Share Purchase and Sale

What is Share Purchase and Sale Transaction?

A share purchase and sale transaction involves the purchase/sale of all or part of the shares of a corporation. When a buyer acquires shares, they are purchasing an ownership stake in the business and, unlike an asset purchase, assume all the company’s assets, liabilities, and ongoing operations. This method is often preferred when the buyer wants to take over a part of the business or the entire business, including its contracts, employees and intellectual property.

In a share purchase, the company’s legal entity remains intact and the business continues without interruption, but ownership of the company changes hands.

The Process of Share Purchase and Sale

1. Initial Discussions and Negotiation

Just like in every transaction, in a share purchase transaction, a buyer and seller first may do initial discussions and negotiate the terms of the sale as required. At this stage, they may cover main aspects of the deal, including:

• The number and class of shares to be sold.
• The purchase price for the shares.
• The timeline for the transaction.

During this stage, the parties should discuss initial and very important terms, such as any closing conditions, is finalized), key representations and warranties and how any existing liabilities will be handled.

2. Letter of Intent (LOI)

Once the key terms have been agreed upon, the buyer and seller may sign a Letter of Intent (LOI). The LOI is a non-binding agreement that outlines the basic terms of the transaction. Although it is not legally binding, it serves as a commitment to move forward with the transaction under the negotiated terms.

Main components of LOI usually include:

• Purchase price.
• Payment terms (e.g., cash, financing, deferred payment).
• Share classes and quantities to be acquired.
• Conditions to be met before closing.
• Confidentiality and exclusivity clauses.

3. Due Diligence

Doing due diligence is a crucial step in any share purchase transaction. During this process, a buyer should thoroughly investigate the company’s financial, legal, and operational details. It is to ensure that the buyer is fully aware of the risks, liabilities and opportunities during and after the purchase. Areas of focus during this due diligence can be:

• Financial statements, including profit and loss statements, balance sheets and tax returns.
• Legal obligations, such as contracts, leases and pending litigation.
• Corporate records, including minute books, articles of incorporation and shareholder agreements.
• Employee matters, including employment contracts, pensions and benefit plans.
• Intellectual property, such as trademarks, patents and copyrights.

4. Share Purchase Agreement (SPA)

Once due diligence is completed, the next step is drafting the Share Purchase Agreement (SPA). The SPA is the legally binding contract that outlines the terms and conditions of the sale. A Share Purchase Agreement includes:

• Purchase price
• Number and class of shares
• Representations and warranties
• Conditions that must be satisfied before the transaction can close.
• Indemnification: Provisions that protect the buyer from future claims or liabilities related to the company’s past actions.
• Closing arrangements: Details on how and when the transfer of shares and payment will occur.

5. Financing the Purchase

The buyer may need to secure financing to complete the purchase. The financing can be in form of:

• Bank loans: A traditional source of financing that may involve pledging the purchased shares as collateral.
• Seller financing: Where the seller allows the buyer to pay the purchase price in installments over time.
• Private equity or investors: Involving third parties to provide funding for the purchase.

6. Regulatory Approvals (if required)

Depending on the industry in which the company operates, the share purchase may require regulatory approval from federal or provincial authorities. Common regulatory considerations include:

• Competition Act compliance, particularly for large transactions that may impact market competition.
• Industry-specific regulations, such as those governing financial institutions or telecommunications companies.
• Foreign ownership restrictions, which may limit the ability of non-Canadian entities to purchase shares in certain businesses.

Both the buyer and seller must ensure that any necessary regulatory filings are made and that approvals are obtained before closing.

7. Closing the Transaction

The closing is the final step in the share purchase transaction, where the ownership of the company’s shares is officially transferred from the seller to the buyer. At closing, the main events that may take place are:

• Transfer of shares: The seller transfers the shares to the buyer, typically through share certificates or electronic records.
• Payment of the purchase price: The buyer pays the purchase price, either as a lump sum or in installments, as per the SPA.
• Execution of closing documents: Both parties sign various closing documents, such as share transfer forms, updated corporate records and tax filings.

Once the closing is complete, the buyer becomes the new owner of the company and the seller receives the agreed-upon compensation for the shares.

8. Post-Closing Matters

After the transaction has closed, there are several post-closing obligations that may need to be fulfilled, including:

• Adjustments to the purchase price: If the purchase price was based on estimates (e.g., working capital adjustments) or a correction needs to be made in any amount, these may be adjusted/finalized post-closing.
• Indemnity claims: If undisclosed liabilities or breaches of the SPA arise, the seller may be required to compensate the buyer.
• Integration: The buyer may need to integrate the purchased company into their existing operations, which can involve updating internal systems, merging corporate cultures and rebranding.