The purchase and sale of a business is a complex transaction requiring legal counsel to provide guidance and advice throughout the process. This includes negotiating and drafting the underlying purchase agreement, assisting with satisfying conditions and preparing and negotiating closing documents. Show The purchase and sale of a business can be broken down into two steps:
Step One – The Agreement of Purchase and SaleThe Agreement of Purchase and Sale (“APS”) is a binding contract between the purchaser and seller that obligates the purchaser to buy and the seller to sell assets or shares of a corporation subject to the terms and conditions in the APS. The APS will include terms such as the purchase price, representations and warranties, conditions, and the closing date. When a purchaser is buying assets, the APS is called an Asset Purchase Agreement; when the purchaser is buying shares, it is called a Share Purchase Agreement. Whether assets or shares of a corporation are being purchased (See our article: Asset sale vs. Share sale), the first step is to negotiate and draft the APS. The APS is occasionally prepared by real estate agents, brokers or even the parties themselves. However, it is customary and recommended that lawyers are retained to prepare or at least review the APS prior to the parties signing. At this stage, the buyer and seller will likely have entered into preliminary discussions regarding the key terms (e.g. purchase price, asset or share sale) or may even have drafted a non-binding letter of intent outlining all the key terms. The lawyers are then tasked with negotiating and ironing out the details of the APS. The parties must also agree on a closing date, which is the date that the transfer of ownership will officially occur. The closing date often occurs 30 to 60 days after the APS is signed but this will vary depending on the circumstances of the parties. Step Two –Closing Documents and ConditionsIn Step Two, the lawyers will work with the clients towards closing by first (a) assist with satisfying all of the conditions and second (b) prepare and negotiate the closing documents. A. Conditions In most APS, the completion of the transaction is conditional upon the satisfaction of certain conditions (or the parties waiving such conditions). The following are three commonly included conditions
The purchaser will typically have a conditional period anywhere from five to twenty days after the APS has been executed to perform due diligence and secure financing. B. Closing Documents After all the conditions have been satisfied or waived, the transaction is now considered firm. This means the parties will work towards closing and the lawyers will prepare and negotiate all of the closing documents required to legally effect the transfer of the business. A purchase agreement is merely an agreement to sell the business at a certain date in the future. On the closing date, closing documents must be exchanged
between the purchaser and seller in order to effect the sale. For example, a Bill of Sale is a closing document that is required to legally transfer the assets of a business from the seller to the purchaser on the closing date. The APS alone does not transfer the assets – it merely states that ownership of the assets is to be transferred by way of a Bill of Sale on closing. The business will also require various permits or licenses for its specific type of operation.
In an Asset Sale, a common list of closing documents required to be prepared are:
A couple of notes on the following documents: 1. Non-Competition AgreementsIn an asset sale of purely goodwill, which occurs where a business sells its client lists and trade name, it is crucial for the deal to include a non-competition agreement. This is because the entire purchase price is predicated on the goodwill of the seller. There are no hard or physical assets such as products, equipment or inventory, which make up the value of the business. Goodwill of a business is typically intimately tied to the seller, who has generated that goodwill in the marketplace. If he or she were to continue to operate a similar business, the value of the goodwill being purchased is reduced to zero, effectively destroying your purchase. For example, an insurance broker wishes to sell his or her list of clients–the broker’s goodwill–for $50,000. The purchaser does so in the hopes that the clients on the list will continue to use the purchaser as their insurance broker. Typically in these circumstances, the seller will introduce the purchaser to the clients and indicate that the purchaser is his or her successor to encourage the clients to continue to purchase insurance from the
purchaser. 2. The Termination and Hiring of EmployeesEmployees usually represent another contentious item when negotiating an asset purchase. Under law, when the assets of a business are sold to a new purchaser, all of the employees become successor employees to the purchaser. This means that all of the employees’ liability,
such as their work history, vacation pay, termination pay, and severance pay entitlements are transferred to the purchaser. If the purchaser wishes to terminate an employee after 6 months of buying the business, the purchaser will have to pay the employee termination pay representing the entire time the employee was employed by the previous business. Without provisions in place to protect the purchaser, the purchaser could potentially have to pay a large bill in termination pay to an employee.
