How do I buy the shares of an incorporated company, and what changes after closing?

Buying a company off the shelf can mean buying a newly incorporated company with no history, and this guide is not about that. It is about buying an operating company by buying its shares. In a share purchase, the buyer acquires the shares of the corporation that operates the business, and the corporation stays the same legal entity, with its assets, contracts and liabilities, under new owners. That is why the work before closing and the paperwork after it both look different from an asset sale. The steps below follow the order you will meet them in.

What you are buying, and what comes with it

Treadstone Law’s overview of asset and share purchases notes that in a share purchase the corporation comes with all its assets, contracts and liabilities, and that contracts, leases and licences stay in the corporation’s name. It adds that no third-party consents are usually needed unless a contract has a change-of-control clause. That makes the contracts the first thing to read. The same overview warns that buyers inherit everything, including hidden liabilities, which is why it calls thorough due diligence and strong representations and warranties, backed by indemnities, central to every share purchase agreement. Our answer on buying through a newly incorporated company covers a different structure.

Diligence and the agreement

BDC describes due diligence as the step that gives crucial information on a target’s finances, prospects and legal issues. In a share purchase, the legal issues include anything the corporation has signed or owes. Ask your lawyer to review the minute book, the contracts, the employee arrangements and the tax filings, and to draft a share purchase agreement in which the seller gives written statements about the company and backs them with an indemnity. Ask your accountant to test the financial statements. If the seller is a holding company or several shareholders, confirm that everyone who must sign will sign.

Check for a unanimous shareholder agreement

Under the Canada Business Corporations Act, the directors manage or supervise the management of the business and affairs of a corporation, subject to any unanimous shareholder agreement. The Act also provides that a purchaser or transferee of shares subject to such an agreement is deemed to be a party to it. If the purchaser is not given notice of the agreement, the Act allows the purchaser to rescind the transaction within 30 days after becoming aware of it. Do not rely on that remedy. Ask for every shareholder agreement, and for the articles and by-laws, before you sign. A provincially incorporated company follows its own province’s corporate statute, so ask your lawyer which one applies.

What changes on closing day

A federal corporation must keep a securities register recording the securities it issues in registered form. The Act says that registration of a transfer in the central securities register or a branch securities register is complete and valid registration for all purposes. So make the corporation’s recording of the transfer part of closing, not a task for later. Your closing checklist should include the corporation’s resolutions approving the transfer, the new share certificate or register entry, and the register itself. If the seller’s directors and officers are leaving, plan for their resignations at closing and for the appointment of their replacements.

Registry filings and the CRA

The Canada Business Corporations Act requires a federal corporation to send the Director a notice setting out a change of directors within fifteen days after the change. In Ontario, a corporation files an initial return, a notice of change or an annual return, as applicable, through the Ontario Business Registry. The CRA says that before you contact it, any structure or owner changes for a corporation must be updated and validated with the federal or provincial incorporating authority, that it cannot control how long a registry takes to update, and that in certain circumstances there may be legal implications for outgoing and incoming directors. File first, then call the CRA.

Tell the people who deal with the company

The Treadstone Law overview notes that contracts, leases and licences stay in the corporation’s name, but the people behind the corporation have changed. Ask your lawyer which counterparties must be told or must approve the change of ownership under their agreements, and read any loan documents for a default triggered by a change of control. Update signing authority at the bank and the insured parties on the insurance policies. Tell employees and key customers in a planned way, so that they hear about the sale from you first.

Before you sign

Use the questions below as a final check with your lawyer and accountant.

• Have you read every contract with a change-of-control clause, and asked the other party whether it will consent?
• Have you seen the articles, by-laws, minute book and any unanimous shareholder agreement?
• Does the purchase agreement give you written statements from the seller about the company and an indemnity that backs them?
• Who will file the director changes with the incorporating authority, and by when?