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THE ANNOTATED SHARE PURCHASE AGREEMENT
©2003 A. Paul Mahaffy, Frank Herbert and Paul D. Wickens. All rights reserved. THIS AGREEMENT made as of the . day of ., 20., BETWEEN:
Annotation: Like many share purchase agreements, this Agreement does not include the Corporation as a Party. It assumes that the Vendor is able, and in Section 4.1 requires the Vendor, to cause the Corporation to perform certain covenants during the Interim Period. There may be times, however, when the Corporation should be made a Party in order to evidence its consent not only to the share transfers, but also to any covenants and other agreements it may make with either the Vendor or the Purchaser to facilitate the Transactions, especially if the Vendor doesn't control the Corporation. If the Transactions fail to close, the Purchaser may then have recourse against both the Vendor and the Corporation. Including the Shareholder of the Vendor as a Party is a matter of negotiation and depends to a large extent upon whether the Purchaser insists that the Shareholder be jointly and severally liable with the Vendor for some or all of the representations, covenants and indemnities contained in the Agreement. A person may be bound by only a few, selected provisions of the Agreement, such as the confidentiality or exclusivity provisions, or have its liability restricted to only a few representations. Another person may guarantee only certain financial obligations. However restricted the role any person may play in the Transactions, such person should be made a Party to the Agreement to ensure its cooperation in getting the Transactions closed. It's preferable, especially when the Interim Period is expected to be lengthy, that each of the parties to the other documents required for Closing sign the Agreement as a Party wherever possible. This helps not only to determine early on the identity of any other party who might be substituted for an original Party at the last minute before Closing, but also increases the likelihood that the other parties will produce the required documents bearing their respective signatures on Closing. Some substitute parties may not be known when the Agreement is executed. It is not unusual for a Purchaser to insist on a right to assign its interest in the Agreement to a substitute party in order to achieve the most tax-effective structure, and the tax planning may take considerable time to complete. The substitute may be an existing member of the Purchaser's corporate group, or a special purpose entity to be incorporated by the Purchaser for the purposes of the acquisition. It is also not unusual for a Vendor to incorporate a new company to hold only the assets and liabilities desired by the Purchaser and then proceed to sell the shares of such new company to the Purchaser after the assets and liabilities have been transferred and assumed. Either way, the original Party should continue to be directly liable on, or at least guarantee, the covenants and indemnities contained in the Agreement notwithstanding the Agreement's subsequent assignment to, and assumption by, a substitute party. RECITALS: A. The Vendor is the registered and beneficial owner of . issued and outstanding . shares and . issued and outstanding . shares in the capital of the Corporation. B. The Purchaser wishes to purchase, and the Vendor wishes to sell, . issued and outstanding . shares and . issued and outstanding . shares in the capital of the Corporation on the terms and conditions herein contained. C. The Shareholder controls the Vendor. NOW THEREFORE in consideration of the mutual covenants and agreements herein contained, it is agreed between the Parties as follows:
ARTICLE 1 1.1 Definitions In this Agreement and in the schedules hereto, the following terms and expressions will have the following meanings: (a) "Agreement" means this share purchase agreement and all instruments amending it; "hereof", "hereto" and "hereunder" and similar expressions mean and refer to this Agreement and not to any particular Article, Section, or other subdivision; "Article", "Section" or other subdivisions of this Agreement followed by a number means and refers to the specified Article, Section or other subdivision of this Agreement; (b) "assessment" shall include a reassessment or additional assessment and the term "assessed" shall be interpreted in the same manner; (c) "Audited Financial Statements" means the audited consolidated financial statements of the Corporation as at and for the fiscal year ended ., consisting of a balance sheet, an income statement, a statement of changes in financial position and a statement of retained earnings together with the notes thereto and the opinion of the Corporation's auditors thereon, a copy of which is attached hereto as Schedule 3.1(16); Annotation: The financial statements included in this definition are those referred to in the General Regulation made under the Business Corporations Act (Ontario) as the annual financial statements to be delivered to shareholders under clause 154(1)(a) of that Act. However, the Purchaser may be prepared to base its purchase decision on information acquired through other sources and decide it doesn't need to review a full set of audited annual financial statements for the Corporation's most recent fiscal year before signing the Agreement, especially if it is the Corporation's normal practice to forego an annual audit. While the Purchaser may agree to rely upon only unaudited annual financial statements before signing, it may be less inclined to accept unaudited Closing Date Financial Statements which are used to facilitate the determination of any post-Closing adjustments made pursuant to Section 2.4. This Agreement provides that both the Corporation's latest annual financial statements