3. Seller’s IndemnityOne of the most difficult discussions in negotiating a purchase and sale agreement will concern the seller’s indemnity and any limitations of the liability assumed by the purchaser. An indemnity protects the purchaser against damages suffered due to breaches of the seller’s representations, warranties, and covenants. At the same time, the seller will want to limit his indemnity liability to the purchaser. A seller’s indemnity clause is a contractual provision in which the seller agrees to protect the purchaser from “all liabilities, claims, and demands” that may arise due to breaches of representations or non-performance of covenants made by the seller. Limited Liability The seller will likely want to limit his liability, however. This will involve the inclusion of a survival period, language qualifiers, and monetary limitations. a. Survival Period A survival period limits the time period a buyer can commence litigation for breaches of representations, warranties, or covenants. Common ranges of survival periods are 12 to 36 months for general representations and warranties, six months following the expiration of the limitation period for tax matters, and six months following the expiration of the applicable limitation period of fundamental representations and warranties, such as authority to enter into the purchase agreement and title to the assets. b. Language Qualifiers Other methods used to limit the seller’s liability include language qualifiers, such as “to the best of my knowledge” and “in all material respects,”. For example, “to the knowledge of the seller, the premises contain no asbestos” and “the seller complies, in all material respects, with applicable laws.” The purchaser, therefore, should avoid these qualifiers that limit the seller’s liability, as not doing so would result in shifting the indemnification risk from the seller to the purchaser. c. Monetary Limitations The Purchase and Sales Agreement can also limit the seller’s liability by stipulating the maximum amount that a seller has to pay where there is a breach of the representations, warranties, and covenants made. The limit might be an amount equal to the purchase price or a percentage of the purchase price. Or there might be limits on indemnification specific to certain types of loss, i.e., breaches of general representations and warranties will incur a payout to a maximum of 30% of the purchase price, while breaches of environmental representations and warranties incur a payout up to 50% of the purchase price. For fundamental breaches such as title to the shares or assets, the limit is often not less than the purchase price. Where the purchase price is a substantial amount, claims for indemnification may be subject to a “basket” (also sometimes referred to as a “deductible”). If so, the seller will not be responsible to the purchaser for any indemnification payment unless damages reach a certain amount. Once the basket is reached, the seller is responsible for all liabilities in excess of the basket amount. 3. Corporate Resolutions One of the duties of the directors of a corporation is to approve agreements, contracts, leases and other documents that the corporation will enter or has entered into with other parties. a. Elements of a Directors’ Resolution to Approve an Agreement The corporate by-laws will outline clear instructions for how directors will pass resolutions to approve agreements. A directors’ resolution will lay out the following:
b. Examples of the Elements of a Directors’ Resolution to Approve an Agreement The Recital: The following is an example of language commonly used in the recital portion of Purchase and Sales Agreement: “WHEREAS the Corporation wishes to enter into an agreement of purchase and sale (the “Agreement”) among the Corporation, 5213672 Ontario Inc. (“5213672”), and John Doe dated the 10th day of July, 2019, pursuant to which the Corporation shall purchase from 5213672 all of the assets of a business known as “Coffee Kraze”. Approval of Terms and Conditions The following is an example of the language commonly used in a Directors’ Resolution to approve an agreement’s terms and conditions: “NOW THEREFORE BE IT RESOLVED THAT: The entering into of the Agreement by the Corporation, pursuant to the terms and conditions thereof, is hereby approved. Signing Authority for a Directors Resolution The by-laws of a corporation determine who can sign agreements on behalf of a corporation and whether those persons—usually directors and/or officers—can appoint someone else to approve an agreement. The following is an example of the language commonly used in the Signing Authority portion of a Directors’ Resolution: “Execution of Instruments – Deeds, transfers, assignments, contracts, obligations, certificates and other instruments may be signed on behalf of the Corporation by any officer or director of the Corporation. In addition, the board may from time to time direct the manner in which and the person or persons by whom any particular instrument or class of instruments may or shall be signed. Any signing officer may affix the corporate seal to any instrument requiring the same.” Catchall Phrase: The final clause in a directors’ resolution to approve an agreement is the catchall phrase. This gives the authorized signing authority the right to execute all other ancillary documents that may be required to implement the transaction contemplated by the Agreement. Below is an example of a catchall phrase: “Any officer or director of the Corporation be and is hereby authorized and directed to do all acts and things and to execute or cause to be executed all such instruments, agreements and documents as in his opinion may be necessary or desirable to complete the transactions contemplated herein.” Statutory Declarations and Filings With the CRAMaking statutory declarations and filings with the CRA so that your income tax return reflects your and your business’ new status. The following are some of steps that you should take when you have bought a new business.
Agreements of Purchase and Sale, Letters of Intent, and closing documents are complex. Hiring a qualified lawyer who is experienced to guide you through a corporate and commercial transaction is crucial to protect your rights. The lawyers at Kalfa Law handle a variety of business transactions on a routine basis. With our combined tax and corporate law experience, our lawyers anticipate complex corporate and tax issues and formulate optimal solutions that forward your interests in obtaining the highest valuation for your business and paying the least amount of tax possible. -Shira Kalfa, BA, JD, Partner and Founder Shira Kalfa is the founding partner of Kalfa Law. Shira’s practice is focused in corporate-commercial and tax law including corporate reorganizations, corporate restructuring, mergers and acquisitions, commercial financing, secured lending and transactional law. Shira graduated from York University achieving the highest academic accolade of Summa Cum Laude in 2012. She graduated from Western Law in 2015, with a specialization in business law. Shira is licensed to practice by the Law Society of Ontario. She is also a member of the Ontario Bar Association, the Canadian Tax Foundation, Women’s Law Association of Ontario, and the Toronto Jewish Law Society.© Kalfa Law 2020 The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer. |