Is buying out a partner the same paperwork as buying a whole company?

A partner buyout and a whole-company purchase share some steps, but the documents differ. In a whole-company deal the buyer acquires all the shares or the business’s assets. In a buyout you acquire one owner’s stake, and the business and the other owners carry on. This page assumes the business is a corporation. If it is a partnership, different rules and the partnership agreement may govern instead, so confirm which applies before anything is drafted.

Who pays the departing partner

A buyout can run two ways. You can buy the partner’s shares yourself, or the corporation can acquire them. Under the Canada Business Corporations Act (CBCA), s.34(1), a corporation may purchase or otherwise acquire shares issued by it, subject to s.34(2) and its articles. Section 34(2) bars the payment if there are reasonable grounds for believing the corporation is, or would after the payment be, unable to pay its liabilities as they become due, or that the realizable value of its assets would after the payment be less than the aggregate of its liabilities and stated capital of all classes. Sections 35 and 36 set out exceptions with their own payment limits, including an acquisition under a non-assignable agreement to buy shares owned by a director, officer or employee. Ontario’s Business Corporations Act, s.30, has a comparable test for Ontario corporations, subject to ss.31–32, and other provinces’ statutes are their own. If you pay the partner directly, the corporation is not the one paying.

How the payment is taxed

If a corporation resident in Canada redeems, acquires or cancels its own shares, otherwise than by a transaction described in s.84(2), Income Tax Act s.84(3) deems it to have paid a dividend equal to the amount, if any, by which the amount paid exceeds the paid-up capital of those shares. Section 84(6) and (8) list exceptions. How a purchase by you would be treated instead is a question for your accountant. The paperwork follows the structure chosen, so settle the structure first.

What else the documents must address

Read the shareholder agreement first, since it may already set buy-sell, valuation and transfer steps. Then check whether the lease, licences, loans and key contracts react to a change in ownership of any size; what is a change of control clause explains the wording. If the partner disputes the exit, CBCA s.241 lets a complainant, which includes a registered holder of a security, apply to a court for an order to rectify conduct that is oppressive or unfairly prejudicial to, or that unfairly disregards, the interests of any security holder, creditor, director or officer. The court may direct the corporation, subject to s.241(6), or another person to purchase a security holder’s securities. For the wider route, see how to buy out a business partner.