and the Closing Date Financial Statements are to be audited. "Audited Statements Date" means the date of the balance sheet included in the Audited Financial Statements; (d) "Business" means the business carried on by the Corporation and the Subsidiaries which primarily involves . and all operations related thereto; (e) "Business Day" means any day other than a Saturday, a Sunday or a statutory holiday in the Province of Ontario or any other day on which the principal chartered banks located in the City of . are not open for business during normal banking hours; (f) "Claim" has the meaning ascribed thereto in Section 7.3; (g) "Closing" means the completion of the Transactions pursuant to this Agreement at the Closing Time; (h) "Closing Date" means . or such other date as the Parties may agree upon; (i) "Closing Date Financial Statements" means the balance sheet of the Corporation as at the Closing Time and the income statement for the . month period then ended to be prepared in accordance with Section 2.4; Annotation: Instead of choosing the Closing Date as the date of the final financial statements upon which the various adjustments to the Purchase Price will be determined in accordance with the provisions of section 2.4, the Parties and their accountants may prefer to use an effective date which is more convenient or tax effective. They may choose a date which falls at the end of the Corporation's standard billing cycle or coincides with its regular inventory count, or a date by which beneficial ownership must be transferred for tax purposes. If such a date is chosen, a definition of "Effective Date" should be added to the Agreement, and the "Closing Date Financial Statements" should be renamed "Effective Date Financial Statements". If the Effective Date will precede the Closing Date by a considerable period of time, the Purchaser may wish to impose upon the Vendor during this period the kinds of controls imposed during the Interim Period. This period will become the Interim Period if the Effective Date and the date of the Agreement are the same date, as is often the case. (j) "Closing Time" means . in the City of . on the Closing Date or such other time on the Closing Date as the Parties may agree upon as the time at which the Closing shall take place; (k) "Closing Time Year" means the taxation year of the Corporation or a Subsidiary ending at the Closing Time; (l) "Consent" means a license, permit, approval, consent, certificate, registration or authorization (including, without limitation, those made or issued by a Regulatory Authority, in respect of a Contract, or otherwise); (m) "Contract" means any agreement, understanding, indenture, contract, lease, deed of trust, license, option, instrument or other commitment, whether written of oral; (n) "Corporation" means .; (o) "Deposit" has the meaning ascribed thereto in Section 2.3; (p) "Employee Plans" has the meaning ascribed thereto in Section 3.1(39)(a); (q) "Encumbrances" means mortgages, charges, pledges, security interests, liens, encumbrances, actions, claims, demands and equities of any nature whatsoever or howsoever arising and any rights or privileges capable of becoming any of the foregoing; (r) "Environmental Consents" has the meaning ascribed thereto in Section 3.1(38)(a)(ii); (s) "Environmental Laws" has the meaning ascribed thereto in Section 3.1(38)(a)(i); (t) "GAAP" means the generally accepted accounting principles so described and promulgated by the Canadian Institute of Chartered Accountants which are applicable as at the date on which any calculation made hereunder is to be effective or as at the date of any financial statements referred to herein, as the case may be; (u) "Hazardous Substance" has the meaning ascribed thereto in Section 3.1(38)(a)(iii); (v) "Indemnified Party" has the meaning ascribed thereto in Section 7.3; (w) "Indemnifying Party" has the meaning ascribed thereto in Section 7.3; (x) "Intellectual Property" has the meaning ascribed thereto in Section 3.1(41); (y) "Interim Financial Statements" means the unaudited consolidated financial statements of the Corporation as at and for the . month period ended . consisting of a balance sheet and an income statement, a copy of which is attached hereto as Schedule 3.1(16); Annotation: Depending on the length of time which has elapsed since the date of the Corporation's most recent audited annual financial statements, the Purchaser may insist on at least being given an unaudited interim balance sheet and income statement for such period before signing the Agreement. As the Purchaser may be particularly concerned about the accounts receivable, this Agreement provides a representation in Section 3.1(29) for accounts receivable which specifically refers to the amounts recorded on the Interim Financial Statements. (z) "Interim Period" means the period from and including the date of this Agreement to and including the Closing Date; (aa) "ITA" means the Income Tax Act (Canada); (bb) "Law" or "Laws" means all requirements imposed by statutes, regulations, rules, ordinances, by-laws, decrees, codes, policies, judgments, orders, rulings, decisions, approvals, notices, permits, guidelines or directives of any Regulatory Authority; (cc) "Leased Premises" means the premises leased or subleased by the Corporation or any Subsidiary under the Leases; (dd) "Leases" means the leases, subleases, agreements to lease and tenancy agreements under which the Corporation or any Subsidiary leases or subleases any real property as lessee or sublessee, as listed in Schedule 3.1(37)(c); (ee) "Lessee" has the meaning ascribed thereto in Section 3.1(37)(c); (ff) "Net Worth" of the Corporation as determined from any balance sheet means the amount by which the aggregate value of all of the assets of the Corporation as shown on such balance sheet exceeds the aggregate value of all of the liabilities relating to the Corporation as shown on such balance sheet; Annotation: As discussed in greater detail in the annotation below for Section 2.4, the Parties may decide to refer to changes in something other than the Corporation's "net worth" when determining the adjustments. They may prefer to use changes in the Corporation's "working capital" (often defined to be the Corporation's current assets minus current liabilities) or "shareholders' equity" (often defined to be the Corporation's stated capital, retained earnings or accumulated deficit, and contributed surplus) as indicated on the Closing Date Financial Statements when compared with such items on the Audited Financial Statements. Or they may prefer to use changes in the Corporation's "EBITDA" (often defined to be the Corporation's earnings before interest, taxes, depreciation and amortization) for the period between the Audited Statements Date and the Closing Date when compared with a prescribed threshold. If one of these alternatives is chosen, then the applicable definition should be inserted in place of the definition of "Net Worth". (gg) "Parties" means the Vendor, the Purchaser, the Shareholder and any other person that may become a party to this Agreement; (hh) "Permitted Encumbrances" means:
(i) liens for Taxes, assessments and governmental
charges due and being contested in good faith
and diligently by appropriate proceedings (and for
the payment of which adequate provision has
been made); (ii) "person" includes any individual, corporation, partnership, firm, joint venture, syndicate, association, trust, government, governmental agency and any other form of entity or organization; (jj) "Purchase Price" has the meaning ascribed thereto in Section 2.2; (kk) "Purchased Shares" means . issued and outstanding [class] shares in the capital of the Corporation being sold by the Vendor and purchased by the Purchaser hereunder; (ll) "Real Properties" means the real properties owned by the Corporation and the Subsidiaries, which are described in Schedule 3.1(37)(a); (mm) "Records" means all technical, business and financial records relating to the Business, including customer lists, operating data, files, financial books, correspondence, credit information, research materials, contract documents, title documents, leases, surveys, records of past sales, supplier lists, employee documents, inventory data, accounts receivable data, financial statements and any other similar records in any form whatsoever (including written, printed, electronic or computer printout form); (nn) "Regulatory Authority" means any government, regulatory or administrative authority, agency, commission, utility or board (federal, provincial, municipal or local, domestic or foreign) having jurisdiction in the relevant circumstances and any person acting under the authority of any of the foregoing and any judicial, administrative or arbitral court, authority, tribunal or commission having jurisdiction in the relevant circumstances; (oo) "Release" has the meaning ascribed thereto in Section 3.1(38)(a)(iv); (pp) "Rule" means Ontario Securities Commission Rule 45-501; (qq) "Securities Act" means the Securities Act (Ontario); (rr) "Subsidiaries" means .; (ss) "Tax" and "Taxes" have the meaning ascribed thereto in Section 3.1(36)(a)(i); (tt) "Tax Return" has the meaning ascribed thereto in Section 3.1(36)(a)(ii); and (uu) "Transactions" means the purchase and sale of the Purchased Shares and all other transactions contemplated by this Agreement. 1.2 Best Knowledge Any reference herein to "the best knowledge" of the Vendor and/or the Shareholder will be deemed to mean the actual knowledge of the . of the Vendor and/or the Shareholder, together with the knowledge which they would have had if they had conducted a diligent inquiry into the relevant subject matter. Annotation: As stated in more detail in the introductory annotation to Article 3, this Agreement does not include "best knowledge" qualifications to any of the representations set out. However, if the Parties agree that some of the representations should be qualified by the phrase "to the best knowledge of the Vendor and the Shareholder" or the phrase "to the best knowledge of the Purchaser", this definition should then be inserted. While there may be little debate amongst the Parties that the best of their knowledge should include their actual knowledge, there may be considerable debate over whether a Party should be under a duty to diligently inquire into the matters involved. The Shareholder or any of the other Parties may strongly object to this standard of diligence being imposed upon them in connection with any representation they are expected to give if they are not actively involved in the Business and if such standard would require them to make inquiries which would be prohibitively time consuming and expensive in what may be a relatively short period allowed before the Closing. This definition provides for the insertion of specific officer titles, such as the president or the chief financial officer, or the names of specific individuals, whose knowledge will be deemed to be the knowledge of the corporate Party involved. 1.3 Currency Unless otherwise indicated, all references to dollar amounts in this Agreement are expressed in Canadian currency. 