Buying a business through share purchase: Get the right advice

When a business is operated as a joint stock company, it may be sold through a share or asset sale. In most cases, the seller will require a share sale for tax purposes. It is generally the buyer's responsibility to draft the sale documents. When acquiring a business, regardless of the value of the transaction, it is critical that the buyer seek legal advice. Here's why.

First, purchasing a company's shares usually involves its liabilities and past. Suppose, for example, that Mr. A sells all his shares in Newco Inc. to Mrs. B. Once the sale has gone through, authorities can still tax Newco Inc. for periods prior to the sale. The buyer, Mrs. B., will be responsible for ensuring the taxes are paid, even though the events that led to the assessment occurred under Mr. A's ownership. It is therefore crucial to ensure the transaction documents stipulate that the seller remains responsible for all claims against the business related to periods prior to the sale and provide for an application and compensation mechanism.

In addition, as part of a share purchase, the buyer receives no legal warranty of quality (Villa Royale inc. v. Roy, 2016 QCCS 5571), as would be the case when, for example, a buyer purchases a home and is entitled to a warranty for hidden defects under the Civil Code of Québec. The purchase agreement must therefore include standard warranties for the company being sold to cover all aspects of business, including those related to corporate, legal, tax and accounting matters, as well as employees, assets and their quality (which may include a building), day-to-day business, the environment and intellectual property. The more detailed the warranties, the better protected the buyer will be. Without them, there are very limited options for recourse should a defect or issue affecting the business or its assets arise.

If you are currently involved in a purchasing or sales process, contact one of the experts at PFD Lawyers for the advice and support you need.