How can I protect myself from assuming the seller’s liabilities?

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When acquiring a business, whether in British Columbia or elsewhere, safeguarding yourself from inheriting the seller’s liabilities is of paramount importance. Several strategies can help mitigate these risks.

First, a comprehensive due diligence process is vital, specifically you will want to examine the seller’s financial, legal, and operational history with expert assistance from lawyers and accountants. A well-structured purchase agreement is equally essential, and it should delineate which liabilities you will assume and which the seller will retain. Including indemnification clauses within this agreement will offer protection by allowing you to seek compensation for any unforeseen liabilities after the sale.

Choosing an asset purchase over a share purchase can limit exposure to the seller’s liabilities, while holdback provisions and environmental assessments may provide further security. You will want to carefully review existing contracts, renegotiate where applicable, and invest in insurance coverage to guard against unforeseen liabilities. Finally, legal guidance is indispensable to ensure that your interests are comprehensively protected throughout the acquisition process. Tailoring these strategies to your specific situation is key, underscoring the importance of diligence, knowledge, and proactive measures to minimize the risk of assuming unwanted liabilities.

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What due diligence should I perform before buying a business?

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It is essential to conduct due diligence when buying a business to ensure you are aware of any potential liabilities, legal issues, or other considerations related to the specific business you are acquiring. Consulting with your lawyer and your accountant is highly recommended to make an informed decision based on your unique circumstances.

Before buying a business, you should focus on the financial, legal, and operational aspects of the business you wish to purchase. You will want to ensure that you can receive a clear title to any assets and/or shares. It is important to examine the company’s financial statements, tax records, and outstanding debts. You will also want to review all relevant contracts, corporate records, and potential legal disputes. You should also assess operational efficiency and the workforce and investigate customer relationships, market positioning, and competitive landscape. You should analyze supplier contracts and potential supply chain risks. If applicable, conduct environmental and property assessments, and ensure intellectual property ownership is clear, if applicable. Examine employee contracts, potential severance obligations, and compliance with labor regulations. If premises are leased, review the vendor’s lease obligations and the right of the vendor to assign the lease to you.

You should also verify the business’s compliance with any industry-specific regulations, licenses, and permits. You may also wish to seek customer feedback and references. Another step you should consider is to evaluate the technology infrastructure and IT systems. Review future financial projections and the business’s legal ownership and structure. You should confirm the transferability of supplier agreements and licenses to ensure you are getting the benefit of the business you are purchasing. We recommend engaging professionals for expert assistance and insights throughout the process, including lawyers and accountants. Thorough due diligence is essential to make an informed and secure business acquisition.

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What type of legal structure is best for buying a business?

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The choice of a legal structure for buying a business depends on various factors, including your business goals, tax considerations, liability concerns, and the nature of the business you’re acquiring.

Here are some common legal structures you might consider:

1) Sole Proprietorship: If you plan to operate a business by yourself and want a simple structure, a sole proprietorship may be suitable. However, keep in mind that you will be personally liable for the business’s debts and obligations. An advantage is that you may write off losses from your business against your personal income tax, so a sole proprietorship may be a good choice when you expect there to be operating losses.

2) Partnership: If you are buying a business with one or more partners, a general partnership might be a suitable option. A partnership does not require a formal agreement, and can be presumed when two or more persons are embarking on a business venture together, however, having a written partnership agreement is advisable, as both parties can set out clear expectations. Partnerships offer shared ownership and management responsibilities and are similar to a sole proprietorship, however, a drawback is that the partners are typically personally liable for the partnership’s debts.

3) Corporation: Setting up a corporation can provide limited liability protection for the owners (shareholders) and may offer potential tax advantages. They are more expensive to set up and maintain than either a sole proprietorship or a partnership. Corporations are a common choice for larger businesses. In BC, you can incorporate under the Business Corporations Act (BCA), or you may choose to incorporate as a federal corporation under the Canada Business Corporations Act (CBCA).

4) Cooperative: If you plan to involve the employees or customers in the ownership and decision-making, you might consider a cooperative structure. Cooperative structures distribute both the risk and the reward among its members.

