Representations & Warranties – No One-Size-Fits All

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Private M&A purchase and sale agreements in Canada follow a very familiar pattern and typically include what can be described as the ‘usual representations and warranties’. In sophisticated purchase agreements the usual representations and warranties are comprehensive and cover everything from corporate, employment and environmental matters to financial, tax and intellectual property matters.  While the usual representations and warranties cast a wide net, they are by no means a one-size-fits all solution for addressing risk. Each transaction is unique and requires that clients, their financial advisors and their legal advisors turn their mind to drafting representations and warranties that address the specific risks of the transaction. Continue reading

When Shareholders Can’t Get Along (Part 2)

business04In my last blog post, I explained how the shotgun clause can be used to separate shareholders that are no longer getting along. The shotgun clause can be an effective way of avoiding litigation and providing a clean split between the warring parties.

How does the shotgun clause work? Generally speaking, it provides that one shareholder may make an offer to buy the other shareholder’s interest at a price set by the shareholder making the offer. However, the interesting twist is that having made the offer to buy, that shareholder is also deemed to have offered to sell their interest at the same price and on the same terms as the offer to buy. So it is left up to the shareholder receiving the offer to determine whether or not they want to sell their interest or buy the interest of the other shareholder. This has the effect of making the offering shareholder think carefully about the price. If they make a lowball offer, they may end up being bought out at that low price! Continue reading

When Shareholders Can’t Get Along

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Many privately owned businesses have more than one owner. This can be beneficial to a business, but it also poses its own problems. Sometimes one or more of the parties realizes that the partnership is not working which leads to dissention and conflict. What options are there for individuals facing this scenario? Continue reading

Buyer Beware: Employee Liabilities from a Business Purchase

A purchaser of a new business often keeps on existing employees who have the knowledge to help the buyer operate the business efficiently.  Purchasers are happy to pay and award these employees for their services since the purchase of the business; however, buyers often fail to realize that their obligations to employees may extend to periods prior to the acquisition.  This, unfortunately, can lead to headaches and financial liability, especially in cases where employees have been with the business for many years.  As a purchaser, you should be aware of Section 97 of the Employment Standards Act (the “ESA”) and its effects on the purchase transaction.   In particular, Section 97 of the ESA provides that:

[i]f all or part of a business or a substantial part of the entire assets of a business is disposed of, the employment of an employee of the business is deemed, for the purposes of this Act, to be continuous and uninterrupted by the disposition.

So, what exactly does continuous mean?  An employee who was working for the vendor at the time of acquisition will be deemed to be continuously employed and the buyer will assume the liabilities associated with that employee.  In contrast, if the employee is terminated by the vendor just prior to the closing date of the acquisition, then the employee will not be continuously employed and the vendor will assume the liabilities associated with that employee.

What liabilities are we talking about?  A prospective purchaser of a business should be aware of the consequences of Section 97 of the ESA listed below, which are not exhaustive.  Of course, if the employees of the business are terminated prior to the purchaser acquiring the business, the consequences do not materialize.

  1. Wages. The purchaser is responsible for all outstanding wages owed to an employee.
  2. Statutory Holidays. Employees are entitled to statutory holidays based on employment with both the vendor and the purchaser.
  3. Vacation Pay. Employees are entitled to vacation time and vacation pay as of their employment start date when the business was owned by the vendor. The purchaser assumes the liability for any accrued vacation pay owing to an employee if such pay has not been paid by the vendor.
  4. Benefit Plans. The benefit plans become a condition of employment with the purchaser and must be continued as a condition of employment.
  5. Employees on Leave. Employees on leave, whether paid or unpaid, are still considered employees of the business.
  6. Purchased Assets Subject to Lien. If any wages are owing to employees, the purchaser buys the assets with a lien attached to them.
  7. Severance and Notice.  The purchaser is responsible for ESA severance and notice obligations for employees to their original start date with the business and, in the absence of an enforceable employment agreement limiting severance and notice to the ESA minimums, for common law severance, which could be significant for long term employees.  Keep in mind that severance obligations only arise if an employee is terminated without cause.  Accordingly, a purchaser should factor in the cost of severance for any employees that it anticipates letting go of following the closing of the transaction.

The purchase and sale of a business is a complex process.  Purchasers should seek the help of qualified advisors who can help purchasers avoid surprises after they have taken over the business. Qualified advisors can assist in structuring the transaction so that the vendor is responsible for severance costs associated with the purchase of a business.

Friends with Money: A Cautionary Tale

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An interesting case has recently been heard in the Court of Queen’s Bench of Alberta in respect of a regrettable instance of friends loaning money to their friend’s business.  The plaintiff, Wan Ru Zheng, was asked by her friend Ryan Wittenberg to invest in his new car business, Your New Car Calgary Inc. Mr Wittenberg offered the investment as either a partner, with 20% of the shares of the business, or as a loan. Ms Zheng invested $125,000 in two loans, and received promissory notes in return. To her credit, Ms. Zheng requested significant information about the business and its assets from Mr Wittenberg, both before and after her investment, and even travelled to Calgary to investigate the business – but part of her decision to invest was influenced by her personal relationship with Mr Wittenberg, and his ability to talk up his business acumen.

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The Standstill and Exclusivity Agreement

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When a business succession plan involves the sale of the business to a third party, the buyer is often concerned about staying out of a bidding war. Of course, the buyer wants to avoid a bidding war to ensure that the price is not bid up. Therefore, a buyer will often request the seller to enter into an exclusivity and standstill agreement, sometimes called a “no-shop” agreement. Clearly, if the seller is not subject to a standstill agreement, the buyer may find that there are other buyers in the wings and therefore there is more pressure to increase the price and close the deal quickly. This situation will favour the seller and the smart buyer will therefore ask the seller to sign a standstill agreement to ensure this does not happen. Continue reading

The NDA (or Confidentiality Agreement)

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If you are thinking about selling your business, you should be aware of the heightened need these days for protection of private information. I am constantly surprised by the amount of private information business owners are willing to supply to prospective purchasers of their business. Unsophisticated sellers often allow potential buyers access to highly confidential information, without ever considering that they may be giving up business secrets for free. As a seller, you should never allow anybody to access your confidential information without first having them sign a confidentiality agreement. Continue reading

Shareholders Agreements & CCPC Status

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A corporation that meets the definition of “Canadian-Controlled Private Corporation” (“CCPC”) in the Income Tax Act is entitled to a number of tax benefits, including a reduction in corporate income tax on active business income. Because of these tax advantages, the question of whether or not a corporation qualifies as a CCPC is often an important one.

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