1.4 Governing Law This Agreement shall be governed by and construed and interpreted in accordance with the laws of the Province of Ontario and the laws of Canada applicable therein. The Parties hereby irrevocably attorn to the non-exclusive jurisdiction of the courts of Ontario with respect to any matter arising under or related to this Agreement. Annotation: Although Ontario law is selected as governing this Agreement, this Section is often debated. Far from being an innocuous boilerplate provision, the law chosen to govern the Transactions can have substantial cost significance to the Party whose own local law is not chosen. Although the law chosen is often the law of the place where the Business is primarily conducted, a Purchaser located in a foreign jurisdiction may want to use documents (and the law firm) it has used in previous deals in its own home jurisdiction and with which it is already comfortable. In addition to the Parties having to customize the Purchaser's form to reflect the specific laws applicable to various parts of the Business, the Vendor will be faced with the cost of retaining counsel in the Purchaser's home jurisdiction to assist with document reviews and rendering of a legal opinion regarding the enforceability of the documents under the laws of the Purchaser's home jurisdiction. The choice of forum provision gives rise to the same cost issues, especially if the Purchaser's forum is chosen as the exclusive (which may be of questionable enforceability) or non-exclusive jurisdiction to handle disputes arising in connection with the Agreement. If any of the Parties is or will be located outside of the chosen jurisdiction, it may be preferable to appoint an agent for service on behalf of such Party. 1.5 Interpretation Not Affected by Headings The division of this Agreement into articles and sections and the insertion of headings are for convenience of reference only and shall not affect the construction or interpretation of this Agreement. 1.6 Number and Gender In this Agreement, unless the context otherwise requires, any reference to gender shall include both genders and words importing the singular number shall include the plural and vice-versa. 1.7 Time of Essence Time shall be of the essence of every provision of this Agreement. 1.8 Severability Each of the provisions contained in this Agreement is distinct and severable and a declaration of invalidity or unenforceability of any such provision or part thereof by a court of competent jurisdiction shall not affect the validity or enforceability of any other provision hereof. 1.9 Accounting Terms All accounting terms not specifically defined in this Agreement shall be construed in accordance with GAAP. Annotation: The Parties may generally agree that all accounting terms used in the Agreement and all financial statements for the Corporation, including the Closing Date Financial Statements, should be interpreted or prepared in accordance with GAAP. However, they may decide that certain deviations from or exceptions to GAAP may be appropriate for the Transactions. They may set out in a separate schedule to the Agreement certain assets and liabilities, or certain revenues and expenses, which deserve special treatment in the preparation of the Closing Date Financial Statements. Consequently, the provisions of Sections 2.4(1) and 3.1(16)(a) in this Agreement will have to be amended to refer to any exceptions. 1.10 Calculation of Time Periods Where a time period is expressed herein to begin or end at, on or with a specified day, or to continue to or until a specified day, the time period includes that day. Where a time period is expressed herein to begin after or to be from a specified day, the time period does not include that day. Where anything is to be done within a time period expressed herein after, from or before a specified day, the time period does not include that day. If the last day of a time period is not a Business Day, the time period shall end on the next Business Day. 1.11 Statutory Instruments Unless otherwise specifically provided in this Agreement, any reference in this Agreement to any Law shall be construed as a reference to such Law as amended or re-enacted from time to time or as a reference to any successor thereto. 1.12 Incorporation of Schedules The following are the schedules attached to and incorporated by reference into this Agreement:
ARTICLE 2 2.1 Purchased Shares On the terms and subject to the fulfilment of the conditions hereof, the Vendor agrees to sell, assign and transfer to the Purchaser, and the Purchaser agrees to purchase from the Vendor at the Closing Time on the Closing Date, all of the Purchased Shares. 2.2 Purchase Price The aggregate purchase price (the "Purchase Price") payable by the Purchaser to the Vendor for the Purchased Shares shall be $., subject to adjustment in accordance with Section 2.4. 2.3 Payment of Purchase Price The Purchase Price shall be paid and satisfied, subject to adjustment in accordance with Section 2.4 and subject to any withholding permitted pursuant to Section 2.5, as follows: (1) Concurrently with the execution of this Agreement, the Purchaser will pay to . in trust, by certified cheque or bank draft or other means of immediately available funds, the sum of $. (the "Deposit") as a deposit. The Deposit will be deposited in an interest bearing account of a Canadian chartered bank or trust company in the City of . in the name of . and will be dealt with in accordance with the following provisions. (a) If the Transactions are completed at the Closing Time, the Deposit plus all interest earned thereon will be released from trust and applied toward satisfaction of the Purchase Price. (b) If the Transactions are not completed for any reason at the Closing Time, other than the failure of the Purchaser to satisfy its obligations set out in Section 4.3, the Deposit plus all interest earned thereon will be released from trust and returned to the Purchaser. (c) If the Transactions are not completed at the Closing Time due to the failure of the Purchaser to satisfy its obligations set out in Section 4.3, then the Deposit plus all interest thereon will be released from trust and forfeited and paid to the Vendor. (2) At the Closing Time, the Purchaser will pay to ., in trust, by certified cheque, bank draft or other means of immediately available funds, the sum of $., to be held on the terms and subject to the conditions of an escrow agreement in the form of the draft agreement attached hereto as Schedule 2.3(2). (3) At the Closing Time, the Purchaser will pay to the Vendor, by certified cheque, bank draft or other means of immediately available funds, $. of the balance of the Purchase Price. (4) The remaining balance of the Purchase Price will be paid in two equal instalments due on . and . respectively, which obligation shall be evidenced by delivery at the Closing Time of promissory notes of the Purchaser in favour of the Vendor in the form set out in Schedule 2.3(4)A, payment of which notes shall be secured by the execution and delivery at the Closing Time of a pledge agreement in respect of the Purchased Shares in the form of the agreement annexed hereto as Schedule 2.3(4)B. Annotation: Whether the Purchase Price is to be paid in one lump sum or in a number of instalments, whether security for the unpaid instalments is to be given, whether the Purchase Price is to be allocated amongst various Vendors if there are multiple Vendors, or whether payment of the instalments is conditional upon a certain level of post-Closing earnings of the Business, all needs to be set out if applicable to the Transactions. This Agreement provides for the payment on signing of a deposit which is to be held in an interest-bearing bank account, usually in the name of the Vendor's lawyer. It also provides for the payment on Closing of one amount to an escrow agent, to be held pursuant to a separate escrow agreement entered into between the Parties and the escrow agent, and for the payment on Closing of another amount to the Vendor. Payment of the balance is then to be made in two later instalments which are secured by a pledge of the Purchased Shares. The funds to be held by the escrow agent are to be held for a specified period of time as security for any undisclosed liabilities and breaches of representations and covenants by the Vendor and/or the Shareholder, or for any downward adjustment of the Purchaser Price repayable by the Vendor. The cost of such escrow is ordinarily shared by the Vendor and Purchaser equally. The requirement for a deposit is often the subject of much debate and is related to Section 8.6 dealing with the responsibility for expenses incurred by the Parties in proceeding to close the Transactions. The process for buying and selling a business generally involves considerable time and professional fees being spent by the Parties during the due diligence and document preparation stages without any assurance that the deal will actually close. While Section 8.6 states that each Party will be responsible for its own fees and expenses, the Parties incur not only out-of-pocket expenses but, more significantly, an "opportunity cost" of pursuing the Transactions instead of using their resources to best carry on the day-to-day Business or to pursue alternative business opportunities which could prove to be even more financially beneficial. Therefore, in negotiating the Agreement if the subject has not already been addressed in an earlier letter of intent, each Party often explores the possibility of recovering its investment from the other Party should that other Party prevent the Transactions from closing. Although there are a number of possible mechanisms to enable a Party to recover its investment from the other, this Agreement provides only for a fixed sum deposit to be provided by the Purchaser to the Vendor, which is either to be applied on Closing to the Purchase Price owing, or to be forfeited by the Purchaser should the Purchaser fail to close. Depending on the respective bargaining power of the Parties, the Purchaser might be required to pay the Vendor's professional fees and other expenses incurred in respect of the Transactions, up to a prescribed amount, in the event the Purchaser fails to close. Alternatively, the Vendor might be required to pay the Purchaser's fees and expenses, again up to a stated maximum amount, should the Vendor fail to close. These obligations of one Party to pay the fees and expenses incurred by the other are sometimes called "break-up fees". The Party entitled to be reimbursed runs the risk of being unable to collect from the other. 2.4 Final Determination of Purchase Price (1) Within 60 days following the Closing Date, the Closing Date Financial Statements prepared in accordance with GAAP applied on a basis consistent with the preparation of the Audited Financial Statements shall be delivered by the Vendor to the Purchaser together with a favourable report thereon by the Vendor's auditors. The Purchaser shall provide access, upon every reasonable request, to the Vendor and its auditors, to all working papers and accounting books and records relating to the Business and the appropriate personnel to verify the accuracy, presentation and other matters relating to the preparation of the Closing Date Financial Statements and the Vendor and the Purchaser shall otherwise fully cooperate with each other in the preparation of the Closing Date Financial Statements. The Vendor and the Purchaser shall each bear the fees and expenses of their respective auditors in preparing or reviewing the Closing Date Financial Statements. (2) The Purchaser shall be entitled to review the preparation of the Closing Date Financial Statements and the Purchaser's auditors shall be entitled to have access to and to receive copies of the working papers for the Closing Date Financial Statements prior to their issue. The Closing Date Financial Statements prepared and delivered as aforesaid shall be final and binding upon the Parties for all purposes hereof, absent manifest error, unless the Purchaser notifies the Vendor in writing that it disputes any amounts shown