Embed Size (px)
DESCRIPTION
This presentation outlines the role of legal counsel in the acquisition process, pre-sale due diligence, important strategic issues in selling your business, as well as tax considerations related to the sale of a business.
Citation preview
1
Eye of the Tiger: Preparing to Sell Your Business
2
Role of Legal Counsel in the Acquisition Process
Presenter: Andy Hladyshevsky, Q.C.
3
Role of Legal Counsel in the Acquisition Process
•
Introduction
•
Pre‐Value Phase
•
Consultation during Valuation Phase
•
Strategic Planning of the Deal
•
Due Diligence Process
•
Negotiations
•
Getting the Deal Done
4
Introduction
•
Basic Business Premise of a Vendor
– This is the biggest, most important sale a Vendor will make in their
lifetime
– The role of the lawyer is to assist in value maximization and look for the
“legal landmines”
that destroy value and thereby jeopardize the “Deal”
5
Introduction
•
Basic Business Premise of Buyer
– Obtaining legal ownership of a Business and is seeking to acquire
further growth, earnings and enhancements to profit by paying a fair
price for the Business
– The role of the Buyer’s lawyer is to assist in the verification of any
“alleged”
value and to uncover “legal black holes”
that will reduce the
price or potentially abort the “Deal”
6
Pre‐Value Phase
•
Legal Factors That Hurt Value in Vendor Business
– Failure to properly analyze the major stakeholders in such a
transaction
– Is there value in the Vendor or more importantly in the Vendor’s
management?
7
Pre‐Value Phase
•
Failure to properly protect intellectual property
– Copyright issues– Trademark issues– Patent issues– Trade secrets– Industrial design issues– Impact of IP on international business opportunities
8
Pre‐Value Phase
•
Failure to address important liabilities
– Litigation, litigation, litigation– Environmental liabilities– Tax liability– Employee liability
9
Consultation During Valuation Phase
•
Failure to address all relevant customer and supplier issues
•
Failure to address unions, landlords and other third parties
directly affected
•
Failure to properly address the role that is played by the
Secured Parties to the Company – Banks, Finance Institutions,
others
•
Failure to properly address all government implications –
Regulatory Regimes for commercial transactions,
environmental consequences, labour
relations consequences,
tax consequences
10
Consultation During Valuation Phase
•
Restrictive covenants and confidentiality agreements
•
Audits and investigations
•
Foreign practices and business ethics
•
Product and service warranties
•
Guarantees and indemnities
11
Strategic Planning Phase
•
Failure to deal with those most directly affected by the
transaction– Shareholders– Proper succession plan– Proper functioning Shareholder Agreement– Failure to properly address short term and long term key employee
issues
12
Strategic Planning Phase
•
Failure to address key contacts
– Key customer and supplier contracts– Distribution agreements– Franchise and licence
agreements– Implied partnerships– Joint venture agreements
13
Pre‐Sale Due DiligencePresenter: Sarat Maharaj
CA, LL.B.
14
What is Due Diligence?
•
Investigations into business, legal and financial affairs
– Reviewing contracts, financial statements, etc.
•
To help ensure the intended results
– Are you selling the assets you intend to sell?•
Scope, depth and purpose is transaction specific
15
Due Diligence Questions to be Answered
•
What is being acquired and in what condition
•
What are the risks involved in the acquisition (risk allocation)
– Are there any legal claims against the business?
•
Are there synergies available in this acquisition
– Can the purchaser combine the new business with its existing
business?
•
What is the value of the business
– The inherent value? The value to a buyer because of synergies
involved?
16
Who Performs Due Diligence
•
Teams –
employees of the purchaser and outside professionals
– I.e. accountants, industry experts and lawyers•
“Presale Due Diligence”
involves seller and its outside
professionals
17
Due Diligence Implications to the Seller
•
General disruption to the business
– It can be an intense and time consuming process
•
Resource allocation
– Which employees will be involved? When are lawyers, accountants,
etc. needed?
•
Disclosure of important information
– Pricing, shipping, market share, personnel, suppliers, customers, etc.
