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Despite several interruptions to Parliament over the last few years, Canada continues to move toward affirmation of its commitment to fight against modern slavery in supply chains. The most recent attempt is Bill S-211, An Act to enact the Fighting Against Forced Labour and Child Labour in Supply Chains Act and to amend the Customs Tariff (the Bill) which was first introduced to the Senate on November 24, 2021. The second reading of the Bill at the House of Commons was completed on June 1, 2022 and the Bill has been referred to the Standing Committee on Foreign Affairs and International Development.
The major purpose of the Bill is to serve as a tool for transparency by imposing supply chain reporting requirements on Canadian government institutions and businesses that meet certain criteria. The Bill will apply to any Canadian-linked “entity” that produces, sells or distributes goods anywhere in the world, imports goods into Canada, or control an entity engaged in any of these activities.
An “entity” includes:
(1) any entity listed on a Canadian stock exchange, and
(2) any entity with a place of business in Canada, that does business in Canada or has assets in Canada and that, based on its consolidated financial statements, meets at least two of the following conditions for at least one of its two most recent financial years:
(i) has at least $20 million in assets,
(ii) has generated at least $40 million in revenue, and
(iii) employs an average of at least 250 employees.
The broad definition of “control” in the Bill means that an entity controls another entity if it directly or indirectly controls that entity in any manner. An entity that controls another entity is automatically deemed to control all related subsidiaries.
Impact of the Bill on M&A transactions
General diligence considerations
In an M&A context, potential buyers should ensure that their due diligence practices adequately consider modern slavery and supply chain risks facing the target company. Ideally, such due diligence should incorporate both quantitative and qualitative assessments of the supply chain, with particular attention paid to components of the supply chain that are operating in high-risk industries or located in high-risk geographic locations. Potential buyers will also need to ensure that diligence review captures contractors, sub-contractors, suppliers, service providers, shippers and any other downstream suppliers in the target’s supply chain.
Impact on reporting obligations
Any reporting entity acquiring a new company will want to ensure from the outset that it has confirmed all information necessary about the newly acquired company’s supply chain in order to be able to fulfil its reporting obligations under the Bill. The Bill requires entities to prepare an annual report outlining the steps taken during the previous financial year to prevent and reduce the risk that forced labour or child labour were used in its supply chain; and the report must also include information on the entity’s structure, activities and supply chains and its diligence processes for forced and child labour (including diligence carried out in connection with an M&A transaction).
Buyers may also wish to negotiate indemnities from sellers against losses related to modern slavery issues. Such indemnities could cover issues that arise during the pre-completion period, issues that arise post-completion as a result of modern slavery issues that were undisclosed by the seller(s), and/or issues that arise post-completion as a result of known modern slavery practices uncovered during due diligence. While indemnities can be crafted to include loss of reputation damages, buyers should be cognizant that such intangible damages are difficult to practically quantify, and monetary reparation may not be able to adequately compensate an indemnified party against the long-lasting impacts of bad press or a poor public image.
Other drafting considerations
Buyers will want to ensure that transaction documents include appropriate representations and warranties from the seller(s) that the target company has not committed or been complicit in the commitment of any modern slavery practices, such as forced labour or child labour. Buyers may also wish to require representations, such as that the target company: (i) conducts business in compliance with internationally recognized business and labour standards, (ii) actively mitigates the risk of forced labour or child labour in its operations, (iii) upholds the right to freedom of association and collective bargaining and does not engage in discriminatory employment practices, (iv) complies with modern slavery legislation applicable to it in all jurisdictions of operation and (v) has provided complete and accurate information about its supply chain, operations and modern slavery risks to the buyer through the due diligence process.
The Bill continues to receive support nationwide and it is likely that this version of the Bill will become law sooner rather than later. As such, buyers would be well-advised to both revamp current due diligence practices to properly consider all modern slavery risks, as well as ensure that transaction documents appropriately deal with and apportion such risks.
Likewise, anyone seeking to sell their business in the near future should ensure that they have up-to-date information on their supply chain as well as processes in place to mitigate modern slavery risks. This approach may also contribute to a smoother due diligence process with respect to the sale of the business. Target companies that have established supply chain due diligence procedures may also be more attractive to potential buyers.
The authors wish to thank Humna Shaikh, summer student, for her contributions to this article.