How do I draft or review a share purchase agreement, and who prepares it?

If you are buying the shares of a company and want to draft or review a share purchase agreement, treat it as the document that records what you bought and what the seller stands behind. BDC, the federal development bank, says the agreement typically comes after a letter of intent is signed and most of your due diligence is done, and that it is when you make final decisions on whether to proceed, at what price and on what terms. This guide explains who prepares the agreement, what to look at first, and which other statutes may touch a share deal. It is not a template, and it cannot replace a lawyer’s drafting.

Who prepares it

The agreement is legal work, so ask who will hold the pen before you negotiate anything else. Ontario’s Law Society Act says that, subject to its exceptions, no person other than a licensee whose licence is not suspended shall practise law or provide legal services in Ontario. Other provinces run their own regimes, so confirm the rule where the deal is governed. BDC notes that a lawyer can draft the purchase agreement and conduct legal due diligence. Agree early which side’s lawyer will prepare the first draft. Whichever draft you receive, have your own lawyer read it, not the seller’s.

Start with representations, warranties and indemnities

BDC’s guide to purchase agreements describes representations and warranties as the core of the agreement, all about risk allocation. The seller formally describes the condition of the business and makes disclosures, and BDC notes that it is hard for any company to give clean representations. It describes indemnities as an important and hotly negotiated section, where the parties agree on the compensation the vendor must pay if disclosures turn out to be inaccurate or covenants are not respected. BDC adds that a seller’s liability is typically capped at a percentage of the purchase price. BDC also warns that market norms on indemnities have changed substantially in Canada over the past few years, so use advisors who are up to date on them. Read each representation against what you found in diligence.

Make diligence and the agreement match

BDC says due diligence should encompass all aspects of the company, including legal, tax, financial, operational, environmental, intellectual property and technology. Use that list as a check on the draft. Every risk you found should have a home: a specific representation, a closing condition, an indemnity or a change to the price. A risk that your advisors identified and the agreement ignores is the gap to close before signing. Keep a short table that links each finding to the clause that deals with it, and ask your accountant to read the price and payment clauses with the same table beside them.

Price structure, closing conditions and covenants

BDC says that in these negotiations you will also decide how much of the purchase price is paid on closing and how much is held back in escrow or made subject to conditions. It describes closing conditions as undertakings the vendor agrees to complete during the period before closing so the deal can close, and it gives a non-compete as an example of a covenant, where the vendor promises not to take part in a competing business for a number of years after closing. When you review a draft, check that each of these is written clearly enough for a stranger to apply: who does what, by which date, and what happens if it is not done.

The mechanics of moving the shares

For a company under the Canada Business Corporations Act, the Act says registration of the issue or transfer of a security in the central securities register or a branch register is complete and valid registration for all purposes. It also requires the articles to state any restriction on the issue, transfer or ownership of shares. Read the articles and any shareholder agreement before you finalize the transfer mechanics. Provincially incorporated companies are governed by their own statutes, so ask your lawyer which applies.

Check whether competition law applies

Part IX of the federal Competition Act deals with notifiable transactions, and it identifies the parties to a proposed acquisition of shares as the person or persons proposing to acquire the shares and the corporation whose shares are to be acquired. Whether a particular deal has to be notified depends on tests set out in that Act, which this guide does not summarize. Ask your lawyer early whether it applies, because it can affect timing.

Points to take to your lawyer

• Who prepares the first draft, and which provincial rules on legal services apply to the people doing the work.
• How each diligence finding is dealt with: representation, indemnity, condition or price.
• How the indemnity is limited and how long the seller stays on the hook.
• Which transfer restrictions apply under the articles and any shareholder agreement.
• Whether the Competition Act notification regime applies to the acquisition.