Asset or share purchase requires due diligence, legal advice
There are multiple considerations that should be taken into account when buying or selling a corporation, says Toronto business lawyer Anton Katz.
First, keep in mind there are two primary ways incorporated businesses are acquired or sold — by way of share purchase or asset purchase — and each has its own advantages and disadvantages, he says.
Katz notes buying a company by way of share purchase is conceptually a bit less complex because all of the assets remain with the company for sale and the only required transfer is of the shares of the company itself.
When it comes to an asset purchase, the buyer can purchase some or all of the target company’s assets. These assets should be disclosed on the company’s balance sheet and should include current as well as fixed assets, Katz tells AdvocateDaily.com. There may be other off-balance sheet assets that are being acquired.
“These assets can include cash accounts, suitable inventory, equipment, and capital items,” he says. “They can be listed in schedule A of the asset purchase agreement and could provide a comprehensive list of what is being sold, which in some respects may mirror what’s contained in the balance sheet. Typically, you don’t sell cash but there’s no reason why you couldn’t sell receivables or equipment, inventory, and so forth.”
In either a share or asset purchase, due diligence is strongly recommended to find out more about either the assets or the shares to be acquired, Katz says.
“Due diligence might consist of reviewing books and records of the company, meeting with key employees, reviewing key contracts such as supply agreements, loan agreements and so forth,” he says. “It could also consist of conducting searches to determine the existence of any liens or security registered against the assets of the corporation.”
Whether it’s an asset purchase or a share purchase, the steps are generally the same. “You might begin with a letter of intent and then you would go to an agreement — either an asset purchase or share agreement — then you would conduct due diligence and from there you would, in some circumstances, obtain third-party consent,” Katz says.
If there’s a lease of premises, for example, the sale would typically require the consent of the landlord to assign the lease.
The sale may also require consent from lenders or creditors, he adds.
“From there you would proceed, if satisfied, to complete or close the transaction,” Katz says. “At that time there would either be a transfer of title to the assets or a transfer of title to the shares. Thereafter the purchaser is now the owner of the corporation having acquired either the assets or the shares. If the purchaser acquires the shares, then by default, and unless exempted contractually, it has also acquired the assets and liabilities of the corporations — ‘warts and all.’ When you’re acquiring assets, you can be more selective and cherry-pick certain assets and assume certain liabilities.”
Katz says typically purchasers and sellers have certain preferences as to whether they want to conduct an asset or share deal.
“It depends on which side of the equation you’re on as to whether you would prefer an asset or share deal,” he says. “In either instance, buying or selling a corporation is a significant undertaking and it makes sense to have appropriate legal, accounting and tax advice as to whether it’s better to buy or sell assets or shares.”