Pace Law

Things to Watch Out for in a Share Purchase Agreement

June 1, 2023


A Share Purchase Agreement (SPA) is a complex document used when buying shares of a corporation. It’s important to understand that buying shares means acquiring all aspects of the business, including assets, liabilities, and potential legal issues. Due diligence is crucial to identify risks, liabilities, and potential problems before the purchase. Excluded liabilities and assets should be clearly defined in the SPA to avoid disputes. Determining the purchase price and payment structure requires a fair evaluation and consideration of tax implications. Managing employees during a share purchase requires addressing legal obligations, cultural implications, and potential liabilities. Representations, warranties, and indemnities provide assurances about the company’s condition and can affect the allocation of risk. Other considerations include the method of purchase, share structure, and existing shareholder loans or guarantees. Seeking legal advice is important throughout the process to protect your interests and navigate the complexities of a share purchase agreement.

Table of Contents

  1. Understanding The Nature of a Share Purchase
  2. The Due Diligence Process
  3. Excluded Liabilities and Assets
  4. Purchase Price and Payment Structure
  5. Consideration of Employees
  6. Representation, Warranties, and Indemnities
  7. Other Important Considerations


A Share Purchase Agreement (SPA) is an integral document used when the shares of a corporation are being purchased. The document outlines the agreement between the buyer and seller and can be quite complex. In the context of Ontario’s corporate and commercial law, there are several things to watch out for when dealing with an SPA to ensure that your interests are protected.


Understanding the Nature of a Share Purchase

When purchasing the shares of a business, you’re essentially buying a portion of the corporation that owns the business, thus acquiring a controlling interest. This is different from an asset purchase where you only acquire specific assets and not the entire business. It’s essential to understand the nature of the transaction you’re entering into, as share purchases involve buying all aspects of the business, including its assets, liabilities, and even potential legal issues.

These transactions usually involve the buyer purchasing all the voting shares of the corporation and being transferred all of the other outstanding and issued shares of such corporation(s). This means that you’ll be buying not just the business’s assets but also its debts, which might impact the company’s net worth and your return on investment.

Significant legal and tax implications come with this type of transaction. For example, there may be tax advantages or disadvantages based on the structure of the deal. These can significantly impact the overall cost and benefits of the purchase. Therefore, it’s imperative to involve corporate accountants and lawyers early in the process. Their guidance will help you navigate these complexities and ensure that the purchase aligns with your financial and business goals.

One crucial aspect to watch out for is the potential for hidden liabilities. Since you’re buying the company as a whole, any liabilities not discovered during the due diligence process become your responsibility once the purchase is completed. This could include debts, pending lawsuits, or future liabilities from contracts or obligations the company has entered into.

So, when understanding the nature of a share purchase, you need to comprehend both the potential rewards and the inherent risks. Be vigilant about the corporation’s health and all the potential liabilities you might be assuming with your purchase.


The Due Diligence Process

Due diligence is not just a formality; it’s a critical process of meticulous investigation that should precede any business transaction. This process requires an extensive review of the corporation’s financial statements, contracts, licenses, permits, and much more. In a share purchase, you’re buying everything – assets and liabilities – so the due diligence process is particularly extensive and crucial.

Due diligence is essentially about managing risk. A thorough due diligence process can help identify potential issues, risks, and liabilities, providing an opportunity to re-negotiate terms, seek protections, or even reconsider the transaction. Watch out for any red flags during this process, such as inconsistent financial reports, questionable contracts, or undisclosed liabilities.

It’s important to carefully examine the financial health of the corporation. This includes studying the balance sheets, profit and loss statements, tax returns, and auditor’s reports, if available. Look for consistent profitability and a strong balance sheet with manageable debt levels.

Another important aspect is legal due diligence, which includes examining all contracts, agreements, licenses, and legal compliance. This can reveal potential legal risks and liabilities, including pending lawsuits or disputes, contract terms that could impact future profitability, or compliance issues that could lead to fines or penalties.

Operational due diligence is also important. This involves examining the business operations, including sales and marketing strategies, client relationships, supplier agreements, employee contracts, and more. This can provide insights into the corporation’s operational efficiency and potential future performance.

Moreover, the due diligence process should also include a review of the corporation’s business model, the industry it operates in, its competitors, and its growth prospects. A company might have great historical financials, but if the industry is in decline or the company’s business model is outdated, future profitability might be at risk.

Therefore, it’s crucial to involve legal and financial advisors to aid in this comprehensive examination. They can provide the necessary expertise to understand the intricacies of the business, identify potential issues, and advise on possible solutions.

Remember that due diligence is not just about identifying problems. It’s also an opportunity to understand the business better and identify areas for growth and improvement. It can provide invaluable insights that can help you make the most of your new acquisition. So, take the time to conduct a thorough due diligence process, and don’t hesitate to seek professional advice when needed.


