Share Sale Transactions
We have compiled a top five list of things to consider during share sale transactions. Without further ado…here is our Top 5 List of considerations for Share Sale Transactions:
- Tax Considerations – The implication of tax on a share sale transactions is always a critical issue. The Seller wants to minimize taxes payable on the sale proceeds and the Purchaser is usually willing to accommodate this desire, provided that it is not unduly disadvantaged as a result of any steps taken by the Seller. With respect to the sale of a Canadian controlled private corporation, each Seller may have access to an $866,000 capital gains exemption (in 2020, with indexed increases in future years) on sale proceeds and then capital gains tax treatment on the balance of the gain above that amount. In the case of many companies, this will result in a substantial tax saving for the Seller as opposed to selling assets of the business. In some cases where the Purchaser could realize a significant tax benefit from purchasing assets instead of shares, such as where the business has depreciated assets which could be significantly “written up” for purposes of future depreciation to be taken by the Purchaser, the structuring of the transaction as an asset or a share purchase transaction may be an important threshold negotiating point; however since the Seller is in control of whether it is willing to proceed with a sale transaction and since there are various other advantages to a share transaction, it is more common for the share transaction structuring to be used.
In any event, the net after tax effect of the two structuring options should be assessed by both parties and this will typically result in negotiations on this point.
- Excluded Liabilities and Assets– The Purchaser will be assuming all liabilities of the corporation being purchased in a share purchase transaction except for any specific liabilities which are described in the agreement as being excluded and retained by the Seller. With respect to any such liabilities which are retained, there will need to be an assignment of such liabilities from the target corporation to the Seller and an indemnity from the Seller to the corporation and the Purchaser since the direct exposure on such liabilities will be to the corporation. One common category of excluded liabilities is existing claims or lawsuits against the corporation at the time of closing. Typically the Purchaser takes the position that since these relate to the period prior to closing they are the responsibility of the Seller. This can also lead to negotiations relating to the manner in which these claims can be dealt with by the Seller since they may involve ongoing customers of the target corporation with which the Purchaser wants to maintain a good relationship.
There may also be assets of the target corporation which the Seller wants to exclude from the transaction and retain. For instance, the Seller may want to retain real estate owned and occupied by the target corporation and negotiate a lease with the corporation for its future use. Another common excluded asset is any potential refunds or rebates, such as potential tax refunds of the corporation, for any period up to closing, on the theory that the Seller should be entitled to the assets which relate to that period as well as being responsible for the liabilities relating to the period.
- Employment issues– In a share purchase, the Purchaser will automatically assume all employees of the corporation and any accrued liabilities owing to those employees, unless the Purchaser specifically negotiates for the Seller to retain responsibility for certain employees or certain accrued employee liabilities, such as accrued bonuses or other accrued compensation. The Purchaser may also want to negotiate an indemnity from the Seller for the anticipated severance costs relating to any employees that the Purchaser anticipates terminating at the time of closing or subsequently.
- Warranties and Indemnities– The Purchaser will include in the agreement extensive warranties to be given by the Seller about the assets and liabilities of the business. The Purchaser is acquiring the corporation with all of its history and potential liabilities. The Purchaser will try to identify any potential problems through its due diligence prior to closing but there may be things which are not identified, such as a breach of a significant contract of the target corporation, either by the corporation itself or by the other party to the contract, or an employee termination which has occurred but which has not yet resulted in an actual damages claim. Typically, the Purchaser wants the Seller to be responsible for any claims relating to activities in the business occurring prior to closing, whether the Seller is aware of the potential for a claim or not. On the other hand, the Seller will try to limit his potential liability to matters within his knowledge. This is usually a highly negotiated point.
The Seller will also want to negotiate a minimum threshold for claims, i.e. a minimum dollar value of claims which the Seller is allowed before any claims are made by the Purchaser, and also a maximum time period and monetary cap for the Seller’s indemnity liabilities. The Seller’s objective is to not carry forward any potential liability for the business after sale and the Purchaser’s objective is to ensure that it is not saddled with liabilities it was not aware of in setting the purchase price and deciding to proceed with the transaction.
- Working with the right professionals. It is important to choose your advisors wisely. You will be well served by having a good accountant and good business lawyer work with you during a share sale transaction, or any other corporate commercial issue for that matter. There are also various other matters which may be covered by the Share Purchase Agreement, such as any ongoing employment or consulting arrangements with the Seller after closing and any non-competition or non-solicitation agreements which the Purchaser will want the Seller to enter into. These can also be significant issues in many transactions.
Each sale situation gives rise to its own issues, negotiations and solutions. There is no completely “standard” situation. Both the Seller and the Purchaser need to identify the issues that are important to them at the start of the sale process and ensure that the issues are fully negotiated and dealt with in the Share Purchase Agreement. If you would like to discuss a Share Sale Transaction or any other matter with one of our professionals, feel free to contact us at Conduct Law.
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