Share purchase agreements

How BC law treats it

The share purchase agreement is a contract, interpreted under ordinary common law principles. The Business Corporations Act, SBC 2002, c 57 (BCBCA) governs the transfer mechanics: any restrictions on transfer in the company's articles (often requiring director consent), delivery of the share certificates or transfer instruments, and entry of the new owner in the central securities register. If the buyer acquires control, the company must also update its transparency register of significant individuals. Because the buyer takes the company with all its history, the SPA relies heavily on the seller's representations and warranties about taxes, liabilities, contracts, employees and litigation, backed by indemnities, survival periods, caps and baskets, and sometimes holdbacks or escrow. Price adjustments for working capital or debt, and earn-outs tied to future performance, are common. The buyer's due diligence is what makes these protections meaningful. Other laws apply alongside the contract. A sale of private company shares is a trade in securities that needs a prospectus exemption, usually the private issuer exemption. Non-resident sellers may need a clearance certificate under s. 116 of the Income Tax Act, RSC 1985, c 1 (5th Supp) if the shares are taxable Canadian property. Larger deals may require notification under the Competition Act, RSC 1985, c C-34 or the Investment Canada Act, RSC 1985, c 28 (1st Supp).

What it means for your business

For sellers, a share sale is often preferred because it may allow use of the lifetime capital gains exemption on qualified small business corporation shares and leaves contracts in place. For buyers, it means inheriting every historical liability, so the warranties, indemnities and due diligence are the main protection. Choosing between a share purchase and an asset purchase is one of the first and most important decisions in any business sale. Example: A buyer acquires all shares of a Kamloops trucking company for $4 million, with $400,000 held back for 18 months to cover any breach of the seller's tax and environmental warranties. The directors approve the transfer under the articles and the new owner is entered in the central securities register at closing.

Risks and common mistakes

Skipping due diligence on the company's tax filings and contracts because the seller provided broad warranties. Overlooking a transfer restriction or right of first refusal in the articles or a shareholders agreement. Failing to obtain a s. 116 clearance certificate or hold back funds when buying from a non-resident seller. Leaving the central securities register and transparency register unchanged after closing. Agreeing to an indemnity with no holdback or escrow, leaving the buyer to sue the seller for any claim.