What key clauses should be in a share purchase agreement in Ontario?
A share purchase agreement should cover the price, the promises each side makes about the business, the conditions that must be met before closing, and any promise by the seller not to compete. Many of these terms are negotiated, so the right clauses depend on the deal.
Price clauses should say how the price is split if part is paid for a non-compete, because the tax result follows a reasonable allocation. Amounts received for a non-compete are generally included in income, but a share sale to an arm's length buyer can avoid that if both parties elect in the prescribed form. Ontario's Employment Standards Act (ESA) voids non-competes made on or after October 25, 2021 that fall under its ban, with exceptions for executives and for certain business sales where the seller becomes an employee.
Closing conditions may include advance notice to the Competition Bureau for large transactions or a net benefit review for some foreign buyers. In a share sale the employer stays the same legal entity, generally no GST/HST applies, and the WSIB purchase-certificate policy does not apply because the buyer takes on the seller's liabilities by law. Have a lawyer review the draft.
Key takeaways
- Say in the price clause how the price is split if part of it is for a non-compete, because the tax result follows a reasonable allocation.
- A seller's non-compete in a share sale to an arm's length buyer can avoid income inclusion if both parties elect in the prescribed form.
- Ontario's ban on non-competes has exceptions for executives and for certain business sales where the seller becomes the buyer's employee.
- Closing conditions may need to deal with Competition Bureau notice for large deals or Investment Canada Act review for some foreign buyers.