% 56%

Representations and Warranties

The target’s representations and warranties are important as they serve the basis upon which buyer can obtain disclosure, terminate the transaction, or obtain an indemnity. According to the Studies, deals on both sides of the border are likely to include (i) a “fair presentation” representation on the target’s financial statements that is not GAAP qualified, (ii) a representation regarding no undisclosed liabilities that is not qualified by knowledge and applies to all liabilities (as opposed to only GAAP liabilities), and (iii) a compliance with laws representation that is not qualified by knowledge.

   US Study 2016
 Includes Fair Presentation Representation on Financial Statements  100% 96% 100%
 Includes No Undisclosed Liabilities Representations 99% 85% 79%
 If Includes No Undisclosed Liabilities Representation, Knowledge Qualified 1% 7% 79%
 If Includes No Undisclosed Liabilities Representations, Applies to all Liabilities  62% 81% 74%
 Includes Compliance with Law Representation 99% 96% 89%
 If includes Compliance with Law Representation, Knowledge Qualified 2% 13% 12%
 If Includes Compliance with Laws Representation, Covers Present and Past Compliance 21% 50% 54%
 If Includes Compliance with Laws Representation, Covers Notice of Violation 77% 59% 49%
 If Includes Compliance with Laws Representation, Covers Notice of Investigation  19% 20% 1%

For the first time this year, the US Study looks at whether deals include representations and warranties dealing with (i) #MeToo, (ii) cybersecurity, and (iii) data privacy. In terms, of #MeToo reps, the percentage of inclusion is low (included in 13% of US deals, of which 50% were qualified by target’s knowledge). This may be explained by the fact that whether the target is facing allegations, or is party to a settlement agreement involving allegations, relating to sexual harassment or misconduct may be covered by other representations such as compliance with laws or employment representations. A large number of deals include cybersecurity and privacy representations and warranties (70% and 68% of all US transactions, respectively), which can be explained by the prevalence of cybersecurity and privacy concerns at the board level, both of which go hand in hand.  


According to the Studies, most transactions whether Canadian or US are likely to include a covenant that, in the interim period, the target is required to continue to operate the business in the ordinary course, in a manner consistent with past practices (the OC Covenant). For the first time, the US Study looks at whether the buyer is expressly precluded from unreasonably withholding its consent regarding target’s ability to do what is prohibited by a covenant and 57% of all US deals included such an express preclusion when it comes to the OC Covenant and 66% of all US deals included such an express preclusion when it comes to the target’s other negative covenants. 
   US Study 2016 
 Includes Covenant to Operate in Ordinary Course  97% 97% 87%
 Ordinary Course Covenant Qualified by Consistency with Past Practices  85% 84% 86%
 Buyer Precluded from Unreasonably Withholding Consent to Actions that would Violate Ordinary Course Covenant 57% n/a
 Buyer Precluded from Unreasonably Withholding Consent to Actions that would Violate Other Negative Covenants  65% n/a n/a

Solicitor-Client Privilege

The US Study report on whether the deal agreement preserves the right of sellers to assert solicitor-client privilege over any pre-closing communications. The use of such a clause has increased in the US since the Green Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLP and the recent Shareholder Representative Services, LLC v. RSI Holdco, LLC cases (74% up from 63% in the prior US Study). 

[1] The 2016 Canadian Study reports on transactions signed in 2014 and 2015.


For further details on these and other deal points, please consult the studies, which are all available to ABA members on the Markets Trends Subcommittee of the American Bar Association’s Mergers and Acquisitions Committee website 
*** Some of the authors were involved in the current and previous editions of the Canadian and the US Study. The authors would like to thank Francis Blais-Lord, student-at-law at our Montreal’s office, for his useful contribution. 


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