Will You Inherit Debts and Lawsuits Buying Shares in Alberta?

Buying the shares of an Alberta company feels clean: one signature and you own the business. The worry is what comes with it. If the company owes money or is facing a claim, you may wonder whether that is now your problem.

This article explains in plain terms what generally stays with the corporation, how to look for problems before you buy, and how the purchase agreement can protect you. The details turn on your facts, so a lawyer should review the deal.

This article covers the law of Alberta.

What stays with the company

In a share purchase, you buy ownership of the company rather than its individual assets. How the company's past debts, contracts, tax filings, unresolved claims and mistakes affect you depends on your facts, so it is worth confirming with a lawyer before you sign.

Whether you could be personally responsible for anything depends on the deal, including anything you sign yourself, such as a guarantee. What is clear in practice is that the value of what you bought falls if the company has to pay a bill you did not know about. Think of it as buying the whole history of the business, not only its future.

An asset purchase is structured differently, and which structure fits depends on your facts, so it is worth confirming with a lawyer. In a business asset sale, each property and service is generally treated as a separate supply, so GST (5% in Alberta) can apply to the taxable parts. A valid joint election by the buyer and seller can mean no tax is payable on the supplies under the agreement, but the election is not available where the seller is a registrant and the buyer is not. Even with a valid election, tax is still payable on a taxable service the seller will render, on a taxable lease, licence or similar supply of property, and, where the buyer is not a registrant, on a taxable sale of real property.

Due diligence: finding problems before you sign

Due diligence is the checking you do before closing. It starts with public registries. In Alberta, Corporate Registry searches are requested through a registry agent, and the options include a certified current search, a certified historical search, a certificate of status and a historical certificate of status. Searches can show the registration date, owners, directors and legal addresses.

A certificate of status confirms status as of a given date only, and a historical one confirms status as of a past date. Certificates of status are not available for trade names and partnerships, so the search you need depends on how the business is set up.

The Personal Property Registry is searched separately. Search types include individual debtor name, business debtor name and serial number for items such as vehicles, trailers, aircraft and boats. A search returns an exact match, an inexact match, no match, or both exact and inexact matches. With an inexact match you may need to search the name again or search the specific registration number, and questions about a result go to the party that registered the interest.

Registries only show part of the picture. You should also ask for financial statements, tax filings, contracts, leases, employee records, permits and a list of any claims or disputes.

Warranties and indemnities

A warranty is a statement by the seller in the agreement, such as that the financial statements are accurate or that there are no undisclosed lawsuits. If a statement turns out to be false, you may have a claim against the seller.

An indemnity is a promise to reimburse you for specific losses, such as a tax bill relating to years before closing. Indemnities are often used for risks you already suspect.

• Ask for warranties that cover finances, taxes, contracts, employees, permits and litigation.
• Ask for indemnities for known risks you found during due diligence.
• Consider how long the protection lasts and whether part of the price is held back to back it up.
• Check that the seller will still have money or assets to pay a claim later.

How strong these protections are depends on the wording, so it is worth having a lawyer draft or review them.

Financing and structure points

Your lender will also care about hidden problems. Program financing under the CSBFP does not finance share purchases or assets acquired by a holding company, so a share purchase of an Alberta company cannot be funded this way. If financing is a key part of your plan, ask whether an asset purchase fits better. The program can finance the eligible assets of an existing business, capped at the lower of the purchase price or the appraised value of those assets.

What to do next

• Request corporate and personal property searches through a registry agent.
• Gather financial statements, tax filings, contracts and a list of disputes.
• Have your accountant review the numbers and any tax exposure.
• Negotiate warranties, indemnities and, if appropriate, a holdback.
• Ask a lawyer whether an asset purchase would reduce your risk.

Frequently asked questions