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Executive Summaries Sep 2, 2022

Immigration Due Diligence: A Case Study for Corporate Lawyers and In-House Counsel

Corporate lawyers, in-house counsel, tax advisors and other experts involved in mergers, acquisitions, divestitures, joint ventures, or other types of transactions are natural experts at due diligence process. However, the most overlooked area of due diligence may become the deal breaker. We are not talking about sales, capital, clientele, patents or brands, we are talking about talent.

Despite the global war for talent, which indisputably has been waged by national and international companies for at least a few decades, many corporate and transactional lawyers and the in-house corporate counsel overlook the issue of immigration due diligence much too often. Today, buying a company often means, at least in part, buying its talent. It is now a given that a certain percentage of the company’s workforce will be foreign talent on temporary work permits, and that most if not all work permit holders are mission-critical employees. Failing to conduct an in-depth immigration due diligence can entail severe financial loss.

Without providing a complete overview of all complex aspects of immigration that should be included in a full due diligence process, we illustrated the issue a sample of situations where a lack of attention to immigration on the part of lawyers involved in due diligence can turn a good deal into a pretty bad one. The case studies presented are based on real-life situations, without disclosing any confidential information.  

A Canadian Case Study: Successorship-In-Interest Comes with a Price

It is not only international transactions that have the potential to raise immigration-related concerns. On the contrary, this first case involves a strictly local acquisition of a Canadian company by another Canadian company.

In such a case, the manner in which a merger or acquisition is structured, and whether the buyer is considered a successor-in-interest is crucial to the assessment of the potential implications of the transaction on immigration issues. If the buyer is not considered a successor-in-interest to the acquired company, it is highly likely that new work permits will be required. If so, alternatives to the existing work permits must be considered before the deal is in effect, in order to avoid a lack of employment or worse, the inability to qualify the company’s foreign workforce for new work permits. In this case study, however, the buyer company, had assumed all the liabilities of the original employer, including immigration-related obligations. The seller disclosed employing 25 foreign engineers under Canadian work permits that were still within their validity dates at the time of the due diligence. No further investigation was conducted at the time.

Under Canada’s Immigration and Refugee Protection Regulations, employers of temporary foreign workers are required to comply with a number of conditions declared in the work permit applications. This typically includes the foreign worker’s job title, job duties, work location, wages, benefits, and work hours. In most situations, any changes to these conditions are prohibited unless a new work permit is obtained. In this case, the salaries and benefits paid to the foreign engineers for the year prior to the transaction were below the wages submitted in the work permit applications. As a successor-in-interest, the buyer was required to pay back hundreds of thousands of dollars in wages.

If due diligence had been conducted thoroughly, the discovery of wage non-compliance would have given the buyer the opportunity to budget in advance for the cost of compliance, building it into the purchase price. With a raising number of inspections and the focus on employers rather than foreign workers, a due diligence of all obligations attached to work permits should be included in the due diligence process.

A U.S. Case Study: Change of Nationality of E Investor Company

The second case outlines an international transaction involving a publicly traded Canadian company which acquired a US based business.

The U.S. target of the acquisition was originally owned by a group of European investors, mainly from France, with French nationals having control of the company. Again, the buyer and the seller acknowledged that eight key executives and managers were working in the United States under work permits valid for another two years as of the date of the transaction. There were no changes in job titles, work location or compensation as approved by the immigration agency. However, a serious issue arose due to the specific type of the U.S. work permits held by this group of foreign managers and executives. In this case, all of the key foreign resources held E-2 (treaty investor) visas in the United States. These work visas are likely the most at risk in corporate restructuring scenarios. E-2 work visas are issued pursuant to bilateral treaties between the United States and various countries and they allow an individual from the treaty country to apply for an E visa for an employer sharing their nationality.

Under the Immigration and Nationality Act and related regulations, the “treaty nationality” of a private company is determined by the nationality of individuals who are ultimately controlling the corporation or, in the case of a publicly traded company, by the country where the majority of shares are traded on the stock exchange. In this case, the transaction had the effect of changing the citizenship of the U.S. employer from French to Canadian for E visa qualification purposes. As a result, all E-2 visas became void, despite the fact that all other conditions were met.

There were simply no other U.S. work permit options for the executives and managers, such as intra-company transfer or specialized profession, therefore severely impacting the value of the transaction and the ability to efficiently transfer the knowledge of proprietary work processes and technologies to the buyer.

To avoid undesirable scenarios we have described, it is essential as part of your due diligence to include a legal professional with the necessary knowledge of business immigration issues. Whether you represent the buyer or the seller, you must assess the degree of required disclosure. If there is resistance, you must insist. You must at least be aware of potentially affected foreign workers, making sure that the seller is compliant with all immigration rules, understanding the extent to which the seller relies on foreign labor and what are the difficulties you may face to maintain current work permits, or to obtain new ones to retain and attract the talent needed. Drafting representations and warranties without considering carefully potential immigration-related liability can have severe negative consequences for your clients. We can’t stress enough the importance of adding this aspect to your standard due diligence process.

For further information on immigration due diligence, our Business Immigration team at BCF will be pleased to assist you.

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