Well, well, there you are Mr. U.S. outsourcing lawyer, with your big U.S.-company customer at the beginning stages of a mammoth, multi-jurisdictional outsourcing. You’re planning your legal strategy and you’re thinking: “Am I forgetting something?” (In this article, I use “customer” to refer to the company doing the outsourcing deal and “supplier” for the service provider.)
My message is mainly for U.S. customers and their outsourcing counsel. It is: Don’t forget about or simply ignore your northern neighbor’s pesky laws if there is a Canadian aspect to your large, cross-border deal.
Cross-Border Outsourcing: The Six-Point Checklist
Here is my “quick-and-dirty” checklist for cross-border outsourcing deals.
1. Regulated industry or sector
Are you dealing with a customer in an industry subject to restrictions regarding its ability to outsource?
The general rule is that there are very few industries or companies in Canada that are governed by specific laws or regulations restricting their ability to outsource an information technology function or business process.
On the other hand, the last thing a U.S. attorney wants to hear is that the Canadian roll out of a huge deal may be held up because you missed or ignored some regulatory issue. There may be a work-around solution for the Canadian part but, the large companies that usually do multinational outsourcing deals do not appreciate this oversight. It’s just not good corporate policy.
Arm yourself with enough knowledge to spot a local regulatory issue early and deal with it.
For example, in Canada, financial institutions (FI) are major players in the outsourcing market and their ability to outsource is regulated. As I understand the landscape south of the border, there are a number of federal government authorities that may have a say when FIs look to outsource: Federal Financial Institutions Examination Council; Board or Governors of the Federal Reserve System, Office of Comptroller of the Currency; FDIC; U.S. Treasury Department, Office of Foreign Assets Control; U.S. Commerce Department, Bureau of Industry and Security; and, most recently, the Department of Homeland Security. Of course, there may be state laws as well. (And you think that we are over-regulated in Canada!)
You will notice that in the Canadian context, I have not said “banks” only because the legislation encompasses many other FIs.In Canada, one of our federal regulators is called the Office of the Superintendent of Financial Institutions (“OSFI”). OSFI has issued two major “Guidelines” that affect federally regulated FIs:
- OSFI Guideline B-10: Outsourcing of Business Functions; and
- OSFI Guideline E-3: Processing Information Outside Canada.
The significant points for U.S. counsel are that the OSFI Guidelines require the Canadian operations of a Customer to have completed a risk-management assessment of the proposed cross-border outsourcing (if it’s “material”) and, possibly, to obtain an “order” (which requires a formal application to OSFI) allowing the Customer’s data to be processed outside of Canada.
2. Labor and Employment Issues
How many Canadian employees will be transferred from the customer to the supplier? Is unionized labor involved? In which Canadian provinces are the subject employees situated?
I often find that U.S. attorneys rarely understand the differences between U.S. and Canadian labor and employment laws. This is a bit unsettling because the human resource aspect of a deal is usually the largest cost component and also the most sensitive – so it pays to be well informed and have a thorough local plan.
For example, there is no “employment at will” principle in Canadian employment law. Employees can be legally entitled to significant notice and severance obligations if there is a “termination” of their employment. And, there are both statutory and common law principles that must be taken into consideration in each of the 10 provinces in Canada.
Most of these issues can be solved one way or another from a “who pays for what” perspective. But here are two pointers for U.S. (and foreign) counsel:
- Get a detailed picture of the Canadian employees that are in-scope. You are basically looking for the “W5” for every employee and if you get good information early in the process, you can save dollars and headaches down the road; and
- Get local advice regarding early due diligence steps. For example: Should you perform additional financial modeling using different scenarios regarding those employees? What about pension and benefits liabilities? Do you need to include any particular positioning language in the customer’s Request for Proposal (RFP)?
3. Privacy Laws and the Location of Data Processing
Does your deal involve the processing of “personal” information south of the Canadian border?
There is so much going on in the area of “privacy” law that it is truly a pain in the #%@#! (editor-deleted word) to keep up with this area when it comes to the flow of personal and business information across different borders.
Obviously, privacy law is nothing new but, because of the lightning-fast flow of personal information around the globe, coupled with the fact that identity-theft is probably the fastest growing global crime in the world, there is a potential legal and PR nightmare lurking for both the customer and supplier if sensitive business or personal data is somehow compromised.
The legal and business issues fall squarely into the lawyers’ laps because it all boils down to what’s in the contract.
