So you want to buy a business!
Some preliminary issues to consider, if applicable, include
the Investment Canada Act, which allows federal government officials
to review foreign purchases of Canadian businesses where the value is
over a certain amount.
The new World Trade Organization agreement has
affected this threshold. The topic exceeds the scope of this short, general
article.
In addition, culturally-related industries may be subject to
federal regulation as well.
Also, be aware of the federal Competition
Act which, again, allows federal government officials to interfere
in sizeable company purchases where the sale might result in substantially
less competition. For more, please visit the web site of Canada's Competition
Bureau although be forewarned; these guys move their URL around every few months.
In most scenarios, the purchaser will want
to buy a business in one of two ways:
- buy all the assets or shares of
the company;or
- amalgamate the company into that controlled by the purchaser.
Choosing between an asset or a share purchase can be a tricky
matter. Tax considerations may tend to incline a purchaser towards an asset
purchase. Typically, therefore, purchasers prefer buying the assets whereas
the vendor will prefer selling shares.
If environmental, product liability or tax liabilities are
suspected, the purchaser might be wiser to purchase the assets.
But a
share transaction tends to be simpler, and therefore less expensive in
legal and accounting costs. This is because an asset sale requires changing
any applicable licenses.
If minority shareholders are involved and they
don't want to sell, there are provisions that can be used to achieve the
sale in spite of the objections of the minority shareholders not the least
of which is the stated direction of the board of directors, controlled
by the majority of shareholders.
As far as unions and employees, a share sale has no sunstantial
effect. The employees continue to work for the company, their status unrelated
to the purchase of shares. Even for asset sales, successorship applications
under, for example, BC's Labour Relations Code can end up at the same result.
The Labour Relations Board can bind the purchaser to any existing collective
bargaining agreement (that Board is known to be very interventionist and operates with little effective judicial oversight).
There are many ways to finance the purchase of a business.
Some of the more common include:
- Vendor financing. The vendor is willing to wait for the full
amount. This also has the advantage of giving the purchaser a holdback
in case the vendor's promises or representations don't hold up. The
vendor may want some kind of guarantee that the debt will be honoured.
This can take the form of a mortgage or even an escrow
agreement in which the shares are held by a third party until the purchase
price has been paid in full.
- Borrowing money from a friend or bank. These third parties
may well be inclined to seek security on their money in the form described
in provincial legislation such as the Personal Property Security
Act.
- Equity financing simply means selling shares in the new company
to investors.
A battle between the vendor and purchaser will inevitably
occur over responsibility for the liabilities of the company especially
assumed indebtedness, which is a technical word used to refer to
money liabilities such as accounts payable or bank loans. These are usually
adjusted for in the final price but expect a vendor to request a written
release.
The real debate may hover over the representations and warranties
that the vendor made inducing the purchaser to buy. The purchaser will
try to hold the vendor to those statements even after the closing date,
to protect himself from misrepresentation. The vendor will try to exempt
himself fully or, at the very least, set a short time frame during which
he will be exposed to liability related to his former company.
Another frequent issue in business sales is the restrictive covenant,
whereby the purchaser will attempt to prevent the vendor from starting
or joining another company (for a certain period of time) which would
then compete with the company being purchased. For comment on this topic,
readers are directed to the Restraint of Trade section of the Canadian
Contract Law Centre.
Clearly, buying or selling a business in Canada
involves weighing a large number of elements and being wary of many possible
pitfalls. No matter how big or small the business may be, you would be
best advised to spend a bit of money up-front and see a member of the
Law Society obtaining proper legal advice, than run
the risk of a botched do-it-yourself job.
This information, provided to you by Lloyd Duhaime, contains necessary generalizations, any of which could be inapplicable because of your specific fact matrix. It is for
informational purposes only and should not be considered as legal advice
or instruction. Consult a member of your provincial Law Society
or other legal and professional advice relating to a legal problem. Laws
can be amended with little warning and change some of the information
below so make sure, if you want to "do it yourself", that you
consult official government documents such as the official statutes or
the Gazette.