- When you buy the shares, the company stays the same legal entity, so its past liabilities stay inside it and you own it as it is.
- You are not personally liable for the company's debts just because you are a shareholder, with limited exceptions under the Business Corporations Act.
- Due diligence, warranties and indemnities are the tools that let you find and price hidden problems before closing.
You have found a business you want to buy, and the seller is offering the shares of the company that runs it. The worry is a fair one: what if there are unpaid bills, a lawsuit or a tax problem nobody mentioned?
In short, a share purchase means you take the company with everything in it, including the problems. That does not mean you are stuck with surprises. This article explains how the debts work and how buyers in New Brunswick usually protect themselves.
This article covers the law of New Brunswick.
What actually happens to the debts in a share purchase
In a share purchase, the company does not change. It remains the same legal entity, so the buyer takes it with its past liabilities inside the company. The contracts, the debts, the claims against it and the tax history all stay with the company, and you now own the company.
That is the key difference from an asset sale, where the buyer picks the assets it wants. In an asset sale of a whole incorporated business, the seller's shareholders must approve the sale by special resolution, while a share sale is a deal between the shareholders and the buyer.
So the debts are not yours personally, but the value of what you bought is reduced by them. If the company owes money you did not know about, you own a company that is worth less than you paid for.
Are you personally responsible?
Shareholders are not, as shareholders, liable for any liability, act or default of the corporation, except under section 99 of the Business Corporations Act. How far that protection goes in your case depends on the facts, so it is worth confirming with a lawyer.
There are limits to that comfort. If you sign a personal guarantee for a company loan, or act as a director, your position can be different. Whether any exception applies to you depends on the facts, so ask a lawyer before you sign anything personal.
Share purchase compared with asset purchase
| Issue | Share purchase | Asset purchase |
|---|---|---|
| Past liabilities | Stay inside the company you now own | Buyer chooses assets, but some claims can follow them |
| Seller approval | Deal is between shareholders and buyer | Seller's shareholders approve a sale of substantially all property |
| Employees | Company remains the employer | Service is treated as continuous with the buyer |
| Land transfer tax | No deed is registered | 1% of the greater of price or assessed value if land is transferred |
| Seller's tax position | Lifetime capital gains exemption may be available | Exemption does not apply to a sale by the corporation |
Sellers often prefer share sales for the tax reasons above, which is why buyers frequently face this question. Tax advice for your own situation should come from an accountant working with your lawyer.
How buyers protect themselves
Because the debts come with the company, protection happens before and at closing. Three tools work together.
- Due diligence: your lawyer and accountant review the company's contracts, loans, tax filings, litigation, employee records and corporate records to find what is actually inside the company.
- Warranties: the seller states in the purchase agreement that certain things are true, such as that financial statements are accurate and that there are no undisclosed claims. If a statement is false, you may have a claim against the seller.
- Indemnities: the seller promises to compensate you for specific losses, such as a tax assessment for a period before closing. Buyers sometimes hold back part of the price to back the promise.
A promise is only as good as the person making it. If the seller may spend the sale proceeds or move away, ask your lawyer about security for the promise, such as a holdback or a guarantee from a seller who can pay.
Searches that show hidden debts
Some debts can be found by searching public records. Anyone may search the Personal Property Security Act Registry and obtain a printed search result. The printed result is evidence of registration absent evidence to the contrary. A buyer can search the seller's name to find registered security interests before closing. A lender's registered claim over business equipment, inventory or receivables can stay attached to assets.
Each registration is effective for the period stated in the financing statement, so the length of each claim has to be read from the search result. In a share purchase those registered claims stay with the company, so they matter to you.
Searches do not show everything. Unpaid taxes, unwritten promises and lawsuits that have not yet been started may not appear in a registry, which is why warranties and indemnities still matter.
What to do next
- Ask the seller for financial statements, tax filings, loan documents, key contracts and a list of any claims or disputes.
- Have a lawyer search the registries and review the corporate records.
- Ask your accountant to review the company's tax position.
- Negotiate warranties, indemnities and, where suitable, a holdback in the share purchase agreement.
- Confirm that your lawyer is a practising member of the Law Society of New Brunswick.
- Do not sign a binding agreement or a personal guarantee until the review is finished.
Every business is different, so a lawyer should review the details of your deal before you commit.
Frequently asked questions
Do I take on debts if I buy shares of a company in New Brunswick?
The company keeps its debts, and by buying the shares you own the company. The company remains the same legal entity, so its past liabilities stay inside it. You are not personally liable as a shareholder, apart from exceptions under the Business Corporations Act.
Can I avoid the company's debts by buying assets instead?
An asset purchase lets you choose which assets to buy, which can limit what you take on. It also brings other consequences, such as shareholder approval on the seller's side and continuity of employee service. A registered lender's claim can also stay attached to assets you acquire.
What if a debt turns up after closing?
This is what warranties and indemnities are for. If the seller promised that no such debt existed, or agreed to cover it, you may be able to claim against the seller under the agreement. How strong that claim is depends on the wording and the seller's ability to pay.
Can I search for liens against a company before buying?
Yes. Anyone may search the Personal Property Security Act Registry and obtain a printed result. A search does not replace full due diligence, and how far to go depends on your deal, so it is worth confirming with a lawyer.
Sources
- Business Corporations Act (NB), s. 130 — laws.gnb.ca
- Personal Property Security Act, SNB 1993, c. P-7.1, ss. 19, 25 — laws.gnb.ca
- Employment Standards Act (NB), s. 89 — laws.gnb.ca
- Real Property Transfer Tax Act (NB), s. 2(1.03) — laws.gnb.ca
- Income Tax Act, s. 110.6(1) — Justice Laws (federal)
- Law Society of New Brunswick – Definitions (public) — lawsociety-barreau.nb.ca
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
This is a buying & selling a business question
Buying or selling a business with us is from $3,448.85, tax included. Third-party fees are extra.