In the Canadian context, because of our Constitution, both the federal and provincial levels of government have a say in this area. The federal government was quick out of the box to enact the Personal Information Protection and Electronic Documents Act (“PIPEDA”), which applies throughout Canada to federally-regulated businesses. But, some of the provinces have responded with privacy legislation of their own that may overlap with PIPEDA.
PIPEDA, or substantially similar provincial legislation, if enacted, will apply to all companies that collect “personal information” used or disclosed in the course of “commercial activities.”
The bottom line for a lead lawyer on a U.S.-Canada cross-border deal is to get local advice early about whether and how PIPEDA or other provincial privacy laws may impact the deal.
4. The Nature and Value of the Assets
What type of assets will be transferred from the customer to the supplier? What are their valuation bases?
Often times, U.S. attorneys ignore the Canadian assets because of their relative value to the overall deal. This is unfortunate because there may be tax implications (see below) that could be addressed by using an alternative structure. Or, there may be pesky little laws to consider that could create headaches if ignored.
For example, asset transfers in U.S. deals are usually accomplished by a simple “bill of sale” document – period. In Ontario, there is a law called the Bulk Sales Act with which a seller of assets (i.e. the customer) must comply. Compliance is relatively simple but often missed. In addition, an asset transfer within a cross-border outsourcing deal may inadvertently trigger an issue under our federal Competition Act.
The safest course of action for U.S. (or foreign) counsel is to vet the deal, at an early stage, with local Canadian counsel, to identify major roadblocks that could creep up just prior to or–the horror, the horror–post closing.
5. Taxation
Are there any Canadian tax laws that may make or break the deal?
Time and time again, I have my American friends say, somewhat tongue-in-cheek, that Canadians live in igloos and are taxed heavily because of our socialized medicine and other governmental programs, yada, yada, yada.
For personal income taxes, this may be true – and I say maybe because state and city taxes in some states raise the maximum tax rates to Canadian levels. (I know, I’ve lived in one of those states). With respect to corporate taxes, however, the contrary is most likely true (especially in the province of Ontario).
For example, if the deal involves taking over two of the customer’s in-house data centers situated in two different provinces, is there a tax advantage in shifting everything to one of the two provinces or moving everything to a data centre within a third, different province or, perhaps, closing down the local facilities and shifting the data processing to an existing facility down south? Who knows, but it may pay – in savings – to check it out ahead of time.
Again, it just makes sense to know the lay of the land in Canada, in advance, from a commodity or corporate taxes perspective to plan the structure of the Canadian part of the deal.
6. “Canadianizing” the Outsourcing Agreement
Should you use a separate Canadian agreement or a schedule to a U.S. master agreement? Are there any mandatory or recommended Canadian legal clauses that should be incorporated into the contract?
It is usually a few days prior to closing when U.S. deal teams start focusing on things like “what about Canada?” I accept this attitude as, perhaps, the usual way to deal with what may be perceived as a wrinkle in a mammoth-sized, U.S.-based cross-border outsourcing deal. But I would think professional negligence insurance premiums would encourage U.S. counsel to keep their eyes on all of the balls they are juggling.
It is easier to deal with the Canadian contractual structure or any partial “Canadianization” of the contract at an early, less frantic stage of a deal than scramble to retain local counsel in the 11th hour.
At the end of the day, foreign counsel can simply take a Robin Williams approach (in a South ParkÆ song parody a few years ago at the Academy AwardsÆ) when explaining the need to consult local counsel to the customer or supplier: Just blame it on Canada.
Most of the issues identified above and other miscellaneous ones – such as certain Canada customs paperwork for transporting data tapes across the border – can be addressed painlessly, when identified at an early stage.
Perhaps the most important thing U.S. counsel should remember about Canada is not to schedule any local due diligence in any province except British Columbia between the months of November to April. It’s just too bloody cold.
Lessons from the Outsourcing Journal:
- For Canada-US cross-border outsourcing deals:
- Check with Canadian counsel early in the process for latent local legal issues, such regulatory hurdles, tax, labor and employment and tax;
- Consider whether you need to the “Canadianize” any aspect of the cross-border outsourcing agreement; and
- Don’t schedule due diligence in Canada from November to April (and if you do, bring a Parka).
George Atis is the Chairman of the Outsourcing and Technology practice groups at McMillan Binch LLP, a major Canadian business law firm based in Toronto and dubbed “America’s Canadian Law Firm.” He can be reached at george.atis@mcmillanbinch.com.