3 Timely Due Diligence Tips for Atlantic Canadian Seafood Processing Mergers & Acquisitions
April 29, 2019
By Daniel Watt, Partner at McInnes Cooper
The growing global population is feeding global demand for seafood. Growing demand is likely to drive investment, particularly mergers and acquisitions, in seafood processing, distribution, marketing and export operations. And both global trends coincide with regulatory change in the seafood sector, most recently the new Safe Food for Canadians Act and Regulations.
Since Atlantic Canadian waters produce many high-demand, premium seafood products, Atlantic Canadian seafood processing operations are growing merger and acquisition targets. Due diligence is crucial to the success of any M&A transaction. A key due diligence consideration in a seafood processing operation M&A is ensuring that when the deal closes, the purchaser will end up with all necessary permits, licences and authorizations it requires to continue to operate the business. If not, the purchaser could end up owning the company or assets, but be unable to generate revenue – and the seller could end up in a costly dispute.
Here’s why it might be the right time for investors to trawl for Atlantic Canadian seafood processing M&A deals, and three timely due diligence tips for Atlantic Canadian seafood processing sector mergers and acquisitions.
Trawling for Seafood Processing M&A’s
This is a time of significant growth in seafood demand. And it could be the right time for investors to come trawling for Atlantic Canadian seafood processor M&A deals, and for interested processors to position themselves to be ready.
Growing Demand. The growing global population is driving increased global demand for seafood as a source of protein. In 2017, one billion people depended solely on seafood for protein and 2.9 billion depended on it for at least 20% of their protein. The OECD-FAO Agricultural Outlook 2017-2026 (the Organisation for Economic Co-operation and Development and the United Nations’ Food and Agriculture Organization, respectively) projects that by 2026, world food fish consumption will increase by 19% compared with the average in 2014 to 2016.
Growing Merger & Acquisition Activity. This increased demand will likely drive investment activity in seafood processing, distribution, marketing and export operations. The OECD, in its 2016 report “The Ocean Economy in 2030”, expects that many ocean-based sectors will nearly double the global growth rate – and one of the highest performing industries will be seafood processing. The value of Canadian exports of seafood products in 2018 was almost $7 billion. Atlantic Canadian waters produce many premium seafood products in high demand in foreign markets, including Atlantic lobster, scallops, Snow crab, Arctic surf clam, Northern shrimp – making Atlantic Canadian seafood processing operations attractive investment targets. And much of this investment will be by way of merger and acquisition transactions: many investors prefer to acquire existing seafood processing operations rather than build new ones. Sometimes, this preference is out of necessity: Nova Scotia, for example, isn’t currently accepting applications for licences for new processing establishments. Sometimes, it’s out of practicality: there are many benefits to acquiring an operation that’s established and proven, including that it already holds – or should hold – the myriad of municipal, provincial and federal regulatory permits, licences and authorizations seafood processing operations require to operate.
Growing Regulatory Changes. Coinciding with increased demand for seafood and resulting anticipated investment activity in the seafood processing sector are regulatory changes. The federal Safe Food for Canadians Act and its Safe Food for Canadians Regulations took effect in January 2019, replacing a host of federal food safety regulations, including the Fish Inspection Act and Fish Inspection Regulations. Operations processing seafood for export that previously required a certificate of registration or an export permit under the Fish Inspection Regulations now require a registration or licence under the Safe Food for Canadians Regulations. Contemporaneously, the Canadian Food Inspection Agency (CFIA) has begun to move to its licence and registration application processes from a correspondence-based system to an online system in which applicants create accounts, and complete and submit applications directly.
3 Timely Due Diligence Tips
Due diligence is crucial to the success of any M&A transaction. A key due diligence consideration in a seafood processing operation M&A – and one that parties sometimes overlook or sometimes leave too late – is ensuring that when the deal closes, the purchaser will end up with all necessary permits, licences and authorizations it requires to continue to operate. If not, the purchaser could end up owning the vendor’s company or its assets on closing – but be unable to operate. This is important for sellers too: ensuring the successful transfer of permits to the purchaser is typically a post-closing condition of sale that could give lead to costly disputes if unsatisfied.
Here are three timely tips for conducting due diligence in the Atlantic Canadian seafood processing sector mergers and acquisitions.
1. Make sure the vendor holds all necessary licences, permits and approvals – and that they’re valid.
Purchasers need to thoroughly review the seller’s operations both to confirm that it holds all the necessary licences, permits and regulatory approvals to operate – and that none of them contain any defects. And in anticipation of this, a motivated seller should do so first – and rectify any deficiencies ahead of time.