Excluded Liabilities and Assets

In a share purchase agreement, the default position is that the purchaser acquires all assets and liabilities of the company. However, it’s not uncommon for certain assets or liabilities to be specifically excluded from the transaction, and these need to be clearly defined and agreed upon in the share purchase agreement (SPA).

Excluded liabilities often involve debts or obligations the purchaser is not willing or able to assume. These could include long-term leases, outstanding loans, or pending lawsuits. In such cases, the SPA should contain provisions for how these liabilities will be handled, whether that’s discharge, removal, or assignment back to the seller.

On the other hand, excluded assets are properties of the company that the seller wishes to retain. These could range from tangible assets like real estate, to intangible assets like intellectual property. The SPA should clearly specify how these assets are to be transferred back to the seller, whether by transfer or assignment from the corporation to the seller on or before closing.

One key thing to watch out for when dealing with excluded liabilities and assets is ensuring they’re adequately detailed in the SPA. A broad or vague definition could lead to disputes down the line. Each excluded liability or asset should be clearly identified and described in the agreement, and the mechanism for handling them should be clearly set out.

For example, if a specific piece of real estate is to be excluded from the purchase, the SPA should describe the property in detail and explain how it will be transferred back to the seller. Similarly, if an outstanding loan is to be excluded from the liabilities assumed by the purchaser, the SPA should specify the exact amount of the loan, the creditor, and how the liability will be discharged or assumed by the seller.

Remember, clarity and precision are crucial in drafting these provisions. An oversight or ambiguity here could lead to unexpected liabilities or disputes in the future, so it’s worth investing the time and effort to get it right. And don’t hesitate to seek legal advice to ensure that your interests are adequately protected.


Purchase Price and Payment Structure

Determining the purchase price is one of the most critical stages in a share purchase agreement. This process often involves a comprehensive evaluation of the company’s financials, assets, and overall business standing. It’s usually best to enlist the help of a professional business valuator to ensure an unbiased assessment and a fair valuation.

However, the price is just part of the equation. The payment structure can be just as significant and can greatly influence both parties’ financial and tax implications. The payment structure outlines when and how the purchaser will provide compensation for the shares, and this can significantly affect the overall cost and benefits of the transaction.

The price could be paid all at once, in installments over time, or contingent on certain metrics or milestones being achieved. For instance, a deferred payment arrangement may benefit the purchaser by providing more time to secure finances, and it could also benefit the seller by potentially reducing their capital gains tax liability and earning interest on the unpaid balance.

One thing to watch out for is that any deferred payment or contingent purchase price must be clearly defined in the SPA. If the price is to be paid in installments, the agreement should specify the amounts and due dates of each installment, as well as the interest rate, if any. If the price is contingent on certain metrics, those metrics should be clearly defined, and the calculation method should be explicitly set out.

Another important consideration is the purchase price adjustment clauses. These are often included to ensure fairness and reflect the corporation’s financial position at the closing date. For example, a common adjustment is for working capital, to ensure the business has enough operational funds post-closing. Again, such clauses should be carefully defined to avoid future disputes.

Negotiating a fair price and a favorable payment structure is vital, but don’t forget to protect your interests and watch out for potential pitfalls. A well-drafted purchase price and payment clause can help mitigate risks and prevent disputes down the line.


Consideration of Employees

In a share purchase, the purchaser generally acquires all the existing employees of the corporation, including any accrued liabilities. This might encompass wages, vacation pay, bonuses, and other accrued benefits. However, there’s more to consider in this process than just monetary values.

Firstly, employees often represent a company’s most valuable asset: their skills, knowledge, relationships with customers, and understanding of the business are critical to ongoing operations. Thus, it’s essential not just to know who these employees are but also understand their roles, performance, and their commitment to staying on after the sale.

One crucial thing to watch out for is that the employees’ accrued benefits and rights are properly accounted for in the purchase price and are handled in accordance with relevant employment law. This includes obligations around notice or severance pay if the purchaser intends to terminate any employees.

Secondly, consider the cultural implications. Every company has its own unique culture, and a sudden change of ownership can often lead to uncertainty and anxiety among employees. If not managed carefully, this can lead to a loss of key employees and a decline in morale and productivity. Therefore, it’s important to have a clear communication strategy in place to address employee concerns and ensure a smooth transition.

Finally, keep in mind that certain liabilities tied to employees may not be apparent at first glance. For instance, if there are pending or potential lawsuits from employees, they should be uncovered during the due diligence process. Similarly, any collective bargaining agreements with trade unions should be reviewed, as they can have significant implications for the business’s future.

Remember, managing the transition of employees during a share purchase is not just about complying with legal obligations; it’s also about retaining and motivating the people who will be key to the success of the business going forward. It’s worth investing the time and resources to get this right.


