What is an agreement of Purchase and Sale?
The Agreement of Purchase and Sale (“APS”) is a binding contract between the purchaser and seller that obligates the purchaser to buy and the seller to sell assets or shares of a corporation subject to the terms and conditions in the APS. The APS will include terms such as the purchase price, representations and warranties, conditions, and the closing date.
When a purchaser is buying assets, the APS is called an Asset Purchase Agreement; when the purchaser is buying shares, it is called a Share Purchase Agreement.
What are the conditions that need to be satisfied before an agreement of purchase and sale can close?
The purchaser will typically have a conditional period anywhere from five to twenty days after the APS has been executed to perform due diligence and secure financing.
The following are the most common conditions required before closing:
- Financial and Legal Due diligence: Financial due diligence involves reviewing the financial statements of the target business to ensure that it is a viable business and the financial position of the business justifies the purchase price. Whereas the purpose of legal due diligence is to assess the risks and obligations of the business. For example, the purchaser will likely assume the existing lease of the business on an “as-is” basis so it is important to review the lease to identify any red flags.
- Financing: The transaction will often be conditional on the purchaser securing financing on satisfactory terms and conditions. At this stage, the purchaser will likely have had at least preliminary discussions with lenders regarding financing this transaction.
- Landlord’s Consent: If the business operates out of a leased premises, the parties will be required to obtain landlord’s consent. If the transaction is structured as an asset sale, the landlord will have to consent to assigning the existing lease to the purchaser. In a share sale, the landlord will have to consent to the change of control of the corporation. It is important to review what is required under the lease.
Once an agreement for purchase of sale is signed, what else is required to ensure that a deal has closed?
A purchase agreement (APS) is merely an agreement to sell the business at a certain date in the future. On the closing date, closing documents must be exchanged between the purchaser and seller in order to effect the sale. For example, a Bill of Sale is a closing document that is required to legally transfer the assets of a business from the seller to the purchaser on the closing date. The APS alone does not transfer the assets – it merely states that ownership of the assets is to be transferred by way of a Bill of Sale on closing. The business will also require various permits or licenses for its specific type of operation.
What closing documents are required in an agreement of purchase and sale?
That depends on the transaction, but potentially there are many closing documents required to close a deal.
They include the following for a share sale: Consent to transfer of Shares, New Share Certificate in favour of Purchaser, Resignation of Vendor as director and officer, Section 116 of the Income Tax Act statutory declarations by the Vendors and Pas to their age and Canadian residency, Undertaking by Vendors’ solicitors to withhold closing funds to pay off debts and obligations, and many more.
Closing documents required in an asset sale include the Bill of Sale and General Conveyance or Assignment, Purchaser’s Certificate of Representation and Warranties, Vendor’s Statutory Declaration re residency, Non-Competition Agreement, Statement of Adjustments, and many more.