The choice between the various available structures should be made with the assistance of legal and accounting professionals who can assess your specific situation. There are other potential limited liability options for structures to consider based on the unique circumstances of each business.

Consider factors such as liability protection, tax implications, the number of owners, and your long-term business goals. Ensuring to consult with professionals when considering how to structure your business can help reduce potential issues down the road, as each business is different and your unique circumstances should be taken into account when deciding on a business structure.

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Accessing Shareholder Information under British Columbia’s Business Corporations Act: A Legal Overview

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In British Columbia, a common question is accessibility to a company’s list of shareholders (actually called the “central securities register”). This article will explore who can request this information and the necessary steps to obtain it.

Accessing Shareholder Information: Who Can Request?

The first question that arises is: who has the right to request a copy of a company’s central securities register? The answer is relatively straightforward: any person can apply to a company for a list of the names and addresses of shareholders and the number of shares of each class or series of shares held by each of the shareholders.

Obtaining the Central Securities Register: The Process

To receive a copy of the central securities register, the requesting party must follow a structured procedure. First, they must submit a written application under section 49(1) of the British Columbia Business Corporations Act (BCA) to the company or the person who has custody or control of the central securities register. Alongside the application, an affidavit must be included, providing the applicant’s name, mailing address, and a statement affirming the limited use of the list.

The applicant must confirm that the list of shareholders will only be used for specific and limited reasons: to influence the voting of the shareholders of the company at a meeting of shareholders; to acquire or sell securities of the company; to use in an amalgamation or similar reorganization process involving the company; to call a meeting; or to identify the shareholders of an unlimited liability company. Any other use of the list is unacceptable and not permitted by the BCA. Finally, a prescribed fee, which can go up to $0.50 per page as per the Regulation, must be paid. An affidavit is a written statement the writer has sworn or affirmed that the contents are true. You can have a lawyer or a notary assist you to swear or affirm an affidavit.

Company Obligations and General Inspection Rights

Once an application is received, the company or controlling party must act promptly, providing the requested list up to a date specified in the list that is not more than 14 days before the application’s receipt date. The delivery method should be as agreed upon, or if no agreement exists, by mail or for pick-up by the applicant.
In addition to specific provisions regarding central securities registers, the BCA grants some general inspection rights to certain individuals. Current directors have the right to inspect records without charge. Any person, including the public, may inspect a company’s central securities register during statutory business hours, with an inspection fee capped at $10 per day. Companies also have the option to impose restrictions on inspection through ordinary resolutions.

Additional Considerations and Conclusion

It is crucial to consider the company’s Articles, as they may contain provisions regarding who can inspect corporate records. Additionally, if the company is an amalgamating foreign corporation, specific regulations apply. Certain types of companies, such as public companies, pre-existing reporting companies, community contribution companies, and financial institutions, may grant broader public access to their records.

In conclusion, access to a company’s central securities register in British Columbia is governed by specific rules and regulations outlined in the BCA. While any person can request this information, they must follow a formal application process, include an affidavit, and pay a prescribed fee. Companies and controlling parties have clear obligations to provide this information, ensuring transparency and accountability in corporate affairs. It’s also important to be aware of general inspection rights and any additional provisions in the company’s Articles that may impact access to records.

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Contrasting and Comparing Salary Arbitration in Professional Sport: Major League Baseball vs. National Hockey League

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Introduction

Salary arbitration ensures fair compensation for players and promotes negotiations between teams and players. Before the arbitration hearing, players and teams have the opportunity to negotiate and reach an agreement on a contract, which may help them avoid the arbitration process. In this blog, we’ll explore the distinct salary arbitration systems used in Major League Baseball (MLB) and the National Hockey League (NHL), shedding light on their differences and the benefits they offer to players and teams.

MLB’s Salary Arbitration

MLB employs the “final-offer” arbitration system to resolve salary disputes between players and their teams. A three-arbitrator panel, handpicked by the MLB Players Association and the MLB Labor Relations Department, is responsible for the arbitration process. The panel considers proposals put forth by both parties in a hearing. During the hearing, the panel weighs several criteria, including the player’s past contributions, career consistency, compensation history, comparative salaries, and the team’s recent performance and public acceptance. After hearing arguments from both sides, the panel chooses either the player’s or the club’s salary figure for the upcoming season.