therein within ten (10) Business Days after receipt by the Purchaser of the Closing Date Financial Statements. (3) In the event that the Purchaser disputes any amount shown in the Closing Date Financial Statements, the Parties will work expeditiously and in good faith in an attempt to resolve such disputes within a further period of twenty (20) Business Days after the date of notification by the Purchaser to the Vendor of such disputes, failing resolution of which such disputes shall be submitted for determination to an independent national firm of chartered accountants mutually agreed to by the Vendor and the Purchaser (and, failing such agreement between the Vendor and the Purchaser within a further period of five (5) Business Days, such independent national firm of chartered accountants shall be selected by two such national firms, one nominated by each of the Vendor and the Purchaser). The determination of such third firm of chartered accountants shall be final and binding upon the Parties and not subject to appeal. The third firm of chartered accountants shall be deemed to be acting as experts and not as arbitrators. The costs and expenses of such third firm of chartered accountants shall be borne equally by the Vendor and the Purchaser. The Vendor and the Purchaser shall each bear their own costs in presenting their cases to such third firm of chartered accountants. (4) Within two (2) Business Days following the ten (10) Business Day period referred to in Section 2.4(2) or the resolution of any dispute in accordance with Section 2.4(3), as the case may be, the Purchaser shall pay to the Vendor by bank draft, certified cheque or other means of immediately available funds, the amount by which the Net Worth, as determined from the balance sheet forming part of the Closing Date Financial Statements, exceeds the Net Worth as determined from the balance sheet forming part of the Interim Financial Statements and the Vendor shall pay to the Purchaser, by certified cheque, bank draft or other means of immediately available funds, the amount of such difference, if negative. Annotation: As mentioned in the annotation dealing with Section 1.1(gg), the amount of the Purchase Price in this Agreement is related to the Corporation's Net Worth, although it might be related instead to the Corporation's working capital, shareholders' equity or other "book value" as determined by reference to the balance sheet prepared as part of the Closing Date Financial Statements. Responsibility for the preparation of the Closing Date Financial Statements is often debated. This Agreement places on the Vendor the obligation and expense of producing them. The Purchaser and its auditors have the right to review what the Vendor and its auditors produce. Sometimes, the Purchaser may insist that its auditors perform the audit, with the costs being included as a downward adjustment to the Purchase Price. Instead of adjustments to the Purchase Price being paid by draft or cheque, they might be satisfied by using a portion of the escrow amount, or by adjusting the amounts of the promissory notes delivered for the remaining instalments. Depending on the chosen performance measure and instead of adjusting the Purchase Price by reference to the balance sheet in the Closing Date Financial Statements, reference may be made to the income statement in the Closing Date Financial Statements by using EBITA, revenue or gross margin. Should the Parties agree to adjust the Purchase Price by reference to the Corporation's income statements for one or more fiscal periods following the Closing Time Year, they are agreeing to what is often called an "earnout". Earnout provisions typically operate over a three to five year period after the Closing, and may provide that the Purchase Price initially agreed upon will be increased, depending upon the future success of the Corporation. They can be structured in a number of different ways. The earnout payment, for example, can be a percentage of the amount by which the earnings of the Business for a year exceed the earnings for a base year, such as the Closing Time Year. Alternatively, it can be designed to recognize only the growth in earnings in excess of a benchmark earnings amount that increases yearly during the earnout period. Finally, it can be based on the cumulative earnings of the Business for the entire earnout period. In contrast to using an earnout which increases the initial Purchase Price set, the Parties may instead use a "reverse earnout" which decreases the initial Purchase Price if the Business fails to achieve certain performance conditions. In these circumstances, the Purchaser ordinarily attempts to defer making full payment of the Purchase Price until the reverse earnout performance conditions have been satisfied. If they are not, the amount of the Purchase Price which remains outstanding is reduced. If the Purchaser has paid the Purchase Price in cash on Closing, the Purchaser would then be entitled to receive an adjusting payment from the Vendor. The Purchaser is much more likely to prefer an earnout over a reverse earnout, since initially paying what the Purchaser considers to be a high price subject to a contingent reduction is less attractive than paying a low price subject to a contingent increase. The Vendor, on the other hand, usually prefers a reverse earnout. 