Canada: La fiscalité des conventions d'achat d'actions : le rôle des déclarations et garanties fiscales

Dans le deuxième article de cette série périodique sur l'aspect fiscal des conventions d'achat, nous examinons le rôle des déclarations et garanties fiscales dans une convention d'achat d'actions.

Les déclarations et les garanties sont un élément clé de la majorité des conventions d'achat d'actions. Il s'agit des fondements sur lesquels les parties se sont entendues pour arriver à un accord et convenir du prix d'achat – une étape d'une importance cruciale pour l'acheteur, qui héritera de l'historique (et des dettes) de la société visée.

Une traduction de ce billet sera disponible prochainement.

In this second installment of our periodic series related to taxes and purchase agreements, we discuss the function that tax representations and warranties serve in a share purchase agreement.

Representations and warranties are a critical element of most share purchase agreements. They are the assumptions on which the parties reached their agreement and agreed to pay the purchase price – a step that is of critical importance to the buyer, who will inherit the history (including any liabilities) of the target company.

To a certain extent, tax-related representations and warranties function in the same way as other representations and warranties, especially insofar as they:

  1. substantiate and supplement the due diligence process of the buyer,
  2. facilitate a discretionary "walk right" of the buyer should a representation or warranty be proven to be untrue or materially untrue after signing of the agreement but before closing (called the "interim period"), and
  3. provide, through the related indemnification provisions, a basis for recovery should a representation or warranty be untrue.

In at least one key respect, however, tax representations and warranties tend to differ from other representations and warranties: they tend not to play a significant role in facilitating an indemnification right for the buyer assuming a tax indemnity also exists. Because of this, the comprehensiveness of the tax representations and warranties in a share purchase agreement may take on a diminished importance for a buyer who is otherwise indemnified. We consider this in more detail below, before turning to two important roles that tax representations and warranties can play in the context of a share purchase agreement. 

Tax Indemnities: The Primary Basis of Recovery

The fact that, in many share purchase agreements, tax representations and warranties do not play a significant role in the recovery process may be somewhat surprising. But this makes sense when you consider that, as discussed in the first post in this series, buyers typically negotiate and obtain a separate indemnity for all taxes of the target company related to periods which end on or before closing (generally referred to as "pre-closing" taxes). For a variety of non-tax reasons, this pre-closing tax indemnity is the primary recovery method under the share purchase agreement should unexpected tax obligations arise in the pre-closing period.

The result of this is that the buyer typically does not need to rely on the tax representations and warranties if the unexpected taxes arise in a pre-closing tax period.  In such situations, the pre-closing tax indemnity will usually be the preferred basis for recovery. But what if a breach of the tax representations and warranties gives rise to taxes in a period that ends after closing?  This can arise for a variety of reasons but most frequently arises when tax attributes which the buyer otherwise thought would be available are not.  Consider the following example:

It is typical for a seller to give a representation and warranty that all of the tax returns filed by the target company are true and correct in all material respects. If the target company gets reassessed such that the usability of non-capital losses of the target company is compromised going forward, should this be an indemnifiable claim for the buyer?

In order for this to be an indemnifiable claim, the buyer will need to prove that it has suffered damages as a result of the breach of the tax representation or warranty.  It cannot make a claim under the pre-closing tax indemnity, as there are no additional taxes which have arisen in the period prior to closing.   As a result, the wording of the tax representations and warranties can be of critical importance to a buyer if they are seeking indemnification in such circumstances.

As an observation, many sellers are becoming more attuned to this issue and it is becoming increasingly common for sellers to prohibit any claim for indemnification in respect of a post-closing tax period of the target company on this basis.   Consequently, in many share purchase agreements, the tax representations and warranties play little to no role in the indemnification process for the buyer.

Tax Representations and Warranties: Two Key Functions

While tax representations and warranties may not fulfil a significant indemnification role for a buyer in the purchase agreement, they do serve other important purposes, including aiding the due diligence process and providing a "walk right".

Due diligence

As noted above, because the purchaser will inherit the target company's tax history, it typically undertakes significant due diligence on the target company prior to signing the purchase agreement. This is done – even though the agreement will typically include a tax indemnity – since a buyer will generally prefer to understand any tax risks associated with the target in advance. With that knowledge in hand, the buyer can account for those risks through the negotiation of a reduction in the purchase price prior to closing, rather than relying upon the indemnity to (effectively) roll back the purchase price once an indemnity claim arises.   Moreover, the purchaser will not need to worry about its own knowledge of any adverse fact potentially impacting its rights to an indemnity claim in the future (which can be the case depending upon the "sandbagging" provisions in the agreement and the applicable governing law).  

Tax representations and warranties play an important role in the due diligence process. Specifically, they assist the buyer to elicit information about the target company from the seller, overcoming at least some of the information asymmetry between the two sides. The need to provide tax representations and warranties may focus a seller upon specific issues that would otherwise be overlooked and will give it a forum to disclose associated risks to the buyer.

The relative importance that a buyer places upon this function depends upon the degree in which it is otherwise able to obtain comfort on these matters through its own due diligence. In many transactions, the purchaser retains an accounting firm to provide a full "Quality of Earnings" report and to undertake a significant amount of diligence on the tax side.

Walk right

While a seller may be liable to the buyer for all pre-closing taxes of the target through the pre-closing tax indemnity, this does not mean that a seller is indifferent towards overly broad and unqualified tax representations and warranties. Most purchase agreements provide a condition to the buyer's closing that all of the representations and warranties of the seller be true and correct (or true and correct in all material respects) as of the closing date with the same force and effect as if such representations and warranties had been made on and as of such date. As such, a buyer typically has the right to not close the transaction (typically called a "walk right") if a breach is discovered between the time of signing and closing of the transaction and if it is material. This gives the buyer leverage to either terminate the transaction or renegotiate the purchase price with the seller if breaches are found in the interim period. The tax representations and warranties, like those that are unrelated to tax, play a role in facilitating this right.

Conclusion

As can be seen, in many share purchase agreements the tax representations and warranties do not play a significant rule in the indemnification process for the buyer due to the existence of a specific tax indemnity.  However, these tax representations and warranties may serve other important purposes, both by aiding in the due diligence process and providing a "walk right" in the event of a material breach of such provisions. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions