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Share sale or asset sale
The first question is usually structure. In a share sale, the buyer takes over the company itself, history included. In an asset sale, the buyer picks the equipment, contracts and goodwill it wants and leaves the company behind.
That choice generally affects tax, which liabilities move to the buyer, which contracts need the other party’s consent to transfer, and how employees move over. Your accountant should look at the tax side early.
The two structures also follow different legal rules. Under section 184(3) of Ontario’s Business Corporations Act (the OBCA), a company selling all or substantially all of its property outside the ordinary course of business needs its shareholders’ approval by special resolution, and a shareholder entitled to vote may dissent and be paid fair value under section 185. In a share sale, the company itself does not change; its owners do. We compare the two in detail in asset sale or share sale. The wider deal work is in the buying or selling section of our corporate law page.
How a deal usually runs
- Letter of intent. The key terms: price, structure, timing and conditions.
- Due diligence. A review of the company’s records, contracts, leases and liabilities.
- Purchase agreement. The full deal, including what each side promises and what happens if a promise turns out to be untrue.
- Closing. The documents that make the transfer official, and the payment.
A common mistake is signing a letter of intent before the key terms are settled.
Speak with a lawyer before you sign anything, even a document described as non-binding.
Before the letter of intent, most sellers ask for a confidentiality agreement, because the buyer is about to see private information. During due diligence, the buyer’s lawyer and accountant work through the company’s records; what they look at is set out in what happens in due diligence. The purchase agreement then records what was found, the price and the seller’s promises, and closing turns it into a completed transfer.
| Stage | Seller | Buyer | Legal point |
|---|---|---|---|
| Confidentiality agreement | Shares information only after it is signed | Agrees to keep it confidential | Contract terms |
| Letter of intent | Agrees price, structure and timing in principle | Makes the offer, usually conditional on due diligence | Which terms are binding depends on its wording |
| Due diligence | Provides the minute book, registers, contracts and financial records | Reviews them with its lawyer and accountant | OBCA ss. 140, 140.2, 141 |
| Approvals and consents | Obtains shareholder approval and third-party consents | Confirms they are in hand | OBCA s. 184(3) for an asset sale of substantially all property; transfer approvals in the articles for a share sale |
| Employees | Deals with those not hired by the buyer | Decides whom to hire, on what terms | Employment Standards Act, 2000, s. 9 |
| Purchase agreement and closing | Signs, delivers resignations or bills of sale, receives payment | Signs, pays, receives the shares or assets | Contract terms |
| After closing | Updates its own records and estate plan | Files notices of change, updates registers | Corporations Information Act s. 4; OBCA s. 140.2(4) |
Selling? Plan ahead
Buyers look closely at corporate records, contracts and who owns what. Tidying the minute book and key agreements before you go to market makes a sale smoother, and it is also a good moment to update your estate plan.
In practice, that means checking that every share issue and transfer is recorded in the securities register and register of transfers required by section 141 of the OBCA, that the register of individuals with significant control under section 140.2 is current, and that annual returns are filed. A buyer may also ask for a certificate of status, which Ontario’s registry lists at $26 when ordered from the ministry. If records have fallen behind, our page on what goes in a minute book explains what should be there. The register of individuals with significant control has its own page.
What changes the answer
Employees
In a share sale, the employer does not change. In an asset sale, section 9(1) of the Employment Standards Act, 2000 says that if the buyer employs an employee of the seller, the employment is deemed not to have been terminated or severed for the purposes of that Act, and the time with the seller counts as time with the buyer. Section 9(2) excludes an employee hired more than 13 weeks after the earlier of their last day with the seller and the day of the sale.
A seller who stays on
Buyers often want the seller to stay for a transition and not to compete. Ontario generally prohibits non-compete agreements between employers and employees, but section 67.2(3) of the Employment Standards Act has an exception for a sale of a business where the seller becomes the buyer’s employee immediately after the sale. The rule and its limits are explained in are non-compete clauses enforceable in Ontario.
A shareholders’ agreement or unanimous shareholder agreement
Existing owners may have rights of first refusal, drag-along or tag-along rights that shape how a sale can happen. A buyer of shares in a company with a unanimous shareholder agreement is deemed to be a party to it under section 108(8) of the OBCA. Our page on shareholders’ agreements covers those clauses.
A holding company in the structure
If the operating company is owned by a holding company, the seller of the shares is the holding company, and the buyer may prefer to buy either company. The structure is explained in what is a holding company.
The seller’s estate plan
A sale turns shares into money, or leaves a company holding the proceeds. Wills, powers of attorney and any secondary will for company shares should be updated, as described in estate planning for business owners.
Buying rather than selling
For a buyer, the main protections are in the conditions and the promises. A letter of intent that is conditional on due diligence and financing leaves room to walk away if the review turns up problems. The purchase agreement can then add specific promises from the seller, an indemnity for identified risks, or a holdback of part of the price until those risks have passed. In a share purchase these matter more, because the company’s whole history comes with it. If the business you are buying is a franchise, the franchisor may have to give you a disclosure document before you sign, as explained in what Ontario’s franchise disclosure law requires. If the premises sit on land a public authority plans to expropriate, compensation for disturbance and business loss is governed by Ontario’s Expropriations Act, which our expropriation page explains.
