Selling A Business: A Multidisciplinary Checklist - AnswerConnect

This book is intended as a detailed and annotated “checklist” for managing the sale of a business. This checklist covers, chronologically, the federal legal aspects as well as the federal tax planning details of the sale of a business, from the gathering of information to the steps following the transaction. The author’s commentary is fully supported by law, doctrine, case law, and the administrative position of the tax authorities.

It also features a 30-page chronological checklist that will quickly become an indispensable tool. The guide is divided into three parts: planning – 2 years before the sale, 6 months before the sale, and during and after the sale. Each part covers the steps to take: performing the analysis, collecting documentation, taking action, drafting documents, finalizing the sale, and what to do following the sale.

Inspired by the 1st edition of La vente d’une entreprise: une check-list multidisciplinaire, written by Nancy Fortin and published by Wolters Kluwer

Authors:

Simon Labrecque
Simon Labrecque has extensive experience in mergers and acquisitions, having acted in hundreds of transactions over the last twenty years, both on behalf of buyers, such as private corporations, venture capital funds, institutional funds, and Canadian and non-resident investors, and on behalf of sellers, such as shareholders and target companies, mainly in private transactions. He has also represented major issuers of securities in complex transactions, including private investments and global financing and acquisitions. He also acts in Canadian tax matters, particularly with respect to the implementation of corporate and tax planning and counsel regarding the purchase and sale of businesses.

Nancy Fortin
Nancy Fortin, senior partner, practices primarily in corporate law, where her practice focuses primarily on Canadian business reorganizations, acquisitions and sales, mergers, liquidations, and business dissolutions. She also ensures the corporate and fiscal follow-up of her firm’s clientele, mainly made up of small and medium-sized companies located mainly in Canada, France, and
the United States.

ABBREVIATIONS LIST iii

PREAMBLE xv

INTRODUCTION xix

PART I — 2 YEARS BEFORE THE SALE

CHAPTER 1 — PRELIMINARY STEPS AND ANALYSIS 3

• Corporation Minute Book 4
  • Why maintain the corporation minute book? 4
  • Requirements of the various corporate laws 5
  • Legal opinion 16
  • Penalties and/or criminal offences 17
  • Tax laws and impact on dividends 20
  • Allocation of dividends share capital

structure 32

• Contents of the minute book 34
• Sole shareholder corporation 37
• Other records 37
• Required corrections and summary resolutions and/or resolutions of

regularization 38

• Minute Book of a Management Corporation

Shareholder 47

• Minute Book of a Corporate Shareholder Trust 47

vii

• Professional Fees 55
  • Legal and accounting fees related to the

updating of a corporation’s minute book 55

• Legal and accounting fees related to the

updating of a trust’s minute book 59

• Legal and accounting expenses related to the

sale of shares 60

• Legal and accounting expenses related to the

sale of assets 61

• Appraisal fees 62

• Structure of the Corporation’s Share Capital and

Issued and Outstanding Shares 63

• Structure of share capital and type of shares

outstanding 63

• Analysis of a share capital structure 64
• Identical share classes and taxation 67
• Freeze shares (Preferred shares) 70

• NI 45-106 Prospectus and Registration Exemptions 74
  • Private Issuer Status 74
  • Other exemptions 87
  • Penalties 90
• Legal Status of Each Shareholder 91
• Marital Status of Each Shareholder 93
  • Applicable laws and regimes 93
  • In summary 94
  • Effect of a shareholder agreement 95
• Tax Status of Each Shareholder 95
• Files to Check and Update 97
  • Registrar of Corporations, Corporations

Canada, and other jurisdictions 97

• Canadian Intellectual Property Office 102
• Assignment of intellectual property 118
• Register of personal and movable real rights

(and other jurisdictions) 128

• Land or title register 132
• Court Registries (civil, criminal and other) 135
• Office of the Superintendent of Bankruptcy 139

