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A. Sale of Assets
This may involve the sale of all or only a portion of the assets of the business in question or of a corporation. If the buyer wishes to acquire all of the assets of the business or the corporation, then all property belonging to it is sold to the buyer, including equipment, inventory, patents, and software, if any, as well as the name and goodwill; this is what is known as a sale of the business. Thus, the buyer acquires all the assets of the business or corporation but does not acquire its liabilities, debts, or obligations; consequently, the buyer must ensure that the necessary rights, permits, and licenses required to operate these assets are renewed, subject, however, to the provisions of the laws governing the sale of all or substantially all of the assets of a business or corporation. The buyer sometimes negotiates a discount on the purchase price for the assets in order to reduce the risks associated with such an acquisition. Additionally, the buyer may wish to acquire only a portion of the business’s or corporation’s assets, in which case the buyer still does not acquire the liabilities, debts, and obligations of the business or corporation and may be required to renew rights, permits, and licenses, if applicable.
However, there are legal restrictions on the sale of the assets of a business or a corporation. In Quebec, the law provides that a corporation may not may dispose of its assets if, as a result, it is unable to continue substantial operations, except with the authorization of the shareholders granted by special resolution or if the disposition is made in a subsidiary of the corporation of which the corporation is the sole shareholder; for the purposes of applying this restriction, the disposition of assets includes the sale, exchange, and lease of assets. However, the corporation is deemed to be carrying on substantial operations when its continuing operations following a disposition of its assets meet the following requirements: 1) such operations required the use of at least 25% of the value of the corporation’s company as of the end of the fiscal year preceding the disposition; and 2) those activities generated, during the fiscal year preceding the disposition, at least 25% of the company’s revenue or pre-tax income. Furthermore, a corporation is required to prevent its subsidiary from disposing of its property whenever the corporation, as a result of such disposition, would be unable to continue substantial operations; furthermore, it is established that the loss of a corporation’s control over its subsidiary is deemed to be a disposition of all the assets of that subsidiary.
In Canada, the law provides that sales, leases, or exchanges of all or substantially all of the assets of a corporation, which do not occur in the ordinary course of its business, are subject to the approval of the shareholders, who may authorize such a sale, lease, or exchange by special resolution and set the terms thereof, or authorize the directors to do so; the notice of the shareholders’ meeting must specify the right of dissenting shareholders to receive payment of the fair value of their shares, even if the corporation has only one class of shares; furthermore, upon the adoption of such resolution, every share of the corporation, whether or not it carries voting rights, must carry voting rights. Furthermore, the transfer of all or substantially all of a corporation’s assets to another legal person in exchange for cash, property, or securities of that legal person is considered to constitute an arrangement.
B. The Sale of Shares
Both in Canada and in Quebec, a corporation may purchase all or part of the outstanding shares of another corporation by purchasing its shares directly from its current shareholders. The purchaser thereby acquires the rights, property, and assets of the other corporation but, at the same time, becomes liable for and assumes its debts and obligations; the purchaser thus becomes the owner of the other corporation, along with its liabilities, contracts, employees, and existing assets. This means that upon the purchase of shares, the buyer continues the legal personality of that other corporation. From a tax perspective, there is an advantage to choosing this alternative because the sale of shares by a corporation will allow that company to benefit from a capital gains exemption as permitted by the Income Tax Act (Canada) and the Tax Act (Quebec).