Systems integrator due diligence in Canada

Once a letter of intent is signed, diligence on a systems integrator becomes a matter of tracing each promise to a document, and each document to a person who can sign it. The sections below run from contracts to open projects, and each says what a finding means when it turns up. The earlier screening of the opportunity is in buying a systems integrator in Canada.

Contracts: read the wording, then ask who must agree

Collect every material client contract, subcontract, vendor partner agreement and licence. For each, find the assignment clause, any change-of-control clause, the termination rights and the acceptance and payment terms. A contract may incorporate other documents by reference, so request everything it names; a consent requirement can sit in attached general terms, not on the signature page. Your lawyer will say which clauses a given structure triggers, and are my customer contracts transferable and what is a change-of-control clause set out the difference. A consent requirement found now can become a condition of closing. Found after signing, it can become a price conversation, with the answer arriving on the counterparty’s timetable.

Registry searches, jurisdiction by jurisdiction

Search every registry where the company, a subsidiary or its equipment could have a registration, because the registries are kept separately. Ontario’s is searched through Access Now, where, the province says, registered information is available for searching by potential lenders and buyers; British Columbia’s is handled through BC Registry Services. New Brunswick, Newfoundland and Labrador, Nova Scotia, the Northwest Territories, Nunavut, Prince Edward Island and Yukon are all reached through ACOL’s system, where one client account opens every one of those registries. Its Lien Check service, open without an account, supports serial number searching only, so a search against the company itself needs an account or one of the other routes ACOL lists, such as a value-added service provider. Quebec keeps a separate register of personal and movable real rights, searched for a legal person by its name.

Read the results with Ontario’s statute in mind. Subject to the exclusions in s.4(1), it applies to every transaction that in substance creates a security interest, so a registration can stand behind a lease, a consignment or vendor credit on equipment, not only a bank loan. Where no more specific rule applies, competing registered security interests in the same collateral rank by order of registration, so under that rule an earlier equipment financer can rank ahead of the lender funding your purchase, subject to exceptions such as purchase-money security interests in s.33. An unexpected name on the search means asking what debt it secures and whether it is paid. How do I check for liens on business assets? walks through the search.

Who owns what the firm built

An integrator’s deliverables include scripts, configurations, templates and documentation, and the question is who owns them. CIPO describes an assignment as the transfer of some or all of an owner’s rights, and a licence as permission to use a work under conditions while the owner keeps ownership. Check each major client contract for which of the two it gives the client, and ask for written assignments from every contractor who wrote code or documentation. The CRA distinguishes an employee, who generally works under the direction and control of the individual or business who hired them, from a self-employed worker who is free to choose how to carry out the contract, so contractors who in practice work like employees raise a classification question as well as an ownership one. Who owns code written by a contractor? A finding here changes what the firm can reuse.

The privacy and security record

Ask for the firm’s breach record. PIPEDA requires an organization to report to the Privacy Commissioner any breach of security safeguards involving personal information under its control if it is reasonable in the circumstances to believe that the breach creates a real risk of significant harm to an individual, and the Commissioner’s guidance says every breach involving personal information under its control must be recorded, reported or not, with the records available to the Commissioner on request. A firm that administers client networks and holds no record at all has either had no incidents or has not been recording them, and you need to know which. The Commissioner also says an organization processing personal information for another still has obligations for what is in its possession or custody, so compare the firm’s practice with the security clauses in its client contracts.

Certifications and authorizations, person by person

Ask for a table of every vendor authorization showing its tier, expiry date, the certified individuals who sustain it and any pricing benefit that depends on it. Compare the names with the current staff list, because an authorization that counts engineers who have left is less safe than it looks, and ask each vendor in writing what it requires on a change of ownership. Where the firm serves Quebec public bodies, the Office québécois de la langue française publishes a list of businesses it has certified and a list of those that do not comply with the francization process, so check the firm against both and ask for its attestation of registration or certificate.

Open projects and the findings that end deals

For each open fixed-price project, ask for the contract price, billings and costs to date, the estimate to complete and any unresolved change orders or acceptance disputes. Five findings in particular can end a deal or reopen the price:

• A vendor authorization that lapses on the change of ownership and cannot be restored before in-flight work needs it
• A consent refused or withheld on a contract that carries a large share of the revenue
• A registered security interest the seller did not mention, over assets a lender needs as collateral
• Delivered work that belongs to a contractor or the client, so nothing reusable is being sold
• Open fixed-price projects whose estimate to complete exceeds the unbilled contract value