The final-offer system stimulates negotiations by encouraging each side to present more realistic figures. The arbitrator’s likelihood of choosing the opposing side’s offer motivates compromise, making the more reasonable demand or offer more likely to prevail.

NHL’s Salary Arbitration

In the NHL, both players and teams may elect salary arbitration. The NHL’s salary arbitration system is referred to as conventional arbitration. In this process, negotiators present their offers and arguments to an arbitrator. The arbitrator then makes a final decision, which could either align with one of the offers presented or fall outside of those proposals.

The hearing is presided over by a neutral arbitrator chosen from a group of eight members, all affiliated with the National Academy of Arbitrators. Each side, represented by the NHL Players’ Association (NHLPA)/player and the NHL team, is allotted ninety minutes to present their case, including counter-arguments and comparisons of players from the opposing party. They present their offers by using statistical criteria to identify contracts similar to the player’s and justify where the player stands in relation to those contracts. The arbitrator’s ability to exercise flexibility in salary selection fosters fair and reasonable resolutions, ensuring a well-balanced approach to determining salaries.

 

Conclusion

In conclusion, salary arbitration is an essential mechanism in MLB and the NHL to settle contract disputes between players and teams. The primary distinction between the systems lies in how arbitrators handle the offers. In MLB, the arbitrators must choose one of the two presented offers, while in the NHL’s system, they have the flexibility to select a salary figure not proposed by either side. These arbitration processes actively encourage negotiations, making them vital tools for ensuring equitable compensation and maintaining the competitiveness of both leagues.

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Purchase of a Business – The Importance of Employee Considerations

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Introduction

During the sale of a business, it is essential for both the seller and the purchaser to carefully examine the potential employment issues that may arise. Evaluating these matters during the due diligence process is crucial because hidden employment liabilities, which are often not apparent on the balance sheet, can significantly impact the financial viability of the transaction.

Employment Matters in Share Purchase Transactions

In a share purchase transaction, the purchaser –  by acquiring the vendor’s shares of the company – steps into the vendor’s shoes when it comes to employment issues. This means that existing employment agreements between the employees and the employer remain unaffected, and their terms and conditions continue unchanged. Maintaining employment continuity is of utmost importance in these transactions, and employers can simply inform employees about the share transaction after the closing date.

Employment Matters in Asset Purchase Transactions

In an asset purchase, the purchaser is not automatically obliged to take on the vendor’s employees. Unlike in share transactions, at common law, the sale often results in a termination of employment with the vendor company. Vendors should be aware that the sale of assets does not provide the employer with cause for discharge, reasonable notice, or severance pay. Consequently, the vendor remains liable for such claims, subject to an employee’s duty to mitigate damages or the purchaser agreeing to rehire.

Employment Standards Act of British Columbia

Purchasers must be mindful of section 97 of the Employment Standards Act (“ESA”), which stipulates that if a buyer continues the employment of the employees without any interruption, the buyer will assume the role of the employer and be required to take on all obligations and liabilities. Additionally, section 97 of the ESA states that if the purchaser employs a former employee of the vendor, the benefits contingent on the employee’s length of service, such as vacation, notice of termination, pay in lieu of termination, and severance pay, carry over to the employee’s employment with the purchaser. Consequently, the ESA presumes the purchaser to be liable for the employee’s full length of service with both the vendor and purchaser.

Given the potential liabilities associated with employee terminations, purchasers and vendors often engage in extensive negotiations. To minimize liability, vendors typically prefer the purchaser to hire their entire workforce on the same terms and conditions, rather than selectively retaining specific employees. If the purchaser chooses not to retain all of the vendor’s employees, both parties will negotiate to allocate liability for termination costs.

 

Conclusion

In conclusion, employment matters are critical aspects of business sales that demand thorough consideration from both the seller and the purchaser. Addressing these issues during the due diligence process helps identify potential liabilities and minimizes risks for both parties involved in the transaction. By carefully evaluating employment-related aspects, a smoother and more successful business sale can be achieved.