2.5 Withholding Where Vendor is Non-Resident If the Vendor is a non-resident of Canada and fails to deliver to the Purchaser at or before the Closing Time a certificate issued pursuant to Section 116 of the ITA in respect of the sale of the Purchased Shares containing a certificate limit for the Vendor at least equal to the Purchase Price, the Purchaser shall be entitled to withhold from the cash portion of the Purchase Price payable at the Closing Time the amount required to be withheld pursuant to Section 116 of the ITA. Annotation: The withholding obligations under section 116 of the ITA apply when a Vendor who is not a resident of Canada disposes of taxable Canadian property. The definition of taxable Canadian property in section 248(1) of the ITA includes a share of the capital stock of a corporation that is not listed on a prescribed stock exchange. The failure of the Vendor to obtain a section 116 clearance certificate for Closing has certain implications for the Purchaser. In the absence of a section 116 clearance certificate, the Purchaser is liable to pay to the Canada Customs and Revenue Agency under subsections 116(5) and (5.1) of the ITA, on behalf of the Vendor, tax equal to 25 percent (subject to tax treaties) of the Purchaser's cost of the Purchased Shares within 30 days after the month in which the Closing takes place. However, these subsections don't impose liability on the Purchaser if the Purchaser, after making reasonable inquiries, has no reason to believe that the Vendor is not resident in Canada. This due diligence standard is usually satisfied by requiring the Vendor to provide a representation that the Vendor is not a non-resident (and a representation to this effect is given in Section 3.1(36)(i) of this Agreement). If the Vendor is a non-resident, and given the significant tax consequences to the Purchaser, the Purchaser will generally withhold sufficient funds from the Purchase Price to ensure that the Purchaser can remit the requisite amount of withholding to the Canada Customs and Revenue Agency. Even though the Parties may agree upon an earnout or other arrangement for the payment of the Purchase Price in instalments, it may be necessary to provide that the portion of the Purchase Price to be paid at the Closing Time is at least equal to the amount which is required to be withheld and remitted
ARTICLE 3 3.1 Representations and Warranties of the Vendor and the Shareholder The Vendor and the Shareholder hereby jointly and severally make the following representations and warranties to the Purchaser and acknowledge that the Purchaser is relying on such representations and warranties in entering into this Agreement and completing the Transactions: Annotation: The Vendor's representations and warranties are the Vendor's and the Shareholder's description of the Corporation, the Vendor and the Business. The technical distinction between representations and warranties - representations are statements of past or existing facts while warranties are promises that existing or future facts are or will be true - is no longer relevant in modern practice. For simplicity these annotations use the term representations. The Vendor's representations serve several purposes. First, they provide the Purchaser with disclosure about the Corporation and the Business. The representations, and the exceptions to them disclosed in the representations themselves or in schedules to the Agreement, should provide the Purchaser with detailed information about the Corporation and the Business which will be relevant to the Purchaser's willingness to complete the Transactions and the price which it is prepared to pay. Second, they may provide a means of escape from the Transactions if the Agreement provides, as does this Agreement in Section 5.1(1), that the obligation of the Purchaser to complete the Transactions is subject to the condition that the representations are true and accurate at the Closing Time. Third, the effect of a representation is to allocate some or all of the risk in relation to a particular matter or liability between the Vendor and the Purchaser. A Purchaser which discovers a breach of a representation after Closing may have a right to indemnification under Article 7 and to recover damages on a contractual basis. The extent of the Vendor's representations will depend upon the relative bargaining strengths of the Parties. In an auction, where two or more potential Purchasers are competing, the balance of power may shift to the Vendor. If the Vendor is motivated by the desire to sell a money-losing or non-core business, and the Purchaser is aware of that motivation, the Purchaser may have the power to insist on more extensive representations. In some transactions the identity of the Purchaser will affect the scope of the Vendor's representations. If the Purchaser is familiar with the Business - because, for example, it is or was a member of management or is a direct competitor of the Business and is knowledgeable about it, it may be willing to accept fewer or more heavily qualified representations. Representations can be qualified by (i) disclosing exceptions to them; (ii) limiting them to the knowledge of the Vendor; or (iii) limiting them by reference to materiality. The Vendor can qualify a representation by disclosing exceptions to it in schedules to the Agreement or in the text of the representation itself. Where disclosure is in the schedules, the Purchaser must review the schedules carefully before signing. Schedules must be reviewed by appropriate persons. For example, schedules with technical disclosure should be reviewed by the Purchaser's technical expert, schedules with financial disclosure should be reviewed by the Purchaser's financial and accounting experts. From the Purchaser's perspective, the disclosure in schedules should be specific rather than general or vague. The Purchaser will also want the Agreement to expressly provide that the Vendor's representations are not qualified or affected by the Purchaser's due diligence. That is, even if the Purchaser discovers facts in its due diligence that if true would mean that a representation is incorrect, the Vendor will not escape liability, subject of course to the applicable limitation periods. This Agreement includes language in the introductory