Representations and Warranties in an Ontario Share Purchase Agreement

If you are buying or selling shares of a private Ontario company, the share purchase agreement will contain a long list of statements about the business. These are the representations and warranties. They can look like boilerplate, but they often decide who bears the cost when something about the business turns out to be different from what was described.

This article explains what the terms mean, which topics usually appear, how disclosure schedules narrow the seller's exposure, and which Ontario and federal rules sit behind some of the statements. The details of any one agreement depend on its wording, so have a lawyer review the draft before you sign.

What representations and warranties are

A representation is a statement of fact that one party makes to the other to encourage the deal. A warranty is a promise that the statement is true. In share purchase agreements the two words are almost always used together, and in practice they work as one list of statements the seller gives about the company and the shares.

The buyer uses them to test what it is paying for. If a statement turns out to be untrue, the agreement usually gives the buyer a remedy, most often an indemnity, meaning the seller compensates the buyer for the resulting loss. How long the statements last, how much can be claimed and whether any money is held back are matters the parties negotiate in the contract, so read those clauses closely.

Buyers also give some statements, such as having the authority and the funds to complete the purchase. Sellers should not assume the obligations run in only one direction.

Common topics in the seller's warranties

Most agreements cover the same core ground. The table below pairs typical topics with the Ontario or federal rules that make them matter.

Other typical topics include financial statements, contracts, litigation, permits and compliance with laws. The wording matters: a statement given to the seller's knowledge is narrower than a flat statement of fact.

How disclosure schedules limit liability

A disclosure schedule is a document attached to the agreement. It lists the exceptions to the warranties, such as a pending claim, a contract that can be ended on a change of control, or a registered lien. A warranty that says there is no litigation, except as listed in the schedule, is not breached by a lawsuit that appears on the list.

This is why sellers are careful to disclose fully and why buyers read the schedules before the warranties. Each disclosed item can reduce what the buyer can later claim, so a buyer may ask for a lower price, a specific indemnity or a closing condition instead.

• Check how the agreement defines what counts as disclosed, and whether general or vague entries are enough.
• Check whether the buyer's own knowledge of a problem affects its right to claim.
• Check whether disclosure of an item in one schedule is treated as disclosure against every warranty.
• Check whether the seller can update the schedules between signing and closing, and what happens if it does.

Rules that sit behind the statements

Some statutory rules shape what a buyer needs to ask for. In an asset sale, a WSIB purchase certificate can relieve the buyer of the seller's WSIB liability up to the sale date. That policy does not apply to buyers who acquire a business by acquiring share capital, because they take on the seller's liabilities by law. In a share deal, WSIB and similar warranties and indemnities do much of the protective work.

On employees, the Ministry's manual says s. 9 of the Employment Standards Act, 2000 does not apply to a share sale. However, if the buyer later winds up or amalgamates the corporation so that employees work for another entity, a sale may be found and s. 9 may apply, depending on the facts.

Personal information in the company's records, such as employee and customer data, may be shared during due diligence without consent only if conditions are met, including an agreement limiting its use and disclosure to purposes related to the transaction. After closing, the parties may keep using it if they agree to use it only for the purposes for which it was collected, it is needed to carry on the business, and one party notifies the individuals within a reasonable time.

Some deals also need regulatory steps. Large transactions may require advance notice to the Competition Bureau before closing, based on transaction-size and party-size thresholds. Foreign buyers may face net benefit review under the Investment Canada Act, depending on the investor type and the value of the business. If a non-resident is selling shares not listed on a designated stock exchange, they can be taxable Canadian property where more than 50% of their value came from Canadian real property, resource property or timber resource property at any time in the previous 60 months.

What to do before you sign

• Read the warranties and the disclosure schedules together, not separately.
• Ask what the seller will give as a warranty and what it will treat as a disclosed exception.
• Confirm how long the warranties last, how much can be claimed and whether any money is held back, because these terms are set by the contract.
• Identify any non-compete or similar covenant the seller gives, and have its tax treatment reviewed, since amounts received for a restrictive covenant are generally included in income unless an exception applies.
• Ask an accountant to confirm the tax position and a lawyer to confirm the regulatory filings.

Take the draft agreement and the disclosure schedules to a lawyer early, before the price is fixed, so the risk allocation is negotiated rather than discovered later.

Frequently asked questions