If you are in the process of initiating a purchase or sale of a business, contact Heath Law by PHONE: 250-753-2202 or send us an email.

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Conditions Precedent – What is it?

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Conditions Precedent – What is it and what does it mean?

In real estate or commercial purchase contracts, “Conditions Precedent” are specific conditions or requirements that must be fulfilled or satisfied by either the buyer or the seller (and in some cases both) before the contract becomes legally binding and enforceable.

These conditions act as prerequisites or contingencies that protect the interests of both the buyer and the seller and ensure that certain key elements are in place before the transaction can proceed.

The fulfillment or waiver of the condition precedents, or subject clauses, is normally referred to as “subject removal.” A common example of a condition precedent is: “the Buyer’s obligation to complete the purchase of the Property is subject to the Buyer being satisfied with the results of a physical inspection of the Property on or before [month, day, year].”

Conditions Precedent may vary depending on the specifics of the contract, but common examples include:

Financing: This condition requires the buyer to secure financing or a mortgage for the purchase of the property before the contract is finalized. If the buyer fails to obtain the necessary financing within the specified timeframe, the contract may be terminated without any penalties.

Inspection/Site Investigation: This condition allows the buyer to conduct a property inspection of the land, building or equipment by a qualified professional to determine whether the condition or state of the asset being acquired is satisfactory. If significant issues are found during the inspection, the buyer may request repairs, negotiate the purchase price, or even withdraw from the contract if the seller refuses to address the concerns.

Title Investigation: This condition involves a title search to ensure the property’s title is clear of any liens, charges, encumbrances, or legal disputes. The sale can only proceed if the title is free and marketable or if contractual language is included to address the discharge of any financial charges or encumbrances.

Zoning/Bylaws: The contract may include conditions that require the seller to obtain any necessary zoning approvals, building approvals or permits or other local government approvals for the property.

Third-Party Consents or Approvals: In some cases, the contract may stipulate that the purchase is contingent on obtaining consents or approvals from third parties, such as government authorities or regulatory bodies. Another example is where a business is occupying leased space and the consent of the landlord is required to a change in tenant. A further example is where a franchise is being purchased and the consent of the franchise system to a transfer of the franchise is required.

Have Questions about real-life uses of Conditions Precedent? 

Purchase of a Business – What Are Usual Or Typical Conditions Precedent That a Purchaser Would Want in an Asset Purchase Agreement

What Are Usual or Typical Conditions Precedent That a Purchaser Would Want in a Share Purchase Agreement

Key Differences Between an Asset Purchase and a Share Purchase in Business Acquisitions

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Securing Employee Matters

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Key employees are vital to a business’s success, and purchasers may include a condition precedent related to negotiating arrangements with these employees. This ensures that essential staff members are retained and motivated during the transition.

 

Compliance with Applicable Laws and Regulations: Purchasers need confidence that the target business is in compliance with all applicable laws, regulations, and licenses. This condition is essential to avoid potential legal and financial repercussions in the future.

 

Obtaining Third-Party Consents: If the transaction involves a change of ownership or assignment of contracts, purchasers may need to obtain consent from third parties involved in those agreements. This condition ensures that third-party relationships are maintained smoothly.

 

Material Adverse Change: To safeguard their investment, purchasers often include a condition precedent to confirm that there have been no material adverse changes in the assets or the target business since the negotiations began. This protects them from unforeseen risks that could negatively impact the acquisition.

 

Securing Necessary Financing: If external financing is required to fund the acquisition, purchasers may make the agreement contingent on obtaining the necessary financing commitments. This ensures that the purchaser has the financial resources necessary to complete the transaction successfully.

Every well-run business has one or more staff members that played a crucial role in helping your business thrive. Securing these employees can make or break the successful sale or purchase of a business so don’t overlook the employees when acquiring or selling a business venture. For assistance in evaluating and ensuring these key employees are included in your business transaction, contact Heath Law, located in Nanaimo, BC.

