Share Purchase Transaction

Contact Neufeld Legal PC for corporate transactional and legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

Acquiring the corporate stock of the target company or merger partner.

Retaining the corporate entity, while facilitating the transference or acquisition of the company's stock, is the premise for a share acquisition or merger. Acquiring a company's shares presents an inherent challenge not associated with asset purchases - the fact that the bad comes along along with good, such that all the liabilities (both known and unknown) flow to the acquiring company. This presents many inherent challenges, which can be adddressed in part through the due diligence process and in the negotiation of the terms and conditions of the merger or acquisition agreement - operations from which parties will greatly benefit from the involvement of the appropriate legal counsel.

Share purchases can be exceedingly challenging and complex, especially when they are allowed to become convoluted by alternate perspectives and interpretations of the transaction's form and objectives. This can make the process and/or the results exceedingly costly, especially when legal counsel is incapable of managing and navigating the process so as to effectively achieve the client's objectives. This is a critical element that is all too frequently in short supply, unless the lawyer has the capacity to understand business and transform theory into a workable and profitable reality.

Key Reasons for pursuing a Share Purchase Transaction

A. Tax Advantages for the Seller

This is often the most significant driver of a share purchase.

• Capital Gains Treatment: For the seller, the proceeds from the sale of shares are generally treated as a capital gain, with only 50% of the gain being taxable. This is a much more favorable tax rate than the tax on business income or dividends.

• Lifetime Capital Gains Exemption (LCGE): In many cases, if the shares are of a "Qualified Small Business Corporation," the seller may be able to use their LCGE to exempt a significant portion of the capital gain from taxation entirely. This can result in a massive tax saving for the seller.

• No "Double Taxation": In an asset sale, the company first sells its assets and pays tax on the resulting income. The after-tax proceeds are then distributed to the shareholders, who are taxed again on the distribution. In a share sale, there is only one layer of taxation, at the shareholder level.

From the Purchaser's Perspective: Any prospective purchaser needs to factor in both the added after-tax amount for the seller in selling shares as opposed to assets, together with the added legal liability being assumed by the purchaser in an asset purchase transaction, when negotiating the purchase price, which should be substantially less than a comparable asset purchase transaction.

B. Simplicity and Continuity of the Business

A share purchase is often considered a simpler and more streamlined transaction from a legal and operational perspective.

• No Asset Transfers: Since the legal entity of the company does not change, there is no need to individually transfer each asset, such as real estate, equipment, intellectual property, and inventory. This significantly reduces the administrative burden and legal costs.

• Preservation of Contracts and Relationships: The company's existing contracts, licenses, permits, and customer and supplier relationships remain with the corporation. This avoids the need for time-consuming renegotiations and the risk of a third party (e.g., a landlord or key customer) refusing to consent to a contract transfer.

• Employee Continuity: Employees remain employed by the same legal entity, which simplifies the process and avoids potential issues related to termination and re-hiring, as well as the assumption of liabilities like severance pay.

C. Acquisition of Tax Attributes

For the buyer, a share purchase can be attractive due to the ability to acquire the company's tax attributes.

• Non-Capital Loss Carry-Forwards: If the target company has accumulated tax losses, the buyer may be able to use these losses to offset future taxable income of the acquired company. This can be a very valuable benefit, though it is subject to specific rules under the Income Tax Act.

D. Preservation of Intangible Value

By acquiring the entire company, the buyer ensures that all intangible assets are transferred without disruption.

• Goodwill and Brand Recognition: The reputation and brand of the business are fully preserved as the legal entity and its name do not change.

• Proprietary Information: All proprietary data, customer lists, and internal processes are acquired as a whole. This is crucial in industries where intellectual property and data are key to success.

When it comes to the legal component of corporate mergers & acquisitions, that is when the law firm of Neufeld Legal P.C. comes into play. Such that when your company is seeking knowledgeable and experienced legal representation in orchestrating and completing business mergers, acquisitions and divestitures, contact us at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com.