In most cases, it’s likely that a processor holds all the necessary permits and regulatory approvals, and that an administrative agency has issued them under clear legislative authority. But this isn’t always the case, particularly in Atlantic Canada where many processors have been operating for decades based on regulatory permissions granted to them in the past. It’s possible that some permissions are in fact no longer valid, or that new legal requirements have subsequently taken effect but been overlooked by either the regulator or the processor. For example, Nova Scotia regulators have issued “letters of authorization” under the N.S. Crown Lands Act allowing processors to use submerged Crown lands for plant components, such as intake pipes. Such authorizations were issued with ministerial authority, but without obtaining the Cabinet approval that Act requires – and are thus legally invalid. However, the processors to which they’ve been issued are probably unaware of this defect and thus unlikely to flag it to a prospective purchaser.
2. Even if they are, check for legislative transfer or assignability prohibitions and change of control triggers – and structure accordingly.
Even if the seller has all of the necessary licences, permits and approvals in place, and all are valid, some federal and provincial legislation prohibits or restricts their transfer or assignment, or render void the licence, permit or approval on a change of control of the licensee. Both purchasers and sellers are wise to familiarize themselves with the applicable legislative provisions and, where possible, structure the M&A deal accordingly. And given the differing permitting requirements across Atlantic Canadian provinces, purchasers may encounter a number of hurdles when trying to ensure that the necessary permits allowing continued operation are in place on closing.
Some federal and provincial legislation under which the permits, registrations and licences necessary for seafood processing operations to operate are issued expressly prohibit their transfer or assignment – effectively requiring the purchaser to apply for a new licence in its own name, rather than for an administrative transfer of an existing licence – and some legislation is more flexible. For example:
Where the applicable legislation prohibits transfer or assignment, structuring the transactions as a purchase of the target seller’s shares instead of its assets might avoid the need for the purchaser to apply for new licences in its name, since the existing licensee entity will continue to hold the licence(s) after the transaction closes.
However, this won’t always resolve the issue. Some legislation contains “change of control” provisions that restrict the licensee’s ability to sell its shares without imperilling its processing licence. The new federal Safe Food for Canadians Regulations, unlike its predecessor Fish Inspection Regulations, don’t automatically render void a certificate of registration or export licence on the change of effective control or direction of the registered establishment or licence holder. But similar change in control mechanisms still continue in some provincial legislation. For example:
- Newfoundland and Labrador’s Fish Inspection Administrative Regulations requires a corporate licence-holder to give the Minister 30 days’ notice of any proposed transfer or issue of shares (at section 14). Where the Minister is satisfied that transfer or issuance will affect the de facto control of the licence-holder’s operations the licence is cancelled on the transfer unless the Minister approves the transfer.
- Nova Scotia takes a stricter approach. Under the N.S. Fish Buyers’ Licensing and Enforcement Regulations (at sections 10(2) and 10(3) for buying) and Fish Inspection Regulations (at section 5(2)(3) for processing), if a majority of the voting shares of a corporation that holds a fish processing or a fish buyers licence are transferred, its licence ceases to be in force. However, the Minister can approve a transfer to a company the majority of voting shares of which the current licence-holder owns.
3. Establish realistic transaction timing (or be prepared to adjust it).
Both purchasers and vendors need to be prepared for the impact on transaction timing if the purchaser must apply for a new permit, registration or licence or for approval to transfer or assign them from the seller to the purchaser – and plan accordingly.
If the purchaser must do so, it’s well-advised to engage with that regulator(s) as early as possible. This might be difficult to do while the parties are still negotiating the financial and other terms of a deal, and they want to keep it confidential. But the ability and the willingness of regulators to work with applicants, at all or within transaction schedules, to coordinate issuances or transfers on the closing of a deal varies widely. Giving regulators early notice and sufficient information could help facilitate day-of-closing licence issuance or transfer, or at least mitigate any post-closing delays. In particular, while CFIA’s shift to an online application system is still in its early days, and in some cases seems to have led to faster approval and issuance times, it’s not amenable to coordinating licence issuances with transaction closing. Where previously, the CFIA engaged with applicants to try to issue licences in conjunction with or shortly after transaction closings, the new online system doesn’t appear to facilitate transactions.
Please contact your McInnes Cooper lawyer or any member of the Ocean Economy Team @ McInnes Cooper to discuss this topic or any other legal issue.
McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.
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