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Neovasc CEO Alexei Marko (Dean Kalyan)
Neovasc CEO Alexei Marko (Dean Kalyan)

GOING GLOBAL

Buying foreign firms a growing path to expansion Add to ...

It may not be something to rush, either, since relationships can determine whether a deal will be successful. If the culture of two organizations don’t gel, or the principals don’t share the same philosophy, a merger or acquisition can flop, Mr. LeClerc says. He has had clients return after deals have gone south to restructure their company yet again.

There can also be legal challenges associated with doing an international merger or acquisition, says Toronto lawyer Albert Luk of the business law firm Devry Smith Frank LLP. This is particularly true for Canadian firms considering a deal south of the border.

“The U.S. tends to be a jurisdiction of sue first, ask questions later,” says Mr. Luk. If a deal falls apart, U.S. companies can potentially sue for punitive damages. “There’s no cap to pain and suffering or punitive damages in the U.S.,” he warns.

At the opposite end of the spectrum are legal cultures where lawsuits are rarely considered. “In certain parts of the world, it’s seen as a loss of face to sue people, Mr. Luk says. “So, disputes are dealt with privately, rather than pursuing formal litigation.”

As well, , in some countries, legal contracts are considered “living documents,” and Canadian firms can be surprised to discover that a deal may not be really finished even after the papers have been signed, Mr. Luk says. There are also sticky issues connected to intellectual property laws, which don’t exist in every jurisdiction or are considered “suggestions, rather than prohibitions to intellectual property infringement,” he adds.

All of these legal differences make it critical for Canadian companies to lawyer up – both here and overseas. “You make sure you have very good local counsel that understands not only the legal system, but the customs and conventions on how disputes are settled,” he says.

Mr. Luk adds that Canadian firms also need good accounting advice, both in Canada and in the country where an acquisition is being considered, since accounting issues can be just as thorny. Canada doesn’t have tax treaties with every jurisdiction in the world, and in those that it does, some are more favourable than others. So, it’s important to have good accounting expertise to ensure you come out ahead with the government, too, he says.

Another potentially prickly accounting issue: passive income, such as royalties, made outside of Canada, for which Canadian companies may be penalized, Mr. Luk warns.

Practical challenges can also be significant. Mr. Marko found the process of acquiring the two Israeli companies reasonably smooth, but underestimated the growing pains afterward.

“For maybe about a year, we made some sincere and significant attempts to run separate offices,” he says. “But, we found that was fraught with difficulty.”

Travelling between the two countries was a long journey and communicating with technology was tricky, given a 10-hour time difference. Eventually, the company decided to close its Tel Aviv office and consolidated Neovasc’s operations in Vancouver.

Still, “it’s certainly mmore complex than acquiring another Vancouver company, but not in a burdensome way,” he says of making a foreign acquisition.

Even in Canada, many mergers and acquisitions aren’t successful, says Troy Fimrite, CEO of Victoria-based investment brokerage firm Viking Pacific Inc. And “when you cross a border, it reduces the chance of the deal happening,” he adds.

Still, foreign purchases can work out well if done with proper due diligence and expert advice, Mr. Luk says.

“These days, it’s not as simple as putting boots on the ground and saying, ‘We’re doing business here.’ Quite the opposite,” says Mr. Luk. “You might argue that the boots on the ground should be those of local lawyers, accountants and business advisers who know how to have a Canadian enter into the country successfully.

ADVICE FROM THE EXPERTS

  • Find a good team of legal and accounting professionals in Canada and on the ground. Canadian legal and accounting firms often have foreign firms elsewhere that they partner with and can liaise with a foreign firm directly.
  • It’s simpler to acquire a company in a country that has a tax treaty with Canada – and preferably, a favourable one.
  • Ensure the cultures of both organizations are compatible.
  • Get to know the business culture of the country you’re dealing with.
  • Be cautious if using a foreign firm to acquire passive income. Canadian tax rules can penalize passive income acquired internationally.
  • Consider currency risks and the political climate of the country.
  • If you’re planning to maintain staff overseas, understand the labour laws. It may be more difficult to lay off staff than you expect.
  • Brace yourself for growing pains that you may not be able to predict.

An earlier online version of this story incorrectly stated where Mr. LeClerc was based.   This online version has been corrected.

 

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