paragraph of Section 3.3 and in Section 4.2 to so protect the Purchaser. The Vendor may try to negotiate the removal of these provisions on the basis that it would be unfair to withhold from it knowledge of a breach of representation with a view to making a Claim following Closing. This issue is further discussed in the annotations following Section 7.5. As noted in the annotation to Section 1.2, the Vendor may qualify a representation by limiting it to facts of which it is aware. Knowledge qualifications have the effect of limiting the Vendor's risk and shifting to the Purchaser the burden of proving that the Vendor knew of the breach of representation. Generally, the Purchaser should accept knowledge qualifications only in limited circumstances and in respect of certain types of representations. It might accept a knowledge qualification for matters which are, arguably, beyond the knowledge of the Vendor's management, such as threatened litigation (Section 3.1(26)). The Purchaser may properly resist knowledge qualifiers with respect to representations on matters where the Vendor or its counsel or other advisors are in a position to confirm the truth of the representations. Further, the Purchaser may, even where the Vendor can reasonably argue that it does not know or cannot discover the facts, take the position that, as between the Vendor and the Purchaser, the risks relating to unknown matters should be borne by the Vendor. The third way to qualify a representation is to make it subject to a materiality threshold. For example, the representation in Section 3.1(17) (Records) states that the Records "contain full and accurate records of all material matters relating to the Business." Although the Agreement does not do so, the Parties may attempt to provide more certainty by defining materiality by reference to a monetary test. For example, a "material" Contract might be a Contract which provides for the supply in any twelve month period of goods or services having a value of $100,000. While a definition of material with reference to a specific monetary amount is more objective, the Agreement requires careful drafting to ensure that the representation is meaningful. Consider the case where the Business has many small and few large customers. The Business could be in breach of many of its Contracts, but none of them would individually be considered material because none of them has a value greater than $100,000. The representation should therefore, from the Purchaser's point of view, be drafted broadly enough to capture breaches of Contracts which would be, in the aggregate, material to the Business. In some cases the indemnification provisions of a purchase agreement provide that the Purchaser's right to indemnity for breaches of representations will only arise if damages exceed a specified threshold, or "floor", level. See in this regard Section 7.5(2). In other words, until the Vendor's liability for breaches of representations exceeds a specified monetary amount, the Vendor will not be liable to indemnify the Purchaser for these liabilities. Where such a threshold applies to the indemnity, it may be inappropriate to include materiality qualifications in the representations. Materiality qualifications combined with a "floor" for indemnities will permit the maker of the representation to avoid liability for non-material breaches even though such breaches in the aggregate exceed the "floor" amount. For further discussion of this topic, see the annotation to Section 7.5(2). (1) Incorporation and Existence of the Corporation. The Corporation is a corporation incorporated and existing under the laws of .. (2) Incorporation and Existence of the Vendor. The Vendor is a corporation incorporated and existing under the laws of ". (3) Corporate Power. The Corporation and each Subsidiary has the corporate power and authority to own or lease its property and to carry on the Business as now being conducted by it. Annotation: This representation is limited to corporate power and authority, meaning that the applicable corporations have the power and authority under the applicable corporation acts, and their respective articles and by-laws, to carry on the Business. It does not extend to laws generally, which are covered by other representations. (4) Qualification. The Corporation and each Subsidiary is duly qualified, licensed or registered to carry on business and is in good standing in the jurisdictions listed in Schedule 3.1(4). The jurisdictions listed in Schedule 3.1(4) include all jurisdictions in which the nature of the Business or the property owned or leased by the Corporation and the Subsidiaries makes such qualification necessary or where the Corporation or any of its Subsidiaries owns or leases any material properties or assets or conducts any material business. Annotation: This representation elicits important information about where the Business is carried on and may lead to further due diligence by the Purchaser, including corporate, personal property security, litigation and similar searches in those jurisdictions. (5) Subsidiaries. The Corporation does not own nor has it agreed to acquire, directly or indirectly, (i) any of the outstanding shares or securities convertible into shares of any other corporation, or (ii) any participating interest in any person other than the Subsidiaries or as set out in Schedule 3.1(5). Each Subsidiary is a corporation incorporated and subsisting under the laws of its jurisdiction of incorporation. The respective jurisdictions of incorporation, the names of each officer and each director for each Subsidiary, the number of shares in the capital of each such Subsidiary issued, or agreed to be issued, and the class thereof, are set out in Schedule 3.1(5). All such issued shares (and no more) have been duly and validly allotted and