Authors: Alex Gorka and Brett Anderson
Documenting the transaction
The documentation required for an asset purchase transaction and share purchase transaction will be similar in most respects. Each type of transaction will have an acquisition (purchase) agreement, disclosure schedules and ancillary documents, though an asset purchase will require more ancillary documents as a result of the additional conveyances required for each asset.
Purchase agreement
Agreements used to acquire private Canadian businesses follow a similar format to purchase agreements used in the United States, England and elsewhere. The following provisions will normally be included:
Subject matter and consideration
In an asset purchase, the agreement will describe in detail the assets and liabilities being acquired by the purchaser as well as those assets and liabilities being excluded (i.e., that will remain with the seller). A share purchase transaction will list the shares to be acquired. In either case, the agreement will also outline the consideration the seller is receiving (i.e., cash, shares of the purchaser or its parent company or a combination of cash and shares) and when and how it is to be paid. A purchase price adjustment based on the working capital and/or debt of the acquired business determined at the closing date is often included. We note that “lock-box” mechanics
are less common in Canada but are sometimes used in transactions involving European purchasers.
An earn-out payment is a form of contingent consideration that can be used in some circumstances to bridge valuation gaps between the purchaser and seller. Under this arrangement, a portion of the purchase price is deferred and tied to the future performance of the acquired business or specific metrics — such as revenue, EBITDA or customer retention — over a defined period post-closing. Earn-outs attempt to align the interests of both parties by allowing the seller to potentially realize additional value if the business achieves agreed-upon performance targets, while protecting the purchaser from overpaying if those targets are not met. However, earn-outs often lead to protracted negotiations and are one of the most common sources of post-transaction disputes and litigation.
Representations and warranties
It is customary for a seller to provide extensive representations and warranties regarding the condition, status and key aspects of the business or assets being acquired. For example, the seller’s representations and warranties may cover areas such as ownership of shares/assets, financial statements, compliance with laws, pending litigation and tax matters. Conversely, a purchaser’s representations and warranties are normally restricted to its authority and ability to enter into and complete the transaction; sellers typically provide similar representations regarding their own authority and capacity, in addition to the more extensive representations and warranties described above.
These provisions serve several important purposes, including allowing the purchaser to conduct due diligence with confidence, allocate risk between the parties and establish a baseline of information upon which the transaction is based. In the event of a breach of a representation or warranty, the purchaser may have recourse through indemnification provisions or other remedies specified in the agreement. By clearly defining the scope of representations and warranties, the parties can mitigate risks, reduce uncertainties and ensure a more seamless integration following the closing of the transaction.
Pre-closing covenants
In a transaction that requires an interim period between signing and closing, the purchaser will want to ensure that the target business does not change in a material way prior to closing. The purchase agreement will therefore require that the target maintain business operations in the normal course, and may restrict specifically enumerated actions.
Other common pre-closing covenants include a requirement for the seller to provide access to the purchaser for planning purposes and to use an agreed-upon level of effort to complete the steps necessary to close the transaction.
Conditions to closing
During the interim period, the parties will need to satisfy certain conditions before the transaction closes. Common conditions include accuracy of representations and warranties, compliance with covenants, obtaining of all required contractual and regulatory consents and delivery of all closing documentation.
Post-closing covenants
Post-closing covenants may include non-competition and non-solicitation covenants, requirements to maintain confidentiality and books and records and agreements as to how tax returns for the business will be prepared and filed.
Indemnities
It is common for the seller to indemnify the purchaser for any breach of the seller’s covenants or representations and warranties, as well as for certain other specific matters, such as claims relating to taxes or environmental matters. Claims for breaches of most representations and warranties are usually limited in time for a one- to two-year survival period. Claims relating to taxes and environmental matters will survive for a longer period of time and claims relating to fundamental representations and warranties (such as title to the shares or assets being sold) typically survive for an indefinite period.
The seller’s indemnification obligations are typically subject to certain limitations, including a cap and threshold amount (i.e., minimum aggregate amount of losses before an indemnification claim can be made). A portion of the purchase price is sometimes held back or placed in escrow as security for the indemnity obligations.
Other provisions
Purchase agreements will also include standard terms such as assignment and governing law provisions and the mechanics for closing, dispute resolution, any purchase price adjustment and the operation of the indemnity provisions.
Disclosure schedules
Representations and warranties in the purchase agreement will often be qualified by referring to attached disclosure schedules (or sometimes a separate disclosure letter) that contain the specific information or exceptions relating to the representations and warranties.
Ancillary documents
Conveyancing documents will be necessary to effect the completion of either a share or asset transaction. For a share purchase, the certificates representing the shares being acquired will be delivered together with a share transfer form. For an asset purchase, a general conveyance by which the seller transfers the purchased assets and the purchaser agrees to assume the assumed liabilities is typically used. Other documents will be needed to transfer specific types of assets, such as patent and trademark assignment agreements, vehicle transfers and assignments of leases and contracts.
Other common ancillary documents include employment or consulting agreements with key employees and a transition services agreement (particularly in an asset sale where only part of an operating business is being acquired).
