Transaction structures
While several different methods exist to acquire control of a Canadian private business, private company M&A transactions in Canada are most commonly effected by an “asset purchase” or “share purchase.”1 This is the threshold decision a purchaser must make: to purchase assets or shares. While there are a number of factors that influence the decision as to whether to proceed by way of asset acquisition or share acquisition, a purchaser will generally prefer to proceed by way of asset purchase and a seller will generally prefer to proceed by way of share sale. As with all commercial negotiations, the specific facts at hand and the bargaining power of the parties involved will dictate the transaction structure that is ultimately used.
Asset purchase
In an asset purchase transaction, a purchaser will enter into an agreement with a corporation to acquire only those assets that it desires to purchase, and to assume only certain specified liabilities. The rest of the business (particularly unwanted contingent and unknown liabilities) remains with the selling corporation.
Most businesses in Canada that are not operated as sole proprietorships or general partnerships are incorporated as corporations, under either the federal Canada Business Corporations Act or the equivalent statute in one of the 10 provinces or three territories. Canadian jurisdictions also allow for the formation of limited partnerships, which can serve as fiscally transparent vehicles for Canadian businesses. Certain provinces also permit the formation of unlimited liability companies, which can serve as hybrid entities, making them fiscally transparent for U.S. tax purposes but not for Canadian purposes.
This guide focuses on acquisitions of private businesses organized as corporations in Canada. However, many of the issues and considerations explored in this guide are equally relevant to the acquisition of other forms of Canadian businesses.
The ability for a purchaser to pick and choose the assets it wants to acquire and the liabilities that it is willing to assume is an important advantage from a purchaser’s perspective. A purchaser will undertake due diligence to get comfortable that it has properly identified the universe of assets to be purchased and liabilities to be assumed, and will obtain representations and warranties from the selling corporation as to the completeness and sufficiency of the assets being purchased. The purchaser is also often able to contractually limit legacy liability exposure as there is limited risk of assuming unknown or undisclosed liabilities. From a tax perspective, a purchaser will generally prefer an asset purchase to a share purchase, unless the purchaser wishes to acquire certain tax attributes of the target corporation. There is, of course, a tension between the purchaser’s desire to select only the desirable assets and limit its assumption of unwanted liabilities and the seller’s interest in a clean exit from the business being sold with minimal continuing or stranded liabilities.
Note, however, that asset purchase transactions are typically more complex than share purchase transactions since they frequently require parties to obtain a larger number of third-party consents and to transfer a larger number of diverse assets pursuant to various single- and multi-purpose conveyancing and transfer documents.
Where the target corporation is only selling part of its business, or holds more businesses than the one being sold (for example, where it carries on business through various divisions), an asset sale may be the only viable transaction structure (either directly or indirectly — for example, by transferring assets to a new corporation, the shares of which are sold).
A purchaser will generally prefer to proceed by way of asset purchase and a seller will generally prefer to proceed by way of share sale.
Share purchase
In a share purchase transaction, the purchaser acquires all of the shares of the target corporation and, as a result, indirectly acquires all of its assets and liabilities, known and unknown. The target corporation becomes a subsidiary of the purchaser.
Sellers will generally prefer a share sale because (a) it will allow them to ensure that, subject to any indemnity they agree to provide, they will no longer be responsible for any of the liabilities of the target business and (b) they can realize capital gains on the sale of shares, which are taxed more favourably than other types of income in Canada.
The principal benefit of a share transaction to both the seller and the purchaser is its comparative simplicity, including
- the need for only one share transfer, instead of individual conveyances of each asset
- maintaining consistency of the employer, simplifying employee and pension/benefits issues
- avoiding many transfer issues with governmental authorities and licenses (as the holder will not change)
Other structures
In addition, a private acquisition of equity interests in Canada can be effected by other means, including
- an “amalgamation,” in which two or more corporations, typically the acquiring corporation (or a subsidiary) and the target corporation, combine into one continuing corporation. The surviving corporation is a union of the amalgamating corporations, which continue together as one entity (unlike a U.S. merger that extinguishes the legal existence of all parties but the surviving corporation). The amalgamating corporation assumes all assets, rights and liabilities of each amalgamating corporation. Amalgamations are typically used as part of a less than 100% share purchase transaction in order to subsequently squeeze out a minority shareholder.
- an arrangement, which is a court-approved process through which corporations may amalgamate or transfer assets or securities. An arrangement is a flexible way to structure an acquisition because it can be used to deal with complex tax issues and various transaction objectives.
- Most businesses in Canada that are not operated as sole proprietorships or general partnerships are incorporated as corporations, under either the federal Canada Business Corporations Act or the equivalent statute in one of the 10 provinces or three territories. Canadian jurisdictions also allow for the formation of limited partnerships, which can serve as fiscally transparent vehicles for Canadian businesses. Certain provinces also permit the formation of unlimited liability companies, which can serve as hybrid entities, making them fiscally transparent for U.S. tax purposes but not for Canadian purposes.
This guide focuses on acquisitions of private businesses organized as corporations in Canada. However, many of the issues and considerations explored in this guide are equally relevant to the acquisition of other forms of Canadian businesses ↩︎
