The first Question answered between parties to a proposed Sale and Purchase transaction is whether the Purchaser will acquire the object company through a share purchase or asset purchase.
An asset Purchase agreement between the acquirer and the object company, pursuant to which the acquirer agrees to purchase, and the object company agrees to sell, assets (often substantially all of the assets of the object company used in carrying on a specific business (or businesses)); An asset sale allows the Purchaser to “cherry pick” which assets it will purchase and which liabilities it will assume. As a result, the Purchaser can agree only to
expressly assume and become responsible for certain liabilities and obligations (e.g., obligations under leases and material contracts that are assigned to the Purchaser, but only in relation to the period after closing). However, by law, an asset purchaser may become liable for environmental contamination and obligations to employees (e.g., union employees) in an asset transaction.
Purchasers should typically insist that all of the shareholders of the object company (e.g., where it is closely held by a small number of shareholders), or at least the majority or principal shareholders (where the object company may have a larger number of shareholders, which may include employee or minority shareholders), also become party
to the agreement and, along with the object company, make the representations and warranties that the object company is making and provide the indemnification obligations that the object company is providing.
A Share Purchase agreement between the acquirer and all of the shareholders of the object company, pursuant to which the acquirer usually agrees to acquire all of the issued and outstanding share of the object company (although in some cases acquirers do not acquire 100% and instead wish that the vendors retain an interest). When a purchaser acquires a company through a share purchase, all of the assets and liabilities of the object company remain with the object company. This means that, subject to any agreed-upon price adjustments or indemnification obligations in the acquisition agreement, shareholders of the object company will not retain or become liable in relation to the liabilities of the object company, and that such liabilities and obligations will remain with the object
company, which becomes owned by the purchaser. In a share purchase transaction, the vendors that are party to the agreement are the shareholders of the object company. Such shareholders typically must provide representations and warranties not only regarding the shares that they are agreeing to sell (and that they have capacity to enter into the agreement, which is binding upon them), but also representations and warranties regarding the object company and its business, and indemnification obligations in relation to such representations and warranties.
In general, purchasers prefer to acquire a business through an asset purchase, whereas vendors prefer to sell their business through a share sale. Asset purchase transactions are usually more complicated than share purchase transactions, often requiring additional documentation and more governmental or other third-party consents,
approvals or authorizations. There may also be significantly different income tax considerations
In a share transaction, it can be a negotiated by buyer whether the principal of a corporate shareholder of the object company may also be required to become party to the agreement and effectively guarantee the object company’s obligations. Similarly, in an asset transaction, where a shareholder of the object company that is required to become party to the asset purchase agreement is a corporation, a purchaser should seek to require the principal or parent entity of that shareholder to also guarantee obligations.
If a non-resident vendor sells shares of a private Canadian corporation and more than 50% of the fair market value of those shares was derived directly or indirectly from real or immovable property situated in Canada, a Canadian resource property or a timber resource property at any time during the 60-month period that ends at the time of disposition, the purchaser is required to withhold from the purchase price on account of the non-resident vendor’s potential Canadian tax liability and remit the withheld amount in accordance with section 116 of the Income Tax Act. If the non-resident vendor does not provide a Section 116 Certificate on closing, the purchaser is required to withhold Canadian taxes at the rate of 25% from the purchase price. If the certificate is not delivered to the purchaser on or before the 30th day after the end of the month in which the transaction closed, the purchaser is required to remit the taxes withheld to the Receiver General.
This article will cover only share purchase transactions and how the Purchaser can draft the SPA to protect his interest.
For example, if the Purchaser entered into the share purchase agreement to buy the business from a seller on January 1, 2021, the sale closing is kept on April 1, 2021. The Purchaser agreed to purchase all of the issued and outstanding shares. The transaction may be subject to The Competition Act, which is a federal law governing most business conduct in Canada. It contains both criminal and civil provisions aimed at preventing anti-competitive practices in the marketplace.
Its purpose is to maintain and encourage competition in Canada in order to:
• promote the efficiency and adaptability of the Canadian economy
• expand opportunities for Canadian participation in world markets while at the same time recognizing the role of foreign competition in Canada
• ensure that small and medium-sized enterprises have an equitable opportunity to participate in the Canadian economy
• provide consumers with competitive prices and product choices.
The object is the retail business, and when you were in the process of buying it, the object had very strong sales in the last three quarters of 2020. After you executed the sales purchase agreement on January 1, 2021, and in the weeks following the sale agreement, the sales dropped in the 1st quarter of 2021 and were going to be 50% lower than Q4 of 2020. And the Seller did not operate the business during the interim period in accordance with the covenant in the sale-purchase agreement.
As the sales agreement provides that closing will take place on April 1, 2021, but subject to the satisfaction or waiver of all other closing conditions that by their nature are to be satisfied at the closing.
However, on March 20, 2021, Purchaser notified Seller that it may not be closing on April 1, 2021. Purchaser has taken the position that certain closing conditions in the SPA will not be satisfied, which allows it to avoid closing. Purchaser has indicated that it may still be willing to close, but only if there is a significant reduction in the purchase price.
However, for the Purchaser to break the deal, the SPA should have been drafted in a way that should have given leeway to Purchaser to break the agreement.
Issues that have been taken care of in SPA.
– Material adverse effect: There should be a defined clause of Material adverse effect in SPA.
– Operating Covenant during the interim period: They should be properly defined to hold the Seller responsible.
In APS its is very important to lay down the condition for the benefit of Purchaser:
Which includes but is not limited to
– Representation and warranties of vendor
– Material Adverse Effect
– Any regulatory approval
How we help you at Minhas Lawyers:
At Minhas Lawyers, we can make the process of purchasing or selling your business a simple and hassle-free one. Since 2006, our law firm has been helping businesses in either capacity as seller or Purchaser successfully. Turn to our law firm when you need to consult with a Sale purchase Agreement to meet our commercial Lawyer. We will provide you with the proper legal guidance you can depend on.
Our Services Include
• Buying or selling the business
• Preparation and review of Sale purchase agreements
• Guidance on how to buy or sell the business
• Evaluation services to check out a business
• Negotiation of the SPA
• Lease review and negotiation
• Due diligence work for starting your own business
• Shareholder agreements
• Financing agreements
• Disputes, arbitrations and litigation
• Complete business counsel
Minhas Lawyers LLP is a multi-practice law firm based in Mississauga. We advise and represent clients across various segments and practice areas.
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