So you want to buy a company!

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 corporation in one of two ways:

  1. Buy all the assets or shares of the company; or
  2. 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 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.

In regards to unions and employees, a share sale has no substantial effect. In law, the employer has not changed. It is still the corporation. The employees continue to work for the company, their status unrelated to the purchase of shares, and the labour union continues to represent the employees.

Even for asset sales, successorship applications under, for example, BC's Labour Relations Code can end up at the same result. A labour relations board can bind the purchaser to any existing collective bargaining agreement (caution: those boards are known to be very interventionist and operate 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 Contract Law.

Clearly, buying or selling an existing corporation in Canada involves weighing a large number of elements and being wary of many possible pitfalls.

No matter how big or small the company may be, you would be best advised to spend a bit of money up-front and see a member of the Law Society and of the Institute of Chartered Accountants, obtaining proper professional advice, than run the risk of a botched do-it-yourself job.