18
Due Diligence Implications to the Seller
•
Reduction in “value”
due to inadequate
documentation/agreements– Failure to document key relationships– Failure to include key provisions in agreements
•
Employment agreement does not contain non‐compete provisions
– Agreement does not properly describe the nature of the relationship•
Customized computer software might not be owned by the target
company
19
Due Diligence Strategies for the Seller – “Presale Due Diligence”
•
Consider overall process in advance
– What documents and arrangements need to be disclosed– How will they be assembled, collected and disclosed– Who will manage the disclosure
•
Develop a system to collect, index and retain documents
– Where is that major customer agreement kept?– Where are the share certificates that are being purchased located?
20
Due Diligence Strategies for the Seller – “Presale Due Diligence”
•
Correct issues/defects with current agreements and
arrangements– Are key contracts or relationships with suppliers, customers, etc.
documented?
– Do agreements need to be revised –
changes to services, supplies,
etc.?
– Do agreements need additional terms –
confidentiality, non‐compete,
etc.?
21
“Sample Diligence Checklist”
•
Corporate Records
•
Shareholder Information
•
Financing Documents
•
Financial Information
•
Agreements
•
Operations
•
Employees
•
Litigation
22
Important Strategic Issues in Selling Your Business
Presenter: Gord Yakemchuk, Q.C.
23
Important Strategic Issues in Selling Your Business
•
Unanimous Shareholder Agreement
•
Relevance of Will and Enduring Power of Attorney
•
Freezes
•
Family Trusts
24
Unanimous Shareholder Agreement
•
Right of First Refusal
– Arm’s length offer from a party other than a shareholder– Shareholder offer to other shareholders– Common provisions:
•
All shares of a shareholder must be sold
•
Time period to elect to purchase
•
Payment of purchase price in cash
•
Condition of sale binding new party to a Unanimous Shareholder
Agreement
•
Effect of failure to complete sale
25
Unanimous Shareholders Agreement
•
Piggyback Rights
– Applies to corporations with a dominant shareholder– Gives minority shareholders the right to be included in sale of shares of
dominant shareholder
•
Drag‐along Rights
– Dominant Shareholder can require in the sale of its share that the
minority shareholder to sell its shares to another party
26
Unanimous Shareholders Agreement
•
Triggering Events that occur or exist prior or at the time of sale
– A shareholder or his legal personal representative can be compelled to
sell its shares to other shareholders in the event of:•
Bankruptcy and insolvency
•
Claim against shares of a shareholder pursuant to action under the
Matrimonial Property Act
•
Claim against shares of a shareholder pursuant to action under the
Dependant Relief Act
•
Incapacity
•
Death
27
Relevance of Will and Enduring Power of Attorney
•
Will – in event of death prior to or at time of sale
– Problems if no Will– Enables an Executor to accept, negotiate and finalize transaction
•
Enduring Power of Attorney – in event of incapacity prior to or
at time of sale– Problem if no Enduring Power of Attorney– Enables an Attorney to accept, negotiate and finalize transaction
28
Estate Freeze
•
It is a process that fixes the value of a shareholder’s shares at
their present value and allows future growth to accrue in
shares held by others to reduce tax payable on death of the
shareholder
•
Simple Freeze
– Shareholder exchanges existing common shares for fixed value
preferred shares and children subscribe for common shares at nominal
value
•
Use of a corporation in a freeze
– Shareholder transfers existing common shares for fixed value
preferred shares of new holding company and new shareholders
subscribe for common shares of a new holding corporation
29
Estate Freeze
•
Advantages
– Children can acquire shares for nominal investment– Defer tax– Allows income splitting– Shareholder of Preferred Shares retains voting control– Shareholder of Preferred Shares can retain right to appoint directors– Shareholder of Preferred Shares receives timely dividends– Multiplying the capital gains deduction
30
Estate Freeze
•
Use of a family trust in a freeze
– A trust is a relationship where certain individuals hold certain
property
in trust for the benefit of other persons
– Trust subscribes for the Common Shares– Discretionary Trust has the advantages of allowing trustees to
differentiate between distributions to beneficiaries
– Allows assets to be creditor‐proofed– Trustee retains control of shares, may be important if minor children
involved
31
Planning to Minimize Tax on the Sale of your Business
Presenter: Mark Woltersdorf CA, LL.B.
