As a business person contemplating the purchase or sale of a business you will need to consider the structure of the transaction. Generally speaking, there are two methods: 1) the purchase or sale of the assets used to operate the business and 2) the purchase or sale of the shares of the corporation that owns the assets and operates the business.
One of the major advantages of the asset transaction to the purchaser is the ability to choose only those specific assets desired. After having completed all of the appropriate due diligence searches, there is very little risk of unknown liabilities arising after the transaction is completed. The purchaser of shares, however, acquires all of the assets and liabilities of the target corporation. While due diligence is conducted in respect of the corporation, unknown liabilities may indeed arise after the close of the transaction. For this reason, a purchaser may favour an asset transaction.
The issue of employees can be very complex. If the business is a unionized workplace then the Labour Relations Act, 1995 will apply and the purchaser will likely be considered to be a successor employer regardless of the structure of the transaction. This means that the purchaser will inherit the collective agreement with the union. With regard to non-unionized workplaces, while the employer-employee relationship is unaffected by a share transaction, an asset transaction gives rise to many factors for consideration. In an asset purchase, a purchaser may or may not continue to employ the vendor’s employees. Under the Employment Standards Act, 2000 of Ontario, if the purchaser continues to employ the vendor’s employees, the employment is not terminated by the sale but rather the purchaser is considered to be a successor employer and inherits the history of every employee, including years of service. The result can be severe to the purchaser who shortly after the closing determines that a long term employee is unfit for the job and must give such employee an unduly long, but nonetheless statutory, notice of termination. On the other hand, if the purchaser does not continue the employment of some or all of the employees, the vendor must terminate such employees prior to the completion of the transaction having provided each employee with the statutory notice of termination or pay in lieu thereof. This can be costly to the vendor. There are also very complicated common law issues associated with the termination of an employee and these should be given very careful consideration.
One way for the vendor and the purchaser to mitigate the risks associated with employees in an asset transaction is to provide the purchaser with a certain period of time post-closing to assess the employees. If the purchaser terminates any employee for cause during the stipulated time frame, then the parties may further agree that the vendor will indemnify the purchaser for the costs associated with the termination. While this does not remove the obligation for payment from the purchaser as employer, the purchaser is able to seek reimbursement from the vendor.
The sale of assets will usually attract the application of the Bulk Sales Act, 1999 of Ontario which prevents a vendor from selling its assets out of the ordinary course of business without first making adequate provision for the payment of its trade creditors. If the purchaser fails to require the vendor to comply with the legislation, the transaction may be set aside and in some cases the purchaser may be held personally liable to account to the trade creditors. It is imperative that there be compliance with the Bulk Sales Act.
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