How do I sell my equity in a company?

People ask whether they can sell their equity in a company when what they hold is a stake in a private corporation, whether as founder, employee-owner or investor. In a corporation, equity is the shares. Selling it is possible, but the sale is controlled by documents you may not have read in years: the corporation’s articles, any shareholder agreement and the law of the jurisdiction that incorporated it. This guide sets out what to read, what a buyer inherits when shares change hands, and where the tax rules can matter, so that your questions to a lawyer and an accountant are the right ones.

Equity is shares, and shares come in classes

Corporations Canada explains that a person who owns shares in a corporation is called a shareholder, and that the articles can allow for one or more classes of shares. It adds that where there is more than one class, the rights, privileges, restrictions and conditions for each class must be set out in the articles. So the first job is to find out which class you hold and what rights come with it, such as voting or dividends. Have the answer ready for a buyer, since it affects what you can offer.

Check the limits on transferring

Corporations Canada says share owners can transfer, that is sell, their shares and the rights that go with them, but that transfers must conform to any conditions or restrictions that apply to the corporation’s shares and their transfer. It gives the example that directors could have to approve all transfers. A shareholder agreement may add restrictions on share transfers too. Read both documents for approval requirements, rights of first refusal and buy-sell clauses before you approach anyone. That guidance concerns federally incorporated corporations; companies incorporated in a province follow that province’s statute.

A share sale leaves liabilities in the company

The Saskatchewan Workers Compensation Board describes a share sale as one where the assets and liabilities of a company remain with that corporation, and says that in a share sale the seller walks away from any liabilities and the purchaser takes them on. The Board is speaking about its own accounts, but the same structural point is why a buyer of shares will look closely at the company’s history. Prepare for requests for information, and ask your lawyer what assurances, if any, you will be asked to give in the purchase agreement and what protection you want in return.

The tax result is a separate question

The Canada Revenue Agency says that if you have a capital gain on the sale of certain properties, you may be eligible for the lifetime capital gains deduction, and its guidance covers dispositions of qualified small business corporation shares. Whether your shares qualify depends on the definition in section 110.6(1) of the Income Tax Act, whose tests include who owned the shares throughout the 24 months immediately preceding the determination time and whether the corporation’s assets were used principally in an active business carried on primarily in Canada. Because that is a technical question, ask your accountant to test your shares against the definition before you agree a deal, not afterwards.

Information shared with a buyer

A buyer may ask to see records, and some of them may contain personal information about customers or staff. Under section 7.2 of PIPEDA, in addition to the circumstances set out in subsections 7(2) and (3), organizations that are parties to a prospective business transaction may use and disclose personal information without the knowledge or consent of the individual if conditions are met, including an agreement that limits use to the transaction and protects the information. The Privacy Commissioner notes that Alberta, British Columbia and Quebec have their own private-sector privacy laws deemed substantially similar to PIPEDA, so confirm which law applies. Put a confidentiality agreement in place first.

Who may be able to buy, and when to involve them

Selling equity does not always mean finding an outside buyer. Depending on the documents, the corporation itself, a co-shareholder or an outside buyer may be a possible purchaser. Ask your lawyer and accountant whether each route needs a different approval or has a different tax result. Ask your lawyer whether the corporation can buy back your shares, whether your co-owners have a first right to buy, and what the agreement says about price. BDC says you will need a lawyer familiar with business transitions to negotiate the purchase agreement and address any legal issues that arise, and an accountant to help ensure the transaction is structured to minimize tax liability from the sale. Bring both in before you speak with a buyer, not after.

• Which class of shares do you hold, and what rights attach to it?
• Do the articles or a shareholder agreement restrict who can buy, or require approval?
• Does another shareholder have a right to buy first?
• Do your shares meet the definition of qualified small business corporation shares?
• What will you be asked to promise about the company’s liabilities?

If part of your price may be paid in shares of the buyer, or if you are weighing a partial exit, see What rollover equity terms should the vendor negotiate?.