32
Outline
•
Sale of assets, shares or a hybrid of both?
•
Removing redundant assets from a corporation
•
Planning to utilize the capital gain deduction
•
Spring cleaning – the need to simplify your corporate structure
33
Sale of Assets, Shares or a Hybrid of Both?
•
This important decision incorporates tax and non‐tax
considerations
•
A final decision does not need to be made immediately but the
planning must start well in advance so that various options
remain available
•
As noted earlier ‐
there are many non‐tax issues to consider as
part of the planning process (existing legal agreements,
financial institutions, consents, customer contracts, regulatory
approval, licenses etc.)
34
Sale of Assets, Shares or a Hybrid of Both?
OPCO
A
Sale of assets
Sale of shares
35
Sale of Shares
•
Sale of shares may allow an individual shareholder (or
shareholders) to claim the lifetime capital gain deduction
•
Sale of shares is often the easiest from a vendor’s perspective
as the entire business is transferred to the new owners –
assets, debts, operations etc.
•
Tax calculations are straightforward as only a single asset is
sold (i.e. shares of a corporation)
36
Sale of Assets
•
Sale of assets may permit shareholders to access “friendly”
tax
pools to minimize income taxes payable (e.g. tax‐free capital
dividend accounts, general rate income pools, refundable
income taxes, losses carried forward)
•
A sale of assets requires debts of the corporation to be paid
from net proceeds – as such the purchase price is often
greater than the purchase price for shares
•
Due diligence ‐
preparing an “inventory”
of tax attributes can
be time consuming and tedious (which is another way to
describe “expensive”)
37
Hybrid Transaction
•
A “hybrid”
transactions involves the sale of some shares and
all of the “target”
assets
•
This permits the vendor to claim the capital gain deduction
and the purchaser can select which assets to acquire
•
Some risk as the Canada Revenue Agency challenged this
transaction previously (Geransky
v. MNR)
•
Although the CRA lost – they may try again if the fact situation
is different
38
The Hybrid Transaction
OPCO
A Purchaser
OPCO assets
39
The Hybrid Transaction
OPCO
A Purchaser
Purchases enough shares from vendor so
the capital gain deduction can be
claimedOPCO assets
40
The Hybrid Transaction
OPCO
APurchaser
Shares purchased by Purchaser are
repurchased by OPCO –
consideration consists of some of the assets of OPCO
OPCO assets
OPCO assets
41
The Hybrid Transaction
OPCO
A Purchaser
OPCO assets
OPCO assets
42
The Hybrid Transaction
OPCO
A Purchaser
Remaining assets are purchased by
Purchaser
OPCO assets
OPCO assets
OPCO assets
43
The Hybrid Transaction
OPCO
A Purchaser
OPCO assetsOPCO assets
44
Removing Assets Prior to a Sale
•
Where shares are to be sold – often the Vendor desires to
remove certain assets before the sale (e.g. real property used
in the business, investment accounts, the lake cottage used for
“management meetings”)
•
Often real property is retained by the Vendor to reduce the
purchase price or to provide a source of retirement income
•
Implementing this kind of reorganization within two years of a
share sale is risky ‐
the Canada Revenue Agency may
characterize the transaction as part of a series of transactions
that includes the sale – and may deny the tax‐deferred result
45
Removing Assets Prior to a Sale
OPCO
A
Redundant assetsBusiness assets
46
Removing Assets Prior to a Sale
OPCO
A
Redundant assetsBusiness assets
HOLDCOIncorporate a new corporation (or
utilize an existing corporation)
47
Removing Assets Prior to a Sale
A
Redundant assets
HOLDCORedundant assets are sold on a tax-
deferred basis utilizing rollover tax
elections
OPCO
Business assets
48
Removing Assets Prior to a Sale
OPCO
A
Business assets
HOLDCO
Redundant assets
49
Removing Assets Prior to a Sale
OPCO
Business assets
Purchaser
A
HOLDCO
Redundant assets
50
Planning to Utilize the Capital Gain Deduction
•
The Capital Gain Deduction (CGD) is a deduction that an
individual may claim in calculating taxable income
