Liabilities arising from Canadian immigration in mergers & acquisitions

August 2018 | PROFESSIONAL INSIGHT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

August 2018 Issue

Mergers & acquisitions (M&A) are notable components of a free market. From a legal perspective, they involve corporate due diligence to ensure that the merger or acquisition is financially prudent, viable and of minimal legal and financial risk. One aspect of due diligence that requires specific attention and cannot be overlooked is immigration due diligence on all such transactions. A failure of immigration due diligence in M&A transactions can result in exposure for the acquiring company or significant errors in valuation of targeted companies.

In this article, we outline Canadian immigration law as it relates to M&A transactions, and the risks associated with overlooking immigration in an M&A due diligence process.

Canadian immigration law on employer compliance

Canada’s Immigration and Refugee Protection Regulations (IRPR) provide a robust system for ensuring employers’ compliance with the terms and conditions outlined in an immigration application for the entry of a foreign worker. Employers of temporary foreign workers are expected to comply with a number of conditions, including: (i) the conditions included in an offer of employment or a labour market impact assessment (LMIA), including, but not limited to, the foreign national’s title, job duties, remuneration, benefits and hours of work; (ii) the federal and provincial laws that regulate employment, and the recruiting of employees; (iii) making reasonable efforts to provide a workplace that is free of abuse; (iv) demonstrating an offer of employment is genuine; (v) remaining actively engaged in the business in respect of which the offer of employment was made; (vi) ensuring that the employment of the foreign national will result in benefits to the Canadian job market outlined in an application for a LMIA, including direct job creation or job retention for Canadians, the development or transfer of skills and knowledge for the benefit of Canadians, and the hiring or training of Canadians or making reasonable efforts to do so; and (vii) maintaining all documentation confirming the above conditions for a period of six years from the date that the foreign national began employment.

While an employer who is found non-compliant with any of the above conditions may defend its actions to mitigate liability, the justifications for non-compliance are very limited and are specifically delineated in the IRPR. Justifications include changes in federal or provincial law, changes to collective agreements, a dramatic change in economic conditions, a good faith error of interpretation of the employer’s obligations, an unintentional accounting or administrative error, force majeure or similar circumstances.

Approximately one in four employers of temporary foreign workers are randomly audited by Immigration, Refugees and Citizenship Canada (IRCC), Employment and Social Development Canada (ESDC) and Service Canada (SC) on their obligations under these regulations. Any findings of non-compliance will leave employers open to significant penalties, including any or all of the following: (i) administrative monetary penalties, ranging from $500 to $100,000 per violation, to a maximum of $1m per year per employer; (ii) a ban period of ineligibility on future LMIA and work permit applications, for a period of one, two, five or 10 years, or permanently for more serious situations of non-compliance; (iii) the revocation or cancellation of current and pending LMIA and work permits; and (iv) publication of the employer’s name on a public government website for an indefinite period of time.

In addition to these regulations, employers can also be liable for offences under the Immigration and Refugee Protection Act (IRPA). Under Section 124(1), it is an offence to employ a foreign national in a capacity in which the foreign national is not authorised under the IRPA to be employed. Section 124(2) of the IRPA demonstrates the long arm of this offence, stating that a person who fails to exercise due diligence to determine whether employment is authorised is deemed to know that it is not authorised. If found guilty, a person can be liable for a maximum term of imprisonment of two years and for a fine of up to $50,000.

Employers and temporary foreign workers can also be found guilty of offences of misrepresentation or counselling misrepresentation, which are broadly defined offences that can result in imprisonment for a maximum of five years and a fine of up to $100,000. A finding of misrepresentation can also result in the issuance of a removal order against a temporary foreign worker and a bar from entering Canada for a period of five years.

Factors to consider in an M&A transaction

It is clear from the law that penalties for failing to follow Canadian immigration law can be severe. It is therefore essential that all relevant factors be considered at the due diligence stage to ensure that the new organisation has a full understanding of the impact of a corporate restructuring on their exposure to penalties for any prior non-compliance and on a targeted company’s existing temporary foreign workers.