The business name
In a share sale, the company keeps its name and any registered business names. In an asset sale, the name is one of the assets, and a buyer’s company that will trade under it must register it under section 2(1) of the Business Names Act. How corporate and trading names work is explained in numbered company or named company.
Directors stepping down
Directors who resign at closing should have their resignation recorded and a notice of change filed within 15 days under section 4 of the Corporations Information Act. Their duties while still in office are set out in directors’ duties under Ontario’s OBCA.
Example
For example, imagine Teresa, who owns all the shares of a Richmond Hill printing company and wants to retire, and Marcus, a buyer from a similar business. They sign a confidentiality agreement, then a letter of intent for a share purchase, conditional on due diligence and financing. Marcus’s lawyer finds that a 2021 transfer of shares from Teresa’s former partner was never recorded and the significant control register was never set up.
Teresa fixes both before signing the purchase agreement, and Marcus orders a certificate of status from the Ontario Business Registry. At closing, Teresa resigns as director and officer, Marcus’s people are appointed, the securities register and significant control register are updated, and a notice of change is filed within 15 days. Because it is a share sale, the employees stay employed by the same company. Teresa agrees to stay for six months as a consultant. With her accountant, she updates her will now that her shares have become sale proceeds.
Common mistakes
- Signing a letter of intent too early. Settle the key terms first, and check which parts are binding.
- Choosing the structure before tax advice. The tax result often decides between a share sale and an asset sale.
- Going to market with gaps in the records. Buyers find them, and they slow or reprice the deal.
- Forgetting third-party consents. A lease or key contract that cannot be assigned can hold up closing.
- Missing the shareholder approval. An asset sale of substantially all property needs a special resolution.
- Not updating the filings after closing. Notices of change and the significant control register must reflect the new owners and directors.
What to do this week
- Decide, with your accountant, whether a share sale or an asset sale is likely to suit you.
- Check the minute book, registers and annual returns, and list any gaps.
- List the leases and key contracts, and check each for assignment or change-of-control clauses.
- Find any shareholders’ agreement and note rights of first refusal, drag-along and tag-along rights.
- Prepare a confidentiality agreement before sharing information.
- Review your will and powers of attorney with the sale in mind.
- Before you sign a letter of intent, a first consultation takes 30 minutes, by video or in person, and you can request one here.
Frequently asked questions
How long does a business sale take?
Small deals can close within a couple of months of a signed letter of intent; larger or more complex deals take longer. Due diligence and third-party consents usually set the pace.
Do I need a lawyer if I am using a business broker?
Yes. A broker finds the buyer or seller and helps with price; a lawyer protects you in the documents you sign.
Is a letter of intent binding?
Parts of it can be. Many letters of intent say that most terms are not binding but that confidentiality, exclusivity or costs clauses are. The wording decides, which is why it should be reviewed before you sign.
What happens to the employees?
In a share sale they stay with the same company. In an asset sale, those the buyer hires keep their service for Employment Standards Act purposes under section 9, unless they are hired more than 13 weeks later.
Do the other shareholders have to approve a sale?
For an asset sale of substantially all the company’s property, the OBCA requires a special resolution of the shareholders (section 184(3), (7)). For a share sale, the articles and any shareholders’ agreement set the approvals and rights that apply.
What records will a buyer ask for?
Usually the minute book and registers, the articles and by-laws, contracts and leases, employee information, financial statements and recent filings. The full list is in what happens in due diligence.
Sources
- Business Corporations Act, R.S.O. 1990, c. B.16, ss. 108(8), 140, 140.2, 141, 184 and 185
- Employment Standards Act, 2000, S.O. 2000, c. 41, ss. 9 and 67.2
- Corporations Information Act, R.S.O. 1990, c. C.39, s. 4
- Business Names Act, R.S.O. 1990, c. B.17, s. 2
- Ontario.ca: Ontario Business Registry (certificate of status)
Questions clients ask about buying or selling a business
Each of these answers one question in more depth, with the Ontario law behind it.
Buying or selling a business
- Asset sale or share sale when you sell an Ontario business What moves to the buyer in each structure, and the approvals and records each needs.
- What happens in due diligence when you buy a business in Ontario? The searches, records and contracts a buyer reviews, and what to do with the findings.
- How do you transfer shares in an Ontario private company? The documents, approvals and registers involved when shares change hands in a private company.
Contracts
- What does Ontario’s franchise disclosure law require? The 14-day rule, the disclosure document, rescission rights, fair dealing and exemptions.
- Licensing your brand or franchising: which one applies in Ontario? The franchise definition, the exclusions, the consequences and what a brand licence covers.
- Are non-compete clauses enforceable in Ontario? The 2021 ban, the two exceptions, and what a business can still protect.
This page is general information about Ontario law, not legal advice for your situation.