To acquire a Canadian business, you have two options:
- purchase shares
- purchase assets.Several practical, business and legal factors may apply when deciding on the appropriate option, including timing, easiness and tax implications (both income tax and sales tax).
A share purchase is usually simpler and faster than an asset purchase. A share purchase avoids many of the practical problems with transferring particular assets and getting third parties’ consents.
A share purchase may also have tax advantages for the seller; generally the seller may obtain capital gains tax treatment for any gain on the sale of the shares, thereby decreasing overall tax liability.
An asset purchase may have some advantages for the buyer, particularly if it wants to exclude certain parts of the business or its liabilities from the transaction or to increase the tax cost of depreciable assets.
An asset purchase will usually be less advantageous for the seller, because of potential income inclusions in areas such as the recapture of depreciation on the assets being sold.
Depending on whether you’re dealing with shares or assets of the business, your contract will be different. Regardless, in either situation, some common considerations apply.
The buyer should be vigilant about such matters as the condition of the underlying business, the seller’s title to its assets, the status of any contracts with third parties (such as leasing agreements, employment contracts, and licensing agreements), unpaid taxes (income, sales) and debts, the status of present and past employees (including any pending lawsuits over wrongful dismissal that could be passed on to a new owner), and compliance with environmental and other laws.
The buyer will want to protect itself by conducting a due diligence review of the seller’s business and get suitable representations, warranties and covenants in the buy/sell agreement.
The buyer will want to ensure that there are no hidden time bombs, such as years of back taxes or outstanding bills that will have to be paid when it takes ownership.
The buyer might even seek to work in the business until the deal closes. A bailout clause in the buy/sell contract can give the buyer a backdoor if it finds any substantial discrepancies during this period.
For a share purchase, you need to know what approvals are required, possibly including those that apply where a non-resident is seeking to acquire a Canadian company.
The securities rules that apply to a purchase of shares depend on whether the purchase is of a private or a public company. For large acquisitions, pre-clearance under the Canadian competition laws is required.
Other approvals that may be required include those mandated by the Investment Canada Act. Further, the acquisition of shares of a public company could trigger the “take-over bid” requirements of Canadian corporate and securities legislation.
If the acquisition is friendly, it is typically effected by using a plan of arrangement.
An arrangement is a court-approved transaction governed by corporate legislation and requires shareholder approval (generally 66.6%) by the companies involved.
An acquisition may be effected by an amalgamation. An amalgamation is like a merger under U.S. law.
But the amalgamated corporation is legally recognized as the successor of the amalgamating entities and the amalgamated corporation succeeds to the assets and liabilities of the former entities.
Employees of the acquired corporation are not terminated upon the change of control. Existing employment contracts remain in place.
For an asset purchase where a non-resident is seeking to acquire a Canadian company, the review mechanisms of the Investment Canada Act apply to the purchase of “all or substantially all of the assets used in carrying on a Canadian business”. Competition laws might also apply.
Further, consents of landlords, equipment owners, creditors and shareholders may also be necessary.
Generally, if a sale involves disposing all or substantially all of a corporation’s assets, shareholders must approve the transaction by special resolution. Creditors of a business that might be affected by an asset sale are protected.
Their security interest over real or personal property will continue to have priority with respect to the relevant assets as against the purchaser.
At common law, an asset sale results in employees’ termination of employment with the seller company.
But the buyer will usually not be liable for termination payments if the buyer offers continued employment in the business to the employees on comparable terms. Ontario’s Employment Standards Act, 2000 requirements affect a transfer of employees and any resulting terminations. (See also “Employment Law in Ontario”)
For unionized employees, specific laws apply to acquisitions under the Labour Relations Act, 1995 (for provincially regulated businesses in Ontario) and the Canada Labour Code (for federally regulated businesses).
You would be wise to involve a lawyer at the beginning of any acquisition discussions to advise you on whether a share purchase or asset purchase is the best option for you. A lawyer can help throughout the negotiation process and of course, to draft the formal binding buy-sell contract.
Give us a call. We specialize in this area, and can help you with the legal aspects of your deal.
HLF is accustomed to representing a wide range of businesses and providing sound professional advice for many types of business transactions, including:
- divestitures.Further, we have the contacts to help find potential targets, secure funding, and assist in finance negotiations with lenders.
In our first meeting, a member of the professional HLF team will give you a confidential and realistic assessment of your situation given the current business environment and economic climate.
Using both our legal acumen and business savvy, we will then recommend a sensible, appropriate course of action, be it a share acquisition or an asset acquisition.
We will give you a realistic assessment of the array of possible results and any pertinent legal issues that will or may arise and always keep you abreast of current developments.
For more information on Acquiring a Canadian Business, please contact us.