Employer compliance regulations

The first important consideration in any M&A transaction is the compliance history of the targeted company. Without verifying this history, an acquiring entity may unknowingly open itself up to the penalties outlined in the IRPR, including extensive fines and programme bans.

The obligations of employers with respect to their temporary foreign workers do not cease immediately upon the completion of a corporate restructuring. Instead, if there is a new organisation that can be considered to be a “successor in interest” to the previous employer, that organisation becomes responsible for ensuring that all of the conditions outlined in the IRPR are met.

Employers of temporary foreign workers must be able to demonstrate compliance with the terms of a foreign worker’s employment for up to six years after the temporary foreign worker is issued a work permit. If the compliance history of the targeted company is not properly vetted at the due diligence stage, acquiring entities may unwittingly become responsible for large fines and other consequences without having directly hired temporary foreign workers, solely on the basis that the entity assumed the liabilities of the temporary foreign worker’s previous employer.

Justifications for non-compliance are also very limited, and a lack of due diligence prior to purchase will be insufficient to shield an acquiring entity from liability.

Existing temporary foreign workers

The second important consideration in any M&A transaction is whether the restructuring will have an impact on the authorisation of temporary foreign workers to continue to work in Canada.

Temporary foreign workers fall into two major categories: those employed under the Temporary Foreign Worker Program (TFWP), pursuant to an LMIA, and those employed under the International Mobility Program (IMP), exempt from the requirement to obtain an LMIA. The latter category includes a number of programmes, including NAFTA professionals, intra-company transferees and certain youth employment programmes.

For workers under the TFWP, the employer which first applied for the LMIA must contact ESDC and SC to inform them of the change in the corporate structure. This is essential, as LMIAs are issued for a specific position with a specific employer. As a result, after a corporate restructuring, a new LMIA may be required by the new organisation and the temporary foreign worker would require a new work permit.

For workers under the IMP, the extent of the impact a corporate restructuring may have on a foreign worker’s authorisation to continue will depend in part on the specific programme under which the work permit was issued. For example, a temporary foreign worker who obtained a work permit as an intra-company transfer must demonstrate that there is a qualifying corporate relationship between their foreign employer and the Canadian employer. If this relationship is severed as a result of a corporate restructuring, there is no longer a basis upon which that worker may work as an intra-company transferee.

In addition, temporary foreign workers under both the TFWP and IMP typically hold employer-specific work permits. Corporate changes may therefore require that temporary foreign workers cease employment until new work permits can be issued for the new organisation. New organisations that fail to verify whether temporary foreign workers will require new work permits to continue working after a restructuring risk liability for Canadian immigration offences.

Conclusion

It is essential that Canadian immigration counsel be retained during the due diligence stage of an M&A transaction to assess any potential immigration compliance issues before the transaction is completed. This will ensure that acquiring entities are aware not only of financial liabilities that may arise, but also penalties such as jail terms or bans from utilising Canadian immigration programmes. The imposition of a ban on the hiring of temporary foreign workers or the transfer of foreign nationals to a Canadian entity can prevent an acquiring company from training new staff, maintaining Canadian clients, expanding business or increasing profits, all of which may have formed the basis for concluding an M&A deal.

In addition, without taking proper steps at the due diligence stage, an M&A transaction can not only put the resulting entity at risk, but also temporary foreign workers of any former entity involved in the transaction who intend to continue working for the successor organisation. A completed M&A transaction that does not involve a complete assessment of immigration obligations can cost a temporary foreign worker their ability to work in Canada, their ability to travel to Canada and even their freedom. Above all, this cost is far too high to be ignored on any M&A due diligence checklist.

Jacqueline Bart is the founder and Carrie Wright is a senior associate at BartLAW Canadian Immigration, Barristers and Solicitors. Ms Bart can be contacted on +1 (416) 601 1346 or by email: bart@bartlaw.ca. Ms Wright can be contacted on +1 (416) 601 1346 or by email: info@bartlaw.ca.

Jacqueline Bart and Carrie Wright

BartLAW