Assignment of goodwill

How BC law treats it

Goodwill is assigned by the asset purchase agreement, often with a separate bill of sale and general conveyance. No shareholder consent or Corporate Registry filing is needed to sell goodwill as such. A company sells goodwill like any other asset on a board decision. Only a sale of all or substantially all of the company's undertaking outside the ordinary course of business requires shareholder approval by special resolution under the Business Corporations Act, SBC 2002, c 57 (BCBCA), s. 301(1), subject to the exceptions in s. 301(6), and shareholders then have dissent rights under s. 301(5). Because goodwill is only valuable if the seller does not take the customers back, buyers protect it with restrictive covenants. Covenants given on the sale of a business are judged more leniently than employment covenants. In Payette v Guay inc, 2013 SCC 45, the Supreme Court of Canada upheld covenants in a sale context that were reasonable in scope, territory and duration. By contrast, employee non-competes are presumptively unenforceable, and courts will not rewrite an unreasonable one (Shafron v KRG Insurance Brokers (Western) Inc, 2009 SCC 6). Customer lists usually contain personal information. Under the Personal Information Protection Act, SBC 2003, c 63 (PIPA), s. 20, a seller may disclose personal information to a prospective buyer without consent if the parties agree to use it only for the transaction and the information is necessary to decide whether to proceed. After closing, the buyer must use it only for the purposes for which it was collected and the individuals must be notified.

What it means for your business

Goodwill is often the largest part of the price for a service business, franchise location or professional practice. A buyer that pays for goodwill without enforceable restrictive covenants, assigned customer contracts, trade names, phone numbers, domain names and social media accounts may get little. Sellers need clear limits on the covenants they give. Allocation of the price to goodwill also has tax consequences that both sides should review with their accountants. Example: The buyer of a North Vancouver accounting practice pays most of the price for goodwill. The seller assigns the client files and trade name and agrees not to compete within the North Shore for three years, a covenant a court would likely uphold in a sale of business context.

Risks and common mistakes

Drafting sale of business covenants as if they were employee covenants, or the reverse. Using an overbroad territory or duration that a court will strike out rather than narrow. Forgetting to transfer the trade name, phone numbers, domain names and online accounts that carry the goodwill. Sharing customer data with a buyer without a PIPA compliant confidentiality and use agreement. Believing shareholder consent or a Corporate Registry filing is needed to assign goodwill.