Private Company Acquisition Negotiations

The following is a list of key provisions negotiated in all private company acquisition agreements:


  1. Acquisition structure

Firstly, determine whether this will be an asset purchase or share purchase. You should have discussions with your lawyers and accountants very early in the process, so you understand the process and consequences of each. The following will guide your decision:

Complexity: Generally, asset purchase agreements are more complicated than share purchase agreements.

Asset Sale — An asset sale will require transfer documentation for all the assets and liabilities being transferred (e.g., permits and licenses, leases, equipment and vehicles, intellectual property, contractual obligations, etc.). Each asset and liability must be dealt with independently to ensure the purchaser is aware of all rights and obligations currently owing to each asset. Third party consents may also be required. Additionally, certain assets, such as government licenses and permits, are not assignable at all and hence cannot be legally transferred in an asset sale.

Share Sale — Under a share sale, all the assets of the target company remain with the company, so no asset transfer occurs – the same company owns the assets before and after the transaction. The only required transfer is of the shares of the target company that owns and carries on the business (and possibly an assignment of shareholder loans owed by the company to shareholders). The acquisition agreement must state the number and class of shares to be purchased, as well as the identity of the owners of the shares. Third party consents may also be required – if the Target is a corporate shareholder, and subject to a shareholder’s agreement, there may be a change of control clause; or if the Target is involved in a highly regulated industry, such as cannabis, government approval may be required.

Choice of Assets and Liabilities: When a purchaser acquires a company through a share purchase, all the assets and liabilities of the target company remain with the target company, therefor with the purchaser. An asset sale, however, allows the purchaser to “cherry pick” which assets it will purchase and which liabilities it will assume.


Asset Sale — In an asset sale, there is no legal obligation for purchasers to agree to employ non-union employees.

Share Sale — In a share sale, the target company’s employees remain employed by the company. However, when a change of ownership occurs, depending on the employment agreements, it may trigger certain rights for senior employees.

Tax Considerations Share Sale — The proceeds of a share sale (above the adjusted cost base) are taxed as capital gains, meaning only 50% (as of February 8, 2022) is included as income. A lifetime capital gains exemption may be available to Canadian residents who sell shares of a qualified small business corporation. In 2022, the lifetime capital gains exemption is $913,630. A corporate seller may be able to reduce its taxable gains by adjusting the purchase price after paying an inter-company dividend. A purchaser may prefer a share transaction if the Target has previous losses that it can carry forward. A share purchase also allows a purchaser to avoid paying sales and property transfer taxes on purchased assets.

Asset Sale – A purchaser may want to attribute all proceeds towards assets to step up their fair market value and utilize the capital cost allowance to reduce their tax burden going forward. However, if the seller has amortized the asset substantially, there may be a large capital gain.

  1. Form of acquisition consideration.

Cash, shares, royalties, deferred payments, or other consideration.

Break fees: The seller may request the right to not close the transaction and if so, whether a break fee would be payable to the buyer, and vice versa.

Escrow: The parties sometimes agree to hold a portion of the purchase price in escrow for a period of time to satisfy future indemnification claims, milestones, or purchase price adjustments.

  1. Purchase price adjustments

Purchase price adjustments and the formula for adjustment should be considered. Earn outs, ratchets, sandbagging, and other provisions should be considered. Adjustments may be based on a closing date balance sheet or other financial statement with reference to assets, revenues or profitability. Shortfalls or milestones in certain financial targets may result in a post-closing adjustment to purchase price.

  1. Representations and warranties

The type and breadth of the representations and warranties of the seller is a crucial point in negotiations. As sellers will be parties to a share sale agreement, they may face liability (which may be joint and several) for any inaccuracies in the reps and warranties.

  1. Closing conditions

Consider whether there is a mutual closing condition for regulatory consents – for example in a cannabis transaction where security clearance from Health Canada is required. Discuss any material qualifiers or condition precedents that must occur prior to closing and the applicable break fees associated if they are not satisfied or waived. Discuss the inclusion of a material adverse effect closing condition, and then negotiate what constitutes a material adverse effect – something all too important in our present COVID19 environment. Consider what carve-outs from the material adverse effect definition are permitted (general economic changes or conditions, industry wide changes or conditions, war, terrorism or otherwise generally applicable or deal-related risks).

  1. Indemnifications

The scope of the indemnifications will always be subject to significant negotiations. The decision to include caps, survival periods, baskets or deductibles will affect the maximum exposure the parties face.

Baskets and deductibles are designed so the seller is not bothered by immaterial breaches in the reps and warranties, In the case of a basket, when the buyer’s losses exceed the basket amount, the seller is liable for the total amount of the losses, and in the case of a deductible, when the buyer’s losses exceed the deductible amount, the seller is liable only for the excess amount above the deductible. A cap limits the seller’s indemnification obligation. It typically based on a percentage of the transaction value.

There are many things to consider before entering into negotiations for a private company acquisition – these things should be considered in depth with your advisors.

Jason Grewal, Esq.

Barrister & Solicitor

To learn more or to discuss your specific situation, please call one of our experienced lawyers at 604 265 8400 or filling out the online contact form.