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Purchase of a Business – What Are Usual Or Typical Conditions Precedent That a Purchaser Would Want in an Asset Purchase Agreement

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Introduction:

Before completing an asset purchase agreement, prudent purchasers include conditions precedent to ensure certain essential requirements are met. These safeguards protect their interests, mitigate risks, and pave the way for a successful acquisition. In this blog post, we’ll explore the typical conditions precedent that purchasers seek to assert in an asset purchase agreement to make well-informed and secure investment decisions.

Reviewing Contractual Obligations: An important condition precedent involves the review of material contracts related to the target business. Purchasers want to ensure that all contracts have been disclosed and that there are no existing breaches or defaults that could impact the acquisition.

Due Diligence: Another key condition precedent is conducting thorough due diligence. This involves an in-depth assessment of the asset. In the case of real estate, due diligence could include an appraisal, geotechnical engineering reports and an environmental assessment.  In the case of equipment, the purchaser may want an evaluation completed to determine its operating condition.

Obtaining Consents and Approvals: To ensure a smooth transition, purchasers want confirmation that the seller has obtained all necessary consents, approvals, and permits required for the transfer of assets and ongoing business operations. This includes approvals from regulatory bodies and third-party stakeholders.

Clear Title and Ownership: Purchasers seek assurance that the assets being sold have clear title, free from any encumbrances or disputes.

If you’re not sure if all of your obligations and rights have been met or are fair and legal during the course of purchasing or selling a business or commercial property contact Heath Law on Vancouver Island.

Want to know more?

What Are Usual or Typical Conditions Precedent That a Purchaser Would Want in a Share Purchase Agreement

Key Differences Between an Asset Purchase and a Share Purchase in Business Acquisitions

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Vendor Financing in Business Sales: Security/Collateral and Key Considerations for Sellers

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What is Vendor Financing?

 

Vendor financing is a financing option where the seller of a business provides financial assistance to the buyer to help them complete the purchase. Many business sales involve vendor financing for at least a portion of the purchase price.

 

Why do Sellers Offer Vendor Financing?

 

Vendor financing offers several advantages to both buyers and sellers. Firstly, it attracts a larger number of potential buyers who may have difficulty obtaining traditional bank loans, thereby expanding the pool of interested parties. Secondly, it can lead to faster deal closures, streamlining the sales process and reducing the time it takes to finalize the transaction. Finally, seller financing can enable sellers to negotiate a higher selling price by providing an attractive incentive to the buyer, making the business or property more appealing. These benefits make vendor financing an attractive option for those looking to buy or sell a business or property.

 

Security and Collateral for the Seller

 

Security agreements for personal property: These grant the seller a security interest in specific assets owned by the purchaser. The security agreement may be general, offering broader protection covering the present and future assets of the purchaser.

 

Personal guarantees: Obtained from the principals of the Purchaser, making them personally liable for the repayment obligations of the Purchaser.

 

Mortgages over real estate: The Purchaser grants a mortgage to the Seller on the property being acquired.

 

Share escrows: Act as security for the unpaid purchase price, the seller retains physical control of the shares of the Company being purchased and if the Purchaser defaults on their repayment obligations the Seller regains control of the Company.

 

Assignments of life insurance: The seller may require the buyer to assign a life insurance policy to them as collateral. This ensures that, in the event of the buyer’s death, the seller will receive the policy’s proceeds to cover any outstanding debt or obligations.

 

Main Considerations of Vendor Financing

 

The length of the term and the interest rate applicable to the vendor financing are crucial aspects negotiated between the parties. Risk and return play a significant role, as the seller gains potential buyers and a higher chance of selling the property or business, but also faces the risk of non-payment or default. Flexibility is a key advantage of vendor financing, providing buyers with more accessible down payment options and flexible repayment schedules. Proper due diligence is necessary to assess the financial health of the property or business and ensure the viability of the financing arrangement. Additionally, legal documentation, including promissory notes, security agreements, guarantees and mortgages, is vital to safeguard both parties interests and facilitate a smooth transaction. Lastly, the tax implications of vendor financing must be carefully evaluated with the assistance of tax advisors to understand the potential tax consequences for both the buyer and seller.

 

 

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