How do I sell the shares of a privately held company?

Selling company shares privately is different from selling on a stock exchange. There is no market price and no broker’s screen, only a buyer you find, an agreement you negotiate and a corporation that must record the change. The sale of shares is also a structural choice: the other route is for the corporation to sell its assets, and our answer on selling shares or assets compares the two. This guide assumes you have decided to sell shares and walks through what to check, record and ask your advisers, in roughly the order it comes up.

Start with the documents that restrict a transfer

Before you speak to a buyer, read the corporation’s articles, by-laws and any shareholder agreement. Under the Canada Business Corporations Act, adding, changing or removing restrictions on the issue, transfer or ownership of shares is one of the changes that can be made to a corporation’s articles, which tells you restrictions can sit there. A shareholder agreement may add its own conditions, such as approval from other shareholders. If your corporation was incorporated under a provincial statute, its own province’s Act governs, so ask your lawyer which rules apply before you promise a closing date.

Disclose any unanimous shareholder agreement

The Canada Business Corporations Act provides that a purchaser or transferee of shares subject to a unanimous shareholder agreement is deemed to be a party to it. If the buyer is not told about the agreement, the Act allows the buyer to rescind the transaction within 30 days after becoming aware of it. For a seller, that is a reason to disclose the agreement early and attach it to the data room, rather than let it surface after closing. Ask your lawyer whether the same rule applies under your corporation’s statute, and whether the other shareholders must be told or must approve the sale.

Understand how the transfer is recorded

A federal corporation must maintain a securities register recording the securities it issues in registered form. The Act says registration of a transfer in the central securities register or a branch securities register is complete and valid registration for all purposes. The corporation, not the buyer, keeps that register, so your closing steps should include the directors’ resolution approving the transfer, the updated register and the cancelled and replacement share certificates, if the company issues certificates. Your lawyer will list the exact deliverables, and the purchase agreement should say who prepares each. Keep a dated copy of the final register for your own records.

Check whether the shares qualify for the capital gains deduction

The CRA’s guidance for line 25400 of the personal return refers to dispositions of qualified small business corporation shares and to Form T657, which calculates the capital gains deduction. The Income Tax Act defines a qualified small business corporation share as, among other conditions, one that was not owned by anyone other than the individual or a person or partnership related to the individual throughout the 24 months immediately preceding the determination time. It also has requirements about the corporation’s assets and its status as a Canadian-controlled private corporation. Whether yours qualify is a question for your accountant, ideally well before you sign a letter of intent.

Prepare what a buyer will ask to see

BDC says buyers want to understand your financial performance and to see a track record of past profits and solid growth prospects. It advises reviewing your records with your accountant so that they are up to date, and making sure interim statements are accurate and projections are realistic. It also says a valuator’s report can help you evaluate offers and bolster your position in negotiating price or terms. Gather the statements, tax filings, major contracts and corporate records in one place before the first serious conversation. That also tells you early whether the register and the minute book are in order.

Line up your advisers

BDC says you will need a lawyer familiar with business transitions to supply information to buyers during due diligence, negotiate the purchase agreement and address legal issues. It describes an accountant as important for helping you prepare year-end and interim financial statements, and says an accountant can ensure the transaction is structured in a way to minimize tax liability from the sale. Bring both in before you approach buyers. Our guide on finding buyers for your business covers the next step. Agree with each adviser on fees and on who does what before you start, so that the sale does not stall waiting for a document nobody owns.

A seller’s checklist

• Have you read the articles, by-laws and every shareholder agreement for transfer restrictions or approval rights?
• Is there a unanimous shareholder agreement, and does the buyer have a copy?
• Are the securities register and share certificates complete and current?
• Has your accountant tested whether the shares meet the qualified small business corporation share definition?
• Does the purchase agreement state who prepares each closing document and who pays for them?