Buying or Selling a Corporation? A Guide to Share Transactions in Alberta

When it comes to acquiring or divesting a incorporated business in Alberta, you have two primary paths: an asset transaction or a share transaction. While an asset deal involves buying the company's contents, a share transaction means purchasing the entire legal entity itself. This route, which involves buying the corporation's shares from its shareholders, carries a unique set of advantages and risks that both parties must understand.

What is a Share Transaction?

In a share transaction, a buyer purchases the shares of the corporation from the existing shareholders. This means the buyer steps into the shoes of the previous owners and acquires the entire business—lock, stock, and barrel. The corporation, with all its assets, liabilities, contracts, and legal history, continues to exist uninterrupted. Only the ownership changes.

The Buyer's Perspective: Advantages and Key Risks

For a buyer, a share purchase can be an attractive way to acquire a business with a established track record.

Key Advantages for Buyers:

• Seamless Continuity: The business does not miss a beat. All contracts, leases, licenses, and brand names remain intact without needing to seek third-party consent for transfer, which is a significant administrative advantage.

• Tax Benefits: The corporation’s tax attributes, such as non-capital losses that can be used to offset future income, may be preserved for the buyer's benefit (subject to specific rules).

• Simpler Structure: The transaction can be simpler from a legal perspective, as there is only one primary agreement between the buyer and the selling shareholders.

  
  

Key Risks for Buyers:

• Assumption of All Liabilities: This is the most significant risk. The buyer inherits all known and unknown liabilities of the corporation. This includes past tax obligations, potential lawsuits, environmental issues, or hidden debts.

• Extensive Due Diligence: Because of the liability risk, the buyer's investigation must be incredibly thorough. You are not just valuing the assets; you are underwriting the entire legal and financial history of the company.

  
  

The Seller's Perspective: Advantages and Key Steps

For a shareholder looking to exit, a share sale is often the most desirable outcome.

Key Advantages for Sellers:

• Complete Exit: The seller can make a clean exit from the business, with no remaining ties or liabilities left behind in the corporate entity.

• Capital Gains Treatment: The sale of qualified small business corporation shares may result in significant tax advantages for the seller, as the proceeds are often treated as a capital gain, potentially benefiting from the lifetime capital gains exemption.

• Higher Sale Price: Because the deal is often more attractive to the seller from a tax perspective, they may be willing to accept a slightly lower purchase price, or the seamless nature of the transaction may justify a premium for the buyer.

  
  

Critical Steps for a Seller:

1. Corporate Clean-Up: Ensure your corporate records (minute books, shareholder agreements, etc.) are in perfect order. A disorganized corporation can deter buyers or lower the offer price.

2. Obtain Tax Advice: Consult with an accountant early to understand the tax implications and optimize your position to utilize the capital gains exemption.

3. Negotiate Indemnities: The purchase agreement will contain indemnity clauses. Your goal is to limit the scope and duration of your responsibility for post-closing claims.

   
   

The Heart of the Deal: The Share Purchase Agreement

The entire transaction is governed by the Share Purchase Agreement (SPA). This is a complex document that outlines:

• The purchase price and adjustment mechanisms.

• Representations and Warranties: These are legal promises made by the seller about the state of the corporation. They are a key tool for the buyer to uncover risk and seek recourse after closing.

• Indemnification Clauses: These clauses specify how losses from breached warranties or undisclosed liabilities will be handled post-closing.

• Conditions that must be met before the deal can finalize.

  
  

Navigate Your Share Transaction with Confidence

A share transaction can be a win-win, providing a clean exit for sellers and seamless continuity for buyers. However, the stakes are high, and the risks for the buyer are substantial. Professional legal guidance is not just recommended; it is essential.

Disclaimer: This article is for informational purposes only and does not constitute legal advice. The purchase or sale of a corporation involves significant legal and financial

commitments and tax implications.

Considering buying or selling a corporation in Alberta? The experienced business lawyers at Jade Sunrise Law can guide you through the complexities of a share transaction, from due diligence to negotiating the Share Purchase Agreement. Protect your investment and your legacy. Contact us today to schedule a consultation.