In a sale of business through shares entire business passes to purchaser and vendor is no longer connected to business.

Any profit on a share sale is a capital gain for vendor which is taxed at a favorable rate.

When the purchaser acquires a business by share of sales, the purchaser acquires a business by share of sales, the purchaser also acquires any unrecognized problems.

If there are tax losses in a corporation, purchaser can use these to his advantage.

With share sales it may be easier to carry on the business without any apparent interruption.

A person or a company that buys a business by buying its shares acquires all existing and potential liabilities.

The shares are purchased as a personal capital asset, and thus the purchase price becomes the cost base for future capital gains calculation.

Contents of share sales and purchase agreement

The parties need to be clearly identified.

The number and class of shares being purchased must be stated.

The corporation’s recent financial statements and detailed list of its assets should be attached as schedule.

The vendor must warrant that there are no outstanding claims, liabilities or other potential impediments to the sale that have not been fully disclosed to the purchaser or his or her representatives.

The vendor warrants that all necessary federal and provincial corporate and tax filings have been taken care of.

The vendor agrees not to open, manage, own or advise a competing business in a defined territory for a certain period of time after closing.

Searches and reviews before closing

A share sales requires more searches than an asset sale because it involves searches related to both shares and assets.

Corporate Searches

The status of the corporation whose shares are being purchased needs to be ascertained via corporate searches.

If the vendor of shares is itself a corporation, searches will need to be conducted to ensure that the vendor of shares has been in existence through its ownership of shares being sold.

Minute Book Review

Minute book is reviewed to ensure that all of the statements made in the agreement of purchase and sale are true; that there are no undisclosed restrictions In the corporation’s articles that limit the types of business the corporation can carry on; that there are no other unusual provisions in the articles, that the corporation’s authorized capital and the rights, privileges and conditions attached to its shares have been properly passed; and that all shares issues and transfers have been completed in the correct manner.

Financial Statements Review

The purchaser’s lawyer or accountant will review the corporation’s financial statements and records to ensure that corporation’s finances are in order.

Contract Review

All contracts to which the corporation whose shares are being purchased is a party should be reviewed by the purchaser and purchaser’s advisers, where appropriate. The purpose of this is to ascertain the corporation’s legal responsibilities and liabilities, which of course will remain unchanged despite the change in ownership.

Personal Property Security Act Search

Purchaser’s lawyer will undertake this search not just against the corporation to verify statements made in the agreement of purchase and sale concerning the corporation’s indebtedness, but also against the vendor to see whether the shares are being used as security for a loan.

Bank Act Search

This search is undertaken against the corporation whose shares are being purchased. The purpose is to ensure that the corporation’s shares assets are unencumbered by a bank act registration.

Execution Search

This search is done against the vendor to ensure that there will be no claims against the shares.

Bankruptcy Search

This search is done to ensure that the purchaser is buying shares in a solvent business.

Corporate Income Tax Filing

Purchaser’s lawyer will contact Ministry of finance and Canada Revenue Agency to ensure that all necessary corporate income tax returns have been filed and that there are no outstanding taxes, interest payments, or penalties.

A change of control or ownership triggers a financial year end for a corporation, in which case the closing date for the share purchase should coincide with the normal financial year-end or there should be undertakings and a purchase price holdback sufficient to ensure that any amounts due to the provincial and federal government will be paid in full.

Any tax loss carry forward should also be confirmed, because this is sometimes considered as an asset of a benefit to purchaser who has plans to use it against future income.

Real Property Search

When a corporation whose shares are being purchased is the owner of real property, a search should be undertaken to determine whether there are any mortgage or other debt instruments on title.

Documents required on closing

Resolution and Resignations

A shareholder’s or director’s resolution approving the share transfer.

Resignation of the officers and directors of the corporation. After closing, the purchaser appoints new directors, and these will appoint new officers.

Share Certificates

The share certificates for the shares purchased must be delivered by the vendor on closing. The back of each certificate is endorsed by the vendor to indicate the transfer.

Warranties, Covenants and Undertakings Required by the Agreement

As in an asset sale, there may be warranties, covenants, and undertakings that the purchaser wants to ensure do not merge on closing. The purchaser will therefore require the vendor to deliver a separate document confirming their continued existence.

Income Tax Act Affidavit

This affidavit is needed so that the purchaser may transfer the closing funds in full to vendor.

Minute Book, Corporate Seal, Keys and other items

The purchaser needs to receive the minute book, corporate seal, keys and other items necessary for running the business.

After Closing

Elect new directors and new officers.

Update the shareholders, directors and share transfer register.

File notice of change form 1.

Disclaimer:

This information is for educational purposes only. It does not constitute any legal advice or opinion. Please do not use any of its contents without seeking a professional advice.

References:

The fundamentals of corporate law and procedure

By Mark Walma and Patricia McCann – Smith

Publisher: Edmond Montogomery Publications Limited, Toronto, Canada.