Asset Purchase v Share Purchase

I am negotiating to purchase a business and my business advisor has strongly suggested I structure the deal as an “asset purchase”. Why is this preferable?

‍There are two principal ways to structure the agreement of purchase and sale of a business: as an asset purchase or as a share purchase. An asset purchase is just that, a purchase of listed assets without taking on liabilities of the business. A share purchase, by contrast, is the purchase of the shares of the corporation that carries on the business and owns the assets. There are a number of considerations as to which form of purchase is preferable. In this article, we want to focus on why your advisor has strongly recommended an asset purchase.

‍Liability

A properly structured asset purchase agreement will allow you to purchase all of the desirable assets of the business you wish to acquire while leaving out the unwanted liabilities. Your advisor has likely identified the business as one (by its nature or by the disclosure you’ve obtained) in which there are significant potential liabilities that may be avoided through an asset purchase agreement. For example, if the owner of the business has been pocketing cash payments or using corporate assets for personal use, the business may be exposed to reassessments and penalties by the Canada Revenue Agency. A purchase of shares would mean that you, through the purchased corporation, are exposed those claims.

‍Exceptions

‍There are some exceptions to the avoidance of liability by an asset purchase. For instance, if the purchased business employed unionized labour, a collective agreement and any ongoing liabilities thereunder will follow the purchased business, even if structured as an asset purchase. Your legal counsel can assist you to identify and understand the relevant risks and how to avoid them where possible or otherwise obtain protection.

Frequently Asked Questions

Do I really need to have annual minutes?

I have a corporation the shares of which are held only by me and members of my immediate family. Do I really need to have annual minutes?

‍If your corporation is audited by the CRA and matters, such as the declaration of dividends, have not been formally documented by a written resolution of the directors or in annual minutes, the consequence can be severe. There are other risks that may be avoided by having minutes prepared annually. This is analogous to your dentist who encourages you to have good dental hygiene and periodic check-ups so that small problems do not become big problems. Practicing good corporate hygiene just makes good sense.

The minimum legal obligation of a corporation is to hold an annual meeting of shareholders to consider the financial statements, elect directors and to appoint (or dispense with the appointment of) the auditor. In practice, and as permitted by statute, narrowly held corporations often dispense with an annual meeting in favor of signed resolution of all of the shareholders. The failure to hold annual resolutions, or obtain written resolutions in lieu, can lead to legal action from disgruntled shareholders.

The practice of holding annual meetings (or resolutions in lieu) also tends to ensure that corporate matters requiring attention are addressed, such as share transfers, changes to directors, and address changes, which if left unaddressed could become significant problems.

An effective method of ensuring good “corporate hygiene” is for the corporation to instruct its accounting advisors to provide legal counsel with an annual letter of instructions to document applicable financial matters.

It is not uncommon that a new client brings us a minute book that has not been properly organized, or that has not been updated for many years. It is not a cause for embarrassment. We strongly encourage that the minute books be updated before an issue arises, such as a CRA audit.

How do partnerships work and how are they setup?

My friend and I have an idea for a business and we are considering forming a partnership. How does a partnership work and how should one be setup?

Whether or not a partnership exists is a fundamentally a legal question. Ontario’s Partnerships Act says that a relationship between “persons carrying on a business in common with a view to profit” is a partnership within the meaning of the Act. This is important because it means that whether or not you declare yourself to be a partnership, legally speaking, you might be a partnership anyways, whether you intended to or not.

A partnership can exist between you and your friend personally, or even as between two corporations controlled by each of you. Unlike a corporation, however, a partnership has no separate legal existence from the partners themselves and each partner has the power to bind the partnership and each partner is jointly liable for any obligations incurred on behalf of the firm. This is why, when deciding to form a partnership, a partnership agreement can be very practical.

A partnership agreement sets out the rights and obligations for partners in the partnership and provides for what should happen in circumstances of partnership incapacity, retirement or death. Without one, the Partnerships Act will provide for what happens to the partnership in these circumstances, often with unintended results. A partnership agreement can also provide mechanisms for the distribution of partnership income and a process for bringing additional persons into the partnership. Creating a partnership agreement that meets your goals with the help of a commercial Lawyer ensures that your partnership will continue in a manner of your design.

Should I incorporate my medical practice as a professional corporation?

I am a practicing family physician with two young children. My accountant mentioned the idea of incorporating my practice into a professional corporation. How does this work?

As a physician, you are generally permitted to create a physician corporation. The Ontario Business Corporations Act (OBCA) and the Regulated Health Professions Act govern physician corporations. Once incorporated, a Certificate of Authorization from the College of Physicians and Surgeons of Ontario (CPSO) is required for your professional corporation to practice medicine in Ontario.

There may be significant benefits to incorporation arising from income splitting through the payment of dividends to adult shareholders and the deferral of tax through retention of excess cash and investing in the corporation.

A professional corporation carries on the practice of medicine with you as both a shareholder and employee of your corporation. It is important to note that under the provisions of the OBCA, a professional corporation does not shield the shareholders from professional liability as acts of a professional corporation are deemed to be acts of the shareholders. Non-voting shareholders who are not members of the CPSO are exempted from any professional liability.

All voting shares of the corporation must be held by a member of the CPSO. Non-voting shares can be held by a parent, spouse or child (and minor children must have their shares held in trust). Professional corporations are only permitted to carry on the practice of the profession or activities that are related to or ancillary to the profession. Furthermore, a professional corporation is permitted to invest its surplus funds in passive investments.

A Lawyer with experience in incorporating professionals can help you set up your professional corporation such that your objectives may be realized.