The term “purchase and sale agreement” refers specifically to the contract between the vendor and purchaser for the transfer of either shares or assets of a going concern business. More generally, the term identifies the entire process of formalizing the sale of a business. This process typically begins after the vendor and purchaser have agreed to the sale. The purpose of the agreement, as with most forms of legal contracts, is to provide certainty as to the value, identity and ownership of the assets or shares to be sold, and the amount and method of payment to be provided in exchange for the assets or shares.
How can a purchase and sale agreement be structured?
A purchase and sale agreement will typically involve the transfer of either assets or shares. The circumstances of each transaction will determine the preferred method of sale, but it is fair to say that the selection of a share or asset sale will be motivated in large part by the tax consequences incurred as a result of the sale.
a) Sale of Shares
When the vendor is a corporation the sale may consist of the transfer of all, or a controlling interest in, the outstanding voting and/or preferred shares of the corporation. In theory, a share purchase will be less complex than an asset purchase, since the only property transferred between the parties is the shares themselves. In practice however, there is little difference in the amount of research and preparation that must be done for a share or asset purchase because, since the shares represent the value of the corporation, it is necessary to closely examine the financial status of the corporation in order to accurately assess whether the value of the shares reflects the actual value of the underlying assets.
By acquiring the shares of a corporation, the purchaser acquires not only the assets, but also the liabilities of the corporation. The examination of the corporation’s (preferably audited) financial statements is therefore a necessity in order to determine the extent of all assets and liabilities. In addition, a variety of searches should be made in order to fully expose the nature and extent of the corporation’s ownership of the property it holds. For example one would want to ensure there are no outstanding mortgages or other liens against the property.
b) Sale of Assets
Where the vendor is not a corporation, or where the decision is made not to purchase the shares of a vendor corporation, the sale will consist of a transfer of the individual assets which the purchaser wishes to acquire. An asset sale is complicated by the fact that each individual asset must be separately conveyed from vendor to purchase. That additional burden is offset to a certain extent by the fact that the vendor may pick and choose which assets (or liabilities) he will acquire and which he will leave to the vendor; unlike in the case of a share sale where all assets and liabilities are acquired along with the shares. As with a share purchase, a thorough review of the vendor’s financial status must be undertaken prior to the closing date in order to confirm ownership of assets and the ability of the vendor to make a lawful transfer of the assets.
What searches should the purchaser undertake when purchasing shares or assets?
Regardless of whether assets or shares are the subject of the purchase, the same comprehensive searches should be conducted by the purchaser. The following is a typical list of searches and document checks which should be conducted prior to closing the deal. The searches that should be conducted will be very province specific, and the list may depend on the type of assets.