ARTICLE
22 March 2024

An Overview Of The Share Purchase Process

When one is purchasing (or selling) a business, there are generally 2 routes – a share purchase or an asset purchase. In this article, we are going to give an overview of the share purchase process.
Canada Wealth Management

When one is purchasing (or selling) a business, there are generally 2 routes – a share purchase or an asset purchase. In this article, we are going to give an overview of the share purchase process.

In a share purchase, the purchaser(s) will typically buy all of the issued and outstanding shares of the target corporation(s) from the vendor(s). This means that the purchaser(s) indirectly acquire all of the assets, rights, liabilities, etc. of the target corporation(s).

Because some of these liabilities may be undisclosed, unquantifiable, or unknown, generally the deal will be structured so as to minimize these risks through a combination of due diligence, representations & warranties, indemnities, and escrow provisions. Used wisely, such measures can minimize the effect of these liabilities on the purchaser. How we document these deals is a reflection of the ongoing due diligence process and negotiation of these points.

Key Steps/Documents to a Share Deal:

  1. Letter of Intent/Memorandum of Understanding/Term Sheet Whatever you call this document, the general idea is to set out the basic deal terms in principle before beginning the more detailed due diligence investigations, disclosures, and drafting of comprehensive definitive agreements. Usually these are not intended to make a binding legal obligation on the parties, except with regard to things like exclusivity and confidentiality.
  2. Due Diligence Review Once the preliminary deal is laid out, the confidentiality/non-disclosure in place, the purchaser can begin its due diligence to identify issues relevant to the transaction by gathering information on the vendor and the target corporation(s). Key/common due diligence issues include:
    • The vendor's title to the shares;
    • The nature & condition of the target corporation(s)' assets;
    • Identification of any liabilities of the vendor and target corporation(s);
    • Terms of key contracts;
    • Employees;
    • Required consents & approvals for the transaction to take place; and
    • Much, much more.
  3. Share Purchase Agreement As the due diligence process progresses, negotiation of key deal terms tends to begin in earnest. Generally speaking, drafting of the SPA is done by the purchaser & its counsel, in reaction to what is discovered/disclosed during due diligence, and it is usually a relatively long & complex legal document. Key parts/negotiation points of an SPA include:
    • The parties (e.g., vendor(s), purchaser(s), guarantor(s), target(s) (especially if there is a period of time between signing of the SPA and closing of the transaction);
    • The agreement to sell;
    • Conditions of the transaction;
    • Consideration (e.g., what is being exchanged for the shares);
    • Representations & warranties regarding the status of the target corporation and items discovered in due diligence;
    • Indemnifications by the purchaser(s) and/or vendor(s);
    • Pre-closing covenants if there is a period of time between signing and closing;
    • Post-closing covenants (e.g., non-compete, non-solicit, etc.).

    Generally, the key information disclosed by the vendors or discovered by the purchasers as relates to the representations, warranties & indemnities are included as schedules to the SPA that we refer to as "disclosure schedules". These can be important qualifiers to the representations, warranties, and indemnification provisions contained in the SPA.

  4. Closing Documents

These are the actual pieces of paper that effect the various steps of the transaction contemplated by the SPA. Examples of these items include:

  • Share transfers
  • Share certificates;
  • Authorizing resolutions;
  • Documents effecting changes in management;
  • Satisfaction of other pre-closing condition & covenants;
  • Minute book updates;
  • Financing documents;
  • Directions re funds;
  • Liens/secured debt documents;
  • Adjustments;
  • Releases;
  • Employment agreements for employees (potentially including the vendor(s) if they are staying on in any capacity).

Of course, which documents are required and what their exact contents need to be will vary from deal to deal and largely be dictated by factors like the nature of the business & what has been found in due diligence. Thus, it is important to hire qualified and experienced deal counsel with a strong business law background.

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.

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