A first offer or a draft agreement has landed, and you want to know what it asks of you. A share purchase agreement in Canada is the contract where a private company's owners hand their shares to a buyer for an agreed price. It also records what the sellers promise about the business and who pays if a promise proves wrong. But, there are a few details you need to know.
Share deal or asset deal?
Mergers and acquisitions in Canada usually means one of two deals: buying the shares or buying the assets.
In a share deal, the buyer takes the company itself, with its contracts, licenses and employees. However, its debts and legal issues stay with it too, known or not. A share deal can also require third-party consents where contracts or leases have change-of-control clauses. In an asset deal, the buyer picks the assets it wants and negotiates which debts and problems come along, and leases and contracts often need the other party's consent to move.
Sellers tend to prefer a share sale for tax reasons, and buyers tend to prefer an asset deal, to leave issues behind (as mentioned above). In a share sale, an individual who owns qualifying small business shares may be able to claim the lifetime capital gains exemption, which can cut the tax on the gain. One test: for the previous 24 months, only you or a related person or partnership can have owned those shares, including certain family members and companies you control. The company has to pass its own tests on its status and assets. If you incorporated recently, don't assume you're ruled out, because the rules have exceptions. Ask your accountant early, before concluding either way.
Which clauses carry the real risk?
Sellers make promises about the business, such as its financials, and lawyers call these representations and warranties. The seller lists exceptions in a disclosure schedule, and a thin list leaves the seller exposed, because anything not on it is a promise the seller may have broken. So, disclose generously, because buyers read it line by line.
If a promise proves false, or an issue nobody knew about surfaces, the indemnity decides who pays. The maximum payout and how long the buyer has to claim are both negotiated.
Price adjustments come in two common forms: a fix after closing if working capital (short-term assets, less bills due within the year) misses a target, or a price from an earlier balance sheet.
Closing conditions are what must happen before the deal completes, such as third-party consents.
Sellers promise to stay out of the business after the sale (a non-compete). Canadian courts look at these less strictly than employment non-competes, but still ask whether the time, territory and activity covered are reasonable. Enforcement is never guaranteed.
Foreign buyers should raise a federal review early. A non-Canadian buyer acquiring control of a Canadian business needs at least an Investment Canada Act filing, unless an exemption applies. Also, a national security review is separate and can reach investments of any size. Any buyer may face Competition Act notification before closing, depending on deal size. Have counsel check current rules.
When should you get legal advice?
Get advice before you sign a letter of intent or term sheet, the short outline of the deal. It shapes what the final agreement says. A seller needs the promises to match the real business; a buyer needs to know what it's inheriting. Our post on why a handshake isn't enough covers the co-owners' side.
A sale often comes with licenses or supply terms, and we draft those commercial agreements alongside the share purchase agreement. A merger and acquisition lawyer at our Vancouver office advises on asset and share deals, for whichever side hires us.
Book a 15-minute introductory call before you sign anything.
Disclaimer: this post provides general information only and is not legal advice.
