Share Purchases and Sales

A share purchase is where one person purchases shares of a corporation which are held by another person. This is different from a subscription for shares, which is where a person purchase shares of a corporation from the corporation.

Share Purchase Agreement

A share purchase agreement is the main agreement that is entered into as part of the share purchase transaction. It will be prepared in accordance with the circumstances of the transaction and needs of the parties, but the following are some common provisions:

• Description of the Shares: The shares being sold are accurately described.
• Purchase Price: The price to be paid for the shares and how the purchase price will be paid.
• Representations and Warranties: A representation is an assertion that something is true. A warranty is a promise to be financially responsible if an assertion is false. In general, both the purchaser and seller will provide representations and warranties, but the seller's are more substantial and important. The seller's representations and warranties will relate to items such as the legal and financial standing of the corporation, that no third party has any interest in the shares, the correctness and completeness of the corporation's books and records, that there are no tax liabilities, details relating to employees and employee benefit plans and the absence of litigation (or details relating to any litigation), that the corporation has all licences and permits necessary to carry on its business, the corporation's intellectual property rights and trademarks, that the corporation has good title to its property (other than as disclosed) and that the assets are in good condition.
• Covenants: A covenant is an agreement to do or not to do something. In most share purchase transactions, the share purchase agreement is signed before the closing date of the transaction. A seller will often provide a number of covenants in a share purchase agreement, many of which protect the purchaser's interests during the period between the share purchase agreement date and the closing date. The seller's covenants may include to conduct business in ordinary course, to not permit any encumbrances (mortgages, liens, security interest, etc.) to be registered on the corporation's property, to permit the purchase to access the books and records of the corporation to conduct due diligence, to deliver specified documents at closing, such as customer lists, books and records or additional agreements (such as a non-competition agreement).
• Indemnities: An indemnity is an agreement to be financially responsible for a specified loss. Indemnities are generally negotiated, but the seller and purchaser may indemnify the other if they breach any representation or warranty. The seller may also indemnify the purchaser for tax or other liabilities relating to the period prior to the closing date.
• Conditions: The share purchase agreement may set out conditions where either party may terminate the agreement, often without any liability. These can include the purchaser's satisfaction with its due diligence review, the purchaser obtaining third party financing and the receipt of any required third party consents, such as a landlord's consent to assign a lease, the representations and warranties are true and correct and that specified documentation is received.

Steps to a Share Purchase Transaction

A share purchase can vary widely in its complexity. In general, the following are the main steps:

• Preliminary Agreements: In a simple share purchase transaction, the preliminary agreement will generally be the main share purchase agreement. In more complex transactions, the parties may sign a non-disclosure agreement and letter of intent and then enter into a share purchase agreement at a later date.
• Due Diligence: The due diligence stage involves reviewing the corporation's and seller's books, records, contracts and other documentation and to conduct searches in order for the purchase to satisfy themselves as to the state of the corporation whose shares are being purchased. 
• Closing: During the closing, the parties exchange the documentation which is necessary to complete the transaction. This documentation may include share transfers, share certificates, closing funds, resignations, releases and other documentation required by the share purchase agreement.