Asset & Share Purchase

At YLG, we provide our clients with excellent legal advice about asset and share purchase. We explain our clients about the laws related to two possible methods to sell or buy a business: (1) an asset purchase or (2) a share purchase.

An asset purchase requires the sale of individual assets. A share purchase requires the purchase of 100 percent of the shares of a company, effectively transferring all of the company’s assets and liabilities to the purchaser. Generally, the purchaser will prefer an asset transaction and the vendor will prefer a share transaction. However, this preference could vary based on many factors. Generally, an asset purchase is more complex than a share purchase because documentation is required for each asset being transferred.

Purchasing Asset of the Company

An asset purchasing involves the purchase of some or all of a company’s assets, such as equipment, inventory, real property, contracts or lease agreements. Third party consents may also be required where there will be a change to the control provisions in a contract, lease, licence or permit. Agreements often state that a change in control requires approval of the third party or may result in a forfeiture of the agreement.

Typically, this method is favoured by the purchaser because it allows them to be selective regarding the assets they wish to purchase. A purchaser may also desire an asset transaction because it involves less liability risk.

Purchasing Share of the Company

A share transaction is for purchase or sale of 100 percent of the company’s shares. This type of transaction is less complex than an asset deal, requiring fewer transfer documents. Documentation is only required for the transfer of the shares and occasionally for the assignment of shareholder loans.

Service Range

Canada

Category

Business

Applicant

Individuals & Business People

Typically, this method is favoured by the vendor because of the personal income tax benefits. The proceeds of share sales are taxed as capital gains with only 50 percent of the proceeds included as income. There are also certain lifetime income tax exemptions for the sale of shares from qualifying small businesses. This is a significant financial benefit for the vendor. As a result, the vendor may be willing to negotiate a lower price in exchange for the purchaser agreeing to a share transaction.

There may be some tax benefits for the purchaser as well. The purchaser may benefit from non-capital tax loss carry forwards, if the company has accumulated any unused allowable losses, which can be applied against future income the company earns. The purchaser can sometimes avoid paying sales tax on assets such as equipment and inventory and property transfer tax on real property and buildings.

A purchaser may be hesitant to agree to a share deal because the purchaser inherits all of the company’s liability along with its assets. This is risky because liability is often unknown or unforeseeable at the time of the transaction.