Representations, Warranties, and Indemnities

In a share purchase agreement, representations and warranties are statements of fact about the company’s condition and affairs made by the seller to the buyer. They serve to provide a certain level of assurance to the buyer and are intended to disclose information that the buyer may not be aware of and which may impact the value of the business or the buyer’s decision to proceed with the transaction.

For instance, the seller might represent and warrant that the company’s financial statements are accurate, that it owns the assets it purports to own, that it has complied with all laws and regulations, or that there are no pending lawsuits against the company. If any of these statements prove to be false, the buyer may be entitled to seek compensation from the seller.

One thing to watch out for is that these representations and warranties are usually heavily negotiated and can significantly affect the allocation of risk between the parties. As a buyer, you will want the representations and warranties to be as broad and comprehensive as possible. However, the seller will often seek to limit them in scope, duration, and subject matter.

An indemnity clause is a contractual obligation by one party to compensate the other party for certain costs or losses. In the context of a share purchase agreement, the seller often agrees to indemnify the buyer for any losses arising from a breach of the representations and warranties. It is essential to be clear about the circumstances in which the indemnity will apply, the procedure for claiming under the indemnity, and any limitations or caps on the indemnity.

Also, it’s worth noting that representations, warranties, and indemnities are not a substitute for due diligence. Even with the most comprehensive warranties, it’s usually better to discover issues before the purchase, rather than trying to seek compensation after the fact.

As always, it’s advisable to seek legal advice when dealing with representations, warranties, and indemnities. They can be complex and have significant implications for the transaction, so it’s important to understand them fully and ensure that they’re properly drafted to protect your interests.


Other Important Considerations

Decide whether you’ll be purchasing the shares personally or through a newly formed corporation. Each method has different legal and financial implications. Watch out for any implications that may not align with your business strategy.

Furthermore, understand the share structure of the corporation. Are you buying all the shares or just a majority? Who are the other shareholders? What rights do different share classes have? All these questions should be considered and understood before proceeding with the purchase. Watch out for any terms that could limit your control or profitability.

Also, be aware of existing shareholder loans or guarantees that may need to be repaid or discharged. They can significantly impact the overall value and feasibility of the purchase.



Navigating the complexities of a share purchase agreement is not a task to be undertaken lightly. From understanding the nature of the transaction and conducting due diligence, to assessing the purchase price and payment structure, to managing employee transitions and navigating representations, warranties, and indemnities, every stage carries potential pitfalls.

While this article provides a useful overview of things to watch out for, it is not a substitute for professional legal advice. Each transaction is unique and presents its own challenges and opportunities.

At Pace Law, we specialize in corporate and commercial law, including the preparation and negotiation of share purchase agreements. Our experienced team understands the complexities of these transactions and is committed to helping our clients navigate the process with confidence and peace of mind. We work diligently to ensure that our clients are fully informed, that their interests are protected, and that the agreement aligns with their strategic goals.

If you’re considering a share purchase or need advice on any aspect of corporate and commercial law, we invite you to reach out to us. Let’s discuss how we can support your journey and contribute to your success. You’re not alone in this process – we’re here to help.

Share This Post
Trending Posts
How social media can affect your personal injury claim
(Updated 2020) How Long Do I Have To Sue? | Limitation Periods
How long does a civil lawsuit take in Ontario?
Injured at the workplace | WSIB benefits and who you can sue
Tort claim? What it means and why it’s your gateway to personal injury justice
Read More Insights
Angela Barrientos
Whether you’re beginning to consider a will or are ready to finalize one, the process is simpler than it often seems.
Pace Law
Ottawa, 10 de Octubre, 2023— El Honorable Marc Miller, Ministro de Inmigración, Refugiados y Ciudadanía, emitió la siguiente declaración
Pace Law
Entering a second marriage comes with a complex blend of emotional and financial ties from past relationships. It’s crucial to grasp one’s legal rights and responsibilities to be well-prepared for this fresh chapter.
Pace Law
A commercial lease is both a gateway and a potential pitfall for entrepreneurs. In our fast-changing business world, such agreements are more than just essential; they’re the bedrock.
Pace Law
Estate planning, essential for ensuring posthumous wishes are met, remains an area 70% of Canadians neglect. This deficiency largely stems from misconceptions, such as believing estate planning is only for the wealthy or thinking they’re too young to start.
Pace Law
In Ontario, adherence to driving regulations is critical for public safety, but violations occur, leading to criminal charges.

Get in Touch

Call us now or fill out the form to discuss your case with an experienced legal professional.

Our Locations

Office Location

191 The West Mall, Suite 1100
Toronto, ON M9C 5K8
Phone: 1-877-236-3060
Fax: 416-236-1809

Office Location

191 The West Mall, Suite 1100
Toronto, ON M9C 5K8
Phone: 1-877-236-3060
Fax: 416-236-1809