1. Tax Considerations - This is always a critical issue. The Seller wants to minimize taxes payable on the sale proceeds and the Purchaser is usually willing to accommodate this desire, provided that it is not unduly disadvantaged as a result of any steps taken by the Seller. With respect to the sale of a Canadian controlled private corporation each Seller may have access to an $813,600 capital gains exemption (in 2015, with indexed increases in future years) on sale proceeds and then capital gains tax treatment on the balance of the gain above that amount. In the case of many companies, this will result in a substantial tax saving for the Seller as opposed to selling assets of the business. In some cases where the Purchaser could realize a significant tax benefit from purchasing assets instead of shares, such as where the business has depreciated assets which could be significantly "written up" for purposes of future depreciation to be taken by the Purchaser, the structuring of the transaction as an asset or a share purchase transaction may be an important threshold negotiating point; however since the Seller is in control of whether it is willing to proceed with a sale transaction and since there are various other advantages to a share transaction, it is more common for the share transaction structuring to be used.
In any event, the net after tax effect of the two structuring options should be assessed by both parties and this will typically result in negotiations on this point.
2. Excluded Liabilities and Assets - The Purchaser will be assuming all liabilities of the corporation being purchased in a share purchase transaction except for any specific liabilities which are described in the agreement as being excluded and retained by the Seller. With respect to any such liabilities which are retained, there will need to be an assignment of such liabilities from the target corporation to the Seller and an indemnity from the Seller to the corporation and the Purchaser since the direct exposure on such liabilities will be to the corporation. One common category of excluded liabilities is existing claims or lawsuits against the corporation at the time of closing. Typically the Purchaser takes the position that since these relate to the period prior to closing they are the responsibility of the Seller. This can also lead to negotiations relating to the manner in which these claims can be dealt with by the Seller since they may involve ongoing customers of the target corporation with which the Purchaser wants to maintain a good relationship.
There may also be assets of the target corporation which the Seller wants to exclude from the transaction and retain. For instance, the Seller may want to retain real estate owned and occupied by the target corporation and negotiate a lease with the corporation for its future use. Another common excluded asset is any potential refunds or rebates, such as potential tax refunds of the corporation, for any period up to closing, on the theory that the Seller should be entitled to the assets which relate to that period as well as being responsible for the liabilities relating to the period.
3. Employment issues - In a share purchase, the Purchaser will automatically assume all employees of the corporation and any accrued liabilities owing to those employees, unless the Purchaser specifically negotiates for the Seller to retain responsibility for certain employees or certain accrued employee liabilities, such as accrued bonuses or other accrued compensation. The Purchaser may also want to negotiate an indemnity from the Seller for the anticipated severance costs relating to any employees that the Purchaser anticipates terminating at the time of closing or subsequently.
4. Employee Ownership - Another item which may be important is any employee share ownership. If any employees own shares of the target corporation or there is a share option or ownership plan under which any employees currently have or could acquire an ownership interest, this will be reviewed carefully by the Purchaser with a view to ensuring that it identifies all potential ownership interests to be purchased and that any interests which the Purchaser does not intend to purchase are structured in a manner acceptable to it going forward after closing.
5. Warranties and Indemnities - The Purchaser will include in the agreement extensive warranties to be given by the Seller about the assets and liabilities of the business. The Purchaser is acquiring the corporation with all of its history and potential liabilities. The Purchaser will try to identify any potential problems through its due diligence prior to closing but there may be things which are not identified, such as a breach of a significant contract of the target corporation, either by the corporation itself or by the other party to the contract, or an employee termination which has occurred but which has not yet resulted in an actual damages claim. Typically, the Purchaser wants the Seller to be responsible for any claims relating to activities in the business occurring prior to closing, whether the Seller is aware of the potential for a claim or not. On the other hand, the Seller will try to limit his potential liability to matters within his knowledge. This is usually a highly negotiated point.
The Seller will also want to negotiate a minimum threshold for claims, i.e. a minimum dollar value of claims which the Seller is allowed before any claims are made by the Purchaser, and also a maximum time period and monetary cap for the Seller's indemnity liabilities. The Seller's objective is to not carry forward any potential liability for the business after sale and the Purchaser's objective is to ensure that it is not saddled with liabilities it was not aware of in setting the purchase price and deciding to proceed with the transaction.
6. Post-Closing Agreements with Seller - There may also be a holdback of part of the purchase price as security for the payment of indemnity claims and a schedule for periodic release of the holdback over the period that indemnity claims are able to be made. Sometimes an independent escrow agent is engaged to hold and pay out the holdback to the parties as they are entitled to it. This gives the Seller the assurance that the funds are available and will be paid to it to the extent that the amount of the holdback exceeds any allowable claims.
There are also various other matters which may be covered by the Share Purchase Agreement, such as any ongoing employment or consulting arrangements with the Seller after closing and any non-competition or non-solicitation agreements which the Purchaser will want the Seller to enter into. These can also be significant issues in many transactions.
Each sale situation gives rise to its own issues, negotiations and solutions. There is no completely "standard" situation. Both the Seller and the Purchaser need to identify the issues that are important to them at the start of the sale process and ensure that the issues are fully negotiated and dealt with in the Share Purchase Agreement
The most common structuring for selling your business is by way of a share sale. There are a number of reasons for this and a number of consequences which result from this structuring. Some of the key ones are as follows:
