How do I structure a deal with an option to buy the remaining shares later?

An option to buy the remaining shares makes the deal two steps: you buy a first block now and hold a right to buy the rest later. Write the option so a later date, a changed business or a disagreement does not leave you arguing about what was promised. Three areas need settling before you sign: the option terms, the shareholder agreement that governs the gap, and whether a later purchase needs a merger notice.

Settle the option terms in writing

Specify which shares the option covers, how the price will be set, when it can be exercised and how notice is given. Corporations Canada says a shareholder agreement can govern the future purchase of shares and set transfer rules for events such as death, resignation, dismissal, personal bankruptcy or divorce of a shareholder. Settle what happens to the option shares if one of those events occurs before exercise. For the tax side, see how are capital gains taxed on an option to purchase.

Govern the gap with a shareholder agreement

Until you exercise, the seller still holds shares. Corporations Canada explains that directors are elected by ordinary resolution, so a shareholder with a majority of the votes can decide alone who sits on the board, and the board controls management unless a unanimous shareholder agreement says otherwise. If your first block is a minority, ask for a board seat and approval rights over major decisions in the shareholder agreement, since the guidance notes that minority holders may want one for protection.

Check merger notification before you exercise

Under the Competition Act, s.114(1), subject to that Part, the parties to a proposed transaction must notify the Commissioner before it is completed if the Act’s tests are met. For voting shares, s.110(3), subject to ss.111 and 113, applies to a corporation that carries on, or controls an entity that carries on, an operating business, where the size tests are exceeded and the acquirer, with its affiliates, would own voting shares carrying more than a set percentage of the votes. That percentage differs depending on whether any of the shares are publicly traded and on what the acquirer already holds, and the dollar tests are separate. The Competition Bureau says notification applies where a transaction is of a specified type, exceeds thresholds and has no exemption. Ask counsel to test both the first purchase and the exercise.