BUYING A BUSINESS - CORPORATE REVIEW

When acquiring a business, in particular for a share purchase transaction, but also when undertaking an asset purchase transaction, it is important to undertake the appropriate corporate review of the selling corporation.

As one can discern, when the acquisition involves the assumption of the corporate entity, the degree of investigatory work is that much more significant; nevertheless, in every business acquisition it is important to undertake appropriate corporate due diligence.

The critical difference is what one does with the information collected through the corporate review, given that in an asset purchase transaction the objective is to protect against any transposition of financial and legal issues of the selling corporation.

Meanwhile, in a share purchase transaction, the target corporation must be legally cleansed and updated prior to the completion of the share sale, such that the corporate past is not a hinderance to its new owners.

Furthermore, representations, warranties and even indemnification provisions are all too often not sufficient in a share purchase transaction when corporate issues were not previously identified and dealt with prior to closing, as the new ownership is primarily responsible for the acquired company, with rectification and restitution from the seller being a difficult process in far too many circumstances.

So what materials should form part of the corporate review process?

1. Government Corporate Registry documents, including the certificate of incorporation, articles of incorporation and registration statement, based on the jurisdiction, with further articles including articles of amendment, articles of continuance and articles of amalgamation.

The Corporate Registry might also be the source for annual returns, registered office and record office addresses, current officers and current board of directors.

It is also possible to identify default, restoration and other notices issued by the corporate registry with respect to the corporation and its status.

There are range of other corporate documents that go beyond the principal corporate registry’s documents, including extra-provincial registrations, business name registrations, trade name registrations, business licenses, professional accreditation, industry permits, and other governmental documentation, whether from the municipality, workplace safety, employment standards, human rights, etc.

2. Internal documentation related to one’s corporate review, begins with the corporation’s by-laws, together with registers of the officers, directors and shareholders, together with registers setting out shareholdings and share transactions.

And the share certificates themselves.

Directors’ resolutions and shareholders’ resolutions are important for the authorization of the major actions of the corporation, which needs to have been properly dealt with and appropriately ratified by those persons with authority thereover.

Constraints and conditions upon the corporation’s shares, and the authorization to divest those shares or the corporation’s assets, as the case may be, based on a shareholders’ agreement or other legal instruments.

Third party documentation might also arise as part of the corporate review, including leases, loans, indebtedness, security instruments, share pledges, personal property security registrations and other contractual obligations that bear upon the corporation and need to be dealt with in advance of closing.

The corporate review process is but one interrelated facet of the overall due diligence process that should be taken in advance of any business purchase, carrying a heightened significance in a share purchase transaction. To learn more about our legal practice with respect to the purchase and sale of businesses, contact our law firm at Chris@NeufeldLegal.com or 403-400-4092 / 905-616-8864.