Share Purchase Agreements in Ontario: What Buyers and Sellers Should Kno
Buying or selling the shares of a private corporation is a significant transaction.
The buyer is not simply acquiring selected equipment, inventory, or customer contracts. By purchasing the shares, the buyer acquires an ownership interest in the corporation itself. The corporation generally continues owning its assets, owing its debts, employing its workers, and remaining subject to its contractual and legal obligations.
A share purchase agreement establishes the terms of that transaction. It identifies what is being sold, how much the buyer will pay, what each party must do before closing, and who will be responsible if important information about the business proves inaccurate.
A carefully drafted agreement can allocate risk and reduce uncertainty for both buyer and seller.
What Is a Share Purchase Agreement?
A share purchase agreement is a contract under which one or more shareholders sell shares of a corporation to a purchaser.
The transaction may involve:
All issued shares of the corporation
A controlling interest
A minority interest
Shares of a particular class
A purchase by an existing shareholder
A purchase by an outside investor
The agreement should specify the exact number and class of shares being transferred and confirm that the seller legally owns them.
The corporation’s articles, shareholders’ agreement, and securities register should be reviewed for transfer restrictions, approval requirements, or rights held by other shareholders.
Share Purchase Versus Asset Purchase
Before drafting the agreement, the parties should determine whether the transaction will be structured as a share purchase or an asset purchase.
In a share purchase, the buyer acquires ownership of the corporation. The corporation generally continues holding its assets and liabilities. Existing contracts, employees, licences, and tax history remain within the corporation, although third-party consents or regulatory approvals may still be required.
In an asset purchase, the buyer acquires specifically identified business assets. The parties negotiate which assets and liabilities will transfer.
The Canada Revenue Agency explains that purchasing shares does not change the tax values of the assets owned by the corporation because the corporation remains the owner of those assets. The purchase of shares is also generally not subject to GST/HST.
Buyers and sellers may prefer different structures because the legal and tax consequences can vary significantly. The transaction structure should be reviewed with legal and accounting advisers before the parties commit to a deal.
Begin With a Letter of Intent
The parties may begin by signing a letter of intent or term sheet.
This preliminary document can summarize the principal business terms, including:
The proposed purchase price
The shares being acquired
The payment structure
The proposed closing date
Conditions to the transaction
Due diligence access
Exclusivity
Confidentiality
Required financing
Treatment of employees
The seller’s transition role
Most commercial terms in a letter of intent are often intended to be non-binding, while provisions such as confidentiality, exclusivity, costs, and access to information may be binding.
The document should clearly identify which terms are legally enforceable.
A properly prepared letter of intent can reduce misunderstandings and provide a framework for negotiating the final share purchase agreement.
Conduct Legal and Financial Due Diligence
Because the buyer is acquiring an interest in the corporation itself, the buyer should investigate the company before closing.
Legal due diligence may include reviewing:
Articles, bylaws, and corporate records
Share ownership and prior share issuances
Financial statements and tax filings
Material customer and supplier contracts
Commercial leases
Financing and security agreements
Employment and contractor agreements
Intellectual property
Licences and regulatory compliance
Insurance coverage
Pending or threatened claims
Privacy and data-security practices
Related-party transactions
The scope of due diligence should reflect the size, industry, and risk profile of the business.
If a problem is discovered, the buyer may require it to be corrected before closing, negotiate a lower price, request a holdback, seek additional contractual protection, or decide not to proceed.
Establish the Purchase Price
The agreement should state the purchase price and explain how it will be paid.
Payment may include:
Cash at closing
A deposit
Instalment payments
A promissory note
Vendor financing
An earnout
Shares or other consideration
A combination of payment methods
If part of the price will be paid after closing, the agreement should address interest, security, default, acceleration, and early repayment.
The seller should consider what security will be available after transferring ownership. The buyer should confirm that the payment terms are compatible with any third-party financing.
Consider Purchase-Price Adjustments
The value of a business can change between signing and closing.
The parties may use a purchase-price adjustment based on:
Working capital
Cash
Debt
Unpaid taxes
Inventory
Accounts receivable
Transaction expenses
Other agreed financial measures
The agreement should define each component precisely and establish the applicable accounting principles.
It should also explain:
Who prepares the closing statement
When it must be delivered
What records must be provided
How the other party may object
How disputes will be resolved
When the final adjustment must be paid
Unclear accounting terms can produce substantial disagreements after closing.
Seller Representations and Warranties
Representations and warranties are contractual statements about the corporation, the shares, and the business.
The seller may be asked to confirm matters such as:
Legal ownership of the shares
Authority to complete the transaction
Accuracy of the corporate records
Financial statements
Tax filings and liabilities
Material contracts
Employees and contractors
Intellectual-property ownership
Compliance with applicable laws
Privacy obligations
Insurance
Litigation and disputes
Undisclosed liabilities
Relationships with major customers and suppliers
These provisions allow the buyer to proceed based on information contractually confirmed by the seller.
The scope of the warranties should reflect the transaction. A seller should avoid making statements that are broader than their knowledge or ability to verify. A buyer should ensure that the warranties cover the risks identified during due diligence.
Disclosure Schedules
The seller may qualify the representations and warranties through disclosure schedules.
For example, the agreement may state that there is no pending litigation except for the matters identified in a schedule. Another schedule may list material contracts, employees, intellectual property, debt, or required third-party consents.
The schedules should be complete and consistent with the agreement.
A vague disclosure or an unexplained document dump may not adequately qualify a representation. The seller should clearly connect each disclosure to the relevant provision.
Conditions Before Closing
The parties may sign the agreement before they are ready to complete the transaction.
The agreement can establish conditions that must be satisfied before closing, such as:
Completion of satisfactory due diligence
Buyer financing
Required shareholder or director approvals
Third-party consents
Regulatory approvals
Release of existing security
Repayment of shareholder loans
Resignation of specified directors and officers
Execution of employment or transition agreements
Continued operation of the business in the ordinary course
Absence of a material adverse change
The agreement should specify which party benefits from each condition, whether it can be waived, and what happens if it is not satisfied by the deadline.
Indemnities and Liability Limits
An indemnity may require one party to compensate the other for specified losses.
A buyer may seek indemnification for:
A breach of a representation or warranty
Unpaid pre-closing taxes
Undisclosed liabilities
Existing legal claims
A breach of the seller’s closing obligations
Matters specifically identified during due diligence
The parties may negotiate limits on liability, including:
A minimum claim threshold
A deductible or basket
An overall liability cap
Different caps for different claims
Time limits for making claims
Procedures for third-party claims
Exclusions for fraud or intentional misconduct
These provisions can significantly affect the practical value of the agreement. They should not be treated as routine boilerplate.
Holdbacks and Escrows
The buyer may request that part of the purchase price be held back after closing.
A holdback or escrow can provide funds for:
Purchase-price adjustments
Tax liabilities
Warranty claims
Pending litigation
Unresolved customer obligations
Other identified risks
The agreement should state the amount, release date, permitted claims, and process for resolving disputes over the funds.
The seller should ensure that the holdback is limited in amount and duration. The buyer should ensure that the arrangement provides meaningful protection for the relevant risk.
Employees and Management
A share purchase usually does not change the identity of the employer because the corporation remains the employer.
However, the parties may still need to address:
Retention of key employees
Changes to compensation
New employment agreements
Management resignations
Bonuses triggered by the transaction
Change-of-control provisions
Employee benefit plans
Confidentiality and intellectual-property obligations
Post-closing leadership
The buyer should not assume that key personnel will remain after the sale without discussing appropriate retention or transition arrangements.
Contracts, Licences, and Third-Party Consents
Although the corporation remains a party to its existing contracts, those agreements may contain change-of-control provisions.
A customer, supplier, landlord, lender, or licensor may have the right to consent to the transaction, terminate the agreement, or impose conditions.
The parties should identify required consents early. Waiting until immediately before closing can delay or prevent the transaction.
Licences and regulatory approvals should also be reviewed to determine whether a change of ownership affects their validity.
Restrictive Covenants and Transition Support
The buyer may require the seller to provide transition assistance after closing.
The agreement should specify:
The transition period
Services to be provided
Expected availability
Compensation
Expenses
Decision-making authority
Confidentiality obligations
The buyer may also request non-competition and non-solicitation provisions to protect the business’s goodwill, employees, and customer relationships.
These restrictions should be carefully drafted and reasonable in their scope, duration, and geographic application.
Tax Planning Should Begin Early
The seller may realize a capital gain from selling the shares and may, depending on the circumstances, be eligible for available tax relief or deductions. The buyer will also need to understand the tax attributes and history that remain within the acquired corporation.
The CRA identifies ownership changes, inventory, capital gains, GST/HST, payroll, and business-number issues among the matters that may require attention when a business is sold.
Legal and tax advisers should coordinate the structure before the agreement is finalized. A transaction that has already been signed may be difficult to restructure without reopening negotiations.
Closing the Transaction
At closing, the parties may exchange:
Payment of the purchase price
Share certificates and transfer documents
Director and shareholder resolutions
Required third-party consents
Resignations
Releases
Promissory notes and security documents
Employment or consulting agreements
Updated corporate registers
Other documents required by the agreement
The corporation’s securities register and minute book should be updated to reflect the new ownership.
Any post-closing obligations, including price adjustments, transition services, earnouts, and indemnity periods, should also be tracked.
Delta Law’s corporate law services can assist with transaction structuring, corporate approvals, share transfers, and closing documentation.
Avoid Using a Generic Share Purchase Agreement
Every business has different risks.
A generic agreement may not properly address the company’s debt, customer contracts, employees, intellectual property, tax history, licences, personal guarantees, or regulatory obligations.
The agreement should be based on:
The results of due diligence
The negotiated commercial terms
The structure of the purchase price
The parties’ respective risks
The seller’s disclosures
The buyer’s financing
The industry in which the business operates
For more information about business acquisitions, commercial contracts, and corporate transactions, visit Delta Law’s legal resources.
This article provides general information only and does not constitute legal, tax, accounting, or financial advice. The appropriate transaction structure and contractual protections depend on the corporation, the parties, and the particular sale.
Protect the Transaction With a Clear Agreement
A share purchase agreement should do more than record the price. It should establish what the buyer is acquiring, identify the seller’s disclosures, allocate known and unknown risks, and create a clear path to closing.
Delta Law assists Ontario buyers, sellers, and shareholders with share purchase agreements, due diligence, business acquisitions, corporate approvals, and related commercial contracts.