•
Can only be claimed where the individual has realized a
taxable capital gain from the sale of shares of a “qualified
small business corporation”
or the sale of “qualified farm”
or
“qualified fishing”
property
•
Lifetime maximum of $375,000 per individual
($750,000 capital gain = $375,000 taxable capital gain)
51
Planning to Utilize the Capital Gain Deduction
•
The individual and the corporation must meet threshold
requirements to qualify
•
Individual must be resident in Canada, has not used the
lifetime maximum of $375,000 to date, does not have a
“cumulative net investment loss”
(CNIL) and has not claimed
an “allowable business investment loss”
(ABIL)
•
Where CNIL balances exist ‐
advanced planning can reduce or
eliminate
52
Planning to Utilize the Capital Gain Deduction
•
Corporations must meet three criteria as follows:
– in the 24 months prior to a sale more than 50% of the fair
market value of assets must have been used in an active
business carried on primarily in Canada
– At the date of sale 90% or more of the fair market value of
assets must have been used in an active business carried
on primarily in Canada
– Shares must be held by an individual or a related individual
in the 24 months prior to a sale
53
Planning to Utilize the Capital Gain Deduction
•
Only individuals can claim the CGD – as such – consider
implementing a corporate reorganization so that redundant
assets can be paid to a corporation tax‐free but the value of
the shares of OPCO continues to accrue to the individual
shareholders
54
Example of Tax‐Effective Structure
OPCO
A
HOLDCO
1 Class B common
share
10,000 Class A common shares
Business assets Redundant assets
55
Example of Tax‐Effective Structure
OPCO
A
HOLDCO
Redundant assets transferred
annually by tax- free inter-corporate
dividend
10,000 Class A common shares –
eligible for the capital gain
deduction due to transfer of
redundant assets to Holdco
Business assets
Redundant assets
56
Planning to Utilize the Capital Gain Deduction
•
To multiply the number of capital gain deductions available a
corporation may implement a “freeze”
and issue growth
shares to family members or key employees
•
The use of a family trust can accommodate multiple capital
gain deductions while leaving control of voting shares in the
primary shareholder’s hands
57
Multiple capital gain deductions
A
OPCO
Mrs. A Child Family Trust
58
Spring Cleaning
•
Corporate structures tend to evolve over time and can become
complex, administratively cumbersome and inefficient as
corporations out‐live their purpose or cease to be active
•
Corporate structure should simplified where possible by
amalgamation, dissolution or sale
•
This can reduce legal and accounting fees and may significantly
reduce due diligence and other transaction costs if
implemented far enough in advance
•
Must be careful not to lose valuable tax pools however (losses,
CDA accounts, RDTOH etc.)
59
Spring Cleaning ‐
Before
INVESTMENT CO
A
HOLDCO
US CO
INACTIVE CO
OPCO
EMPLOYEE CO
PAYROLL CO
60
Spring Cleaning ‐
After
A
HOLDCO
OPCO US CO
61
Concluding Remarks: 10 Actions Items to Take Away
•
Use legal audit to ask the tough questions of management now
•
Identify and examine problems before others point them out
•
Develop mechanism to “fix”
obstacles and use existing legal
mechanisms to enhance value
•
Extend key contracts
62
Concluding Remarks: 10 Actions Items to Take Away
•
“Stay”
Agreements
•
Solidify intellectual property
•
Enhance management and directors
•
Settle lawsuits
•
Deal with environmental audits
•
Complete appraisals
Questions?
Thanks for joining usAndy Hladyshevsky
780.423.7273 andrew.hladyshevsky@fmc‐law.comSarat Maharaj
780.423.7176 sarat.maharaj@fmc‐law.comGord Yakemchuk
780.423.7149 gord.yakemchuk@fmc‐law.comMark Woltersdorf
780.423.7250 mark.woltersdorf@fmc‐law.com
The preceding presentation contains examples of the kinds of issues companies looking to sell their business could face.If you are faced with one of these issues, please retain professional assistance as each situation is unique.
