In this blog, I’m going to be talking about a few important issues that will come into play in a share transfer:
- Representations and Warranties
So here we go…
I’ve been saying it all along: if you’re buying shares of a health practice, you’re buying all the assets AND LIABILITIES of that practice. You need to pay attention here because there may be hidden liabilities that you don’t know about. These liabilities could relate to things like money owed to current or former employees, unpaid utilities and taxes, leases, pending investigations, court awards or fines for professional negligence or occupier’s liability, etc. The bottom line is that you should know what you’re getting yourself into. You need to know about environmental hazards (if any) and make sure that all the books and records are up to date with the Canada Revenue Agency and other government authorities.
When you’re buying shares of a corporation, you’re inheriting all the liabilities and contracts that existed at the time leading up to the transfer (unless those contracts say otherwise). That means that the purchaser inherits the employees and obligations to them.
Representations, Warranties, and Indemnifications
In a share purchase, you’ll want to make sure that the corporation has title to all of its assets, that it has disclosed all known liabilities, and that it is capable of transferring the shares to the purchaser (i.e. all necessary authorizations and approvals have been obtained). To this end, the purchaser’s lawyer should review the corporate minute book. If you need a lawyer to do this for you, feel free to contact us. The purchaser will want to make sure that the books and financials are up to date to avoid unforeseen or hidden liabilities owing, for example, to the Canada Revenue Agency. So the purchaser will want the seller to make representations that this is the case and also to indemnify the purchaser in case it is not. If there are issues concerning hidden liabilities, the purchaser should ask that some portion of the purchase price be held back until a certain period of time has passed or an event has occurred so that such monies can be used to offset potential damage resulting from those hidden liabilities.
Generally, with the share transfer itself, the parties won’t pay taxes because shares are considered financial instruments (which are an exempt supply). That said, the purchaser will want to see that GST has been paid up to a certain date (prior to the closing) and will request a GST Clearance Certificate. This will show the amount of GST liability that is outstanding, if any, by the corporation up to a certain date.