• Financial Statements and Tax Returns 141
  • Why analyze a corporation’s financial

statements or errors to be corrected 141

• The different types of financial statements 142

• Examples of common audit errors 147
• Types of information likely to have a negative

or positive impact on the proposed sale 150

• Documents Containing Change of Control

Clauses 151

• Shareholder Agreement 152
  • Types of shareholders and related issues 153
  • Unanimous shareholder agreement 155
  • Effects of a unanimous shareholder agreement 156
  • Term and termination of the agreement 159
  • Clauses to be verified 160

CHAPTER 2 — SALE OF SHARES OR SALE OF ASSETS 203

• Sale of Shares or Sale of Assets — Overview 203
• Summary of the Sale of Shares 207
• Summary of the Asset Sale 208
• Comparative Table Between a Sale of Shares and a

Sale of Assets 211

CHAPTER 3 — SALE OF SHARES 215

• History of the Lifetime Capital Gains Exemption 215
• Tax Status of the Corporation (QSBC, CCPC, and SBC) and Conditions for the Capital Gains

Exemption 218

• General and Conditions 218
• Condition 1: Eligible Taxpayer 219
• Condition 2: 24-Month Detention 220
• Condition 3: Qualified Small Business

Corporation Share (‘‘QSBCs’’) 225

• Qualifying Assets 231
• Assets That Are Not Qualifying 233
• Eligible Farm and Fishing Property 238

• Amount of the Exemption and Calculation of the

Capital Gain 241

• Timing of Reporting 242
• Cumulative Net Loss on Investments 246
  • Planning Considerations for the CNIL 248
• Allowable Business Investment Loss 249
• Timing of Net Capital Loss Carryforwards 251
• Calculation of Capital Gain and Capital Gains

Exemption 251

• Consequences of Loss of CCPC Status 253

• Sale of Shares — Tax Consequences for the Seller

and the Purchaser 257

• Sale by an Individual 257
• Repurchase of Shares by the Corporation 258
• Sale of Shares to an Unrelated Third Party 260
• Sale to a Co-Shareholder 262
• Sale to an Employee 268
• Sale to a Family Member or Sale to a

Non-Arm’s Length Person 272

• Estate Freeze 283
• Sale By a Management Corporation 306

• Alternative Minimum Tax 311
  • What Is the Alternative Minimum Tax? 311
  • AMT Calculation 313
  • Seven-year recovery 315
  • Impacts of AMT on Losses, Certain

Deductions, Tax Credits, and Others 318

• Impact of AMT on RRSP Contributions 320
• Capital Gains Reserves 320

• Purification 320
  • Preliminary Verifications 320
  • Crystallization Mechanism 324
  • Purification of Excess Cash 326
• Investments 339
• Life Insurance Policy 340
  • Contract without surrender value 343
  • Contract with surrender value 344
  • How is the cash surrender value calculated? 345
  • Grandfather Rule for Insurance Policies

Issued Before 2017 350

• Transfer of a life insurance policy 351

CHAPTER 4 — SALE OF ASSETS 357

• Taxation 357
• Sale of Depreciable Property 361
• Sale of Depreciable Property — Real Property 364
• Duties on Transfers of Immovables 367
• Immovable Property Held by a Corporation Giving

Right to the DGC 367

• Sale of Goodwill 368

• Traffic and the Canadian Anti-Spam

Legislation (CASL) 374

• Sale of Non-Depreciable Property 376
• Hybrid Sale 377
• Asset Sales and Employees 377

CHAPTER 5 — CHANGE OF CONTROL 381

• Tax and Legal Impacts of a Reorganization or a

Sale 381

• Change of Control 383
  • Concept of ‘‘change of control’’ 383
• Deemed Control 391
• Change of Control and Trust 395
• Change of Control and Deemed Fiscal Year End 397
• Change of Control and tax Election 401
• Change of Control and Losses, Loss

Carry-Forwards, Deductions, Tax Credits 402

• Change of Control for Corporations Involving

Trusts 408

• Tax Loss Trading 409
• Change of Control and Non-Resident Purchaser 410
• Change of Control and Rules of Association 412

CHAPTER 6 — SALES TAXES 417

• Sales Taxes Applicable on the Sale of Shares or

Assets 417

• Sales Taxes and Sale of Shares 420
• Sales Taxes and Sale of Business 420
• Applicable Sales Taxes on Sale of Assets 428
• Applicable Taxes on Sale of Accounts Receivable 429
• Applicable Sales Taxes and Sale of Goodwill 430
• Applicable Taxes and Sale of Real Estate or

Leasehold Improvements 431

CHAPTER 7 — DIRECTORS’ AND SHAREHOLDERS’

LIABILITY 433

• Liability in the Event of a Sale of shares 433
  • Directors’ liability 433
  • Shareholder liability 444
• Liability in a Sale of Assets 447

PART II — 6 MONTHS BEFORE THE SALE

CHAPTER 8 — STEPS TO TAKE BEFORE PUTTING THE

BUSINESS UP FOR SALE 451

8.1 Summary of the Steps Taken in the 18 Months

Preceding the Sale 452

• Preliminary Audits 453
• Information Circular Concerning the Corporation 454
• Valuation of the Corporation’s Shares 459
  • Shareholder Agreement and Valuation

Methods 459

• Valuation Methods 461
• The earnings multiple method 465
• The book value or adjusted book value

method 467

• Discounted cash flow method 468
• The method based on indicators of

comparable transactions 469

• The asset-based method 470
• Valuation based on an expert’s report 470

CHAPTER 9 — DUE DILIGENCE 477

• Preliminary Information 477
• Purpose of a Due Diligence Audit 483
• Due Diligence List 489
• Managing Due Diligence 491
• Due Diligence Report 494
• Lists of Items to be Verified 495
  1. Corporate structure of the corporation 496
  2. Other jurisdictions 496
  3. Business documentation and contractual

obligations 497

1. Intellectual Property 498
2. Movable property 501
3. Insurance coverage 501
4. Real estate ownership 502
5. Finance 502
6. Accounting and Taxation and J) Taxes 503

1. Human Resources 505
2. Environmental matters 506
3. Litigation 507
4. Miscellaneous 508

• Due Diligence Satisfaction Clause 508

PART III — DURING THE SALE AND POST-CLOSING MATTERS

CHAPTER 10 — STEPS TO REFLECT THE SALE OF THE

BUSINESS 513

• Confidentiality Letter or Agreement 513
• Letter of Interest, Letter of Intent, and Offer to

Purchase 520

Letter of Interest 520

Letter of Intent and/or Offer To Purchase 520

• Withdrawal of Offer (Discretionary or Not) 525
• Delays Between the Letter of Intent and the

Deed of Sale 527

• Financing of the Purchaser 528
  • Updating Files 528
  • Documents Required for Financing Before the

Closing Session 529

• Closing Agenda 532
• Agreement for Sale of Shares and/or Sale of

Assets 534

• General Content of the Agreement 534
• Various Clauses 539
• Price Adjustment Clause 543
• Related Party Transaction 559
• Claim Deductible Clause 560
• Claim Clause or Net Basis of Tax Impacts 561
• Mechanism for All Claims and Adjustment

Clauses 562

• Payment of Consideration Clause 563
• Balance of Sale Clause 565
• Balance of sale and provisions 567
• Forfeiture clause 570
• Restrictive Covenants 571
• Goodwill clause 593
• Indexation clause on future profits –

Earn-Out 595

• Reverse Earn-Out 611
• Clause Concerning the Election Provided for in of the 22 ITA Relating to Accounts

Receivable 613

• Clause Concerning the Sales Tax Election

Provided for in S. 167(1) of the ETA 614

• Clause Relating to Shareholder Loans and

Advances, Sureties and Guarantees 617

• PPSA and Land Registry Security Clause 619
• Integrality or Precedence Clause 621
• Clause Related to the Canadian Anti-Spam

Legislation (‘‘CASL’’) 623

• Share Pledge Agreement 624
• Promissory Note 625
• Seller and Purchaser Protections 626
• Escrow Agreement 628
• Pledge Agreement 629
• Employment Contract 635
• Deliverables at the Closing Session 640

CHAPTER 11 — MANAGEMENT OF THE POST-CLOSING

MATTERS 643

SCHEDULE A — DUE DILIGENCE CHECKLIST 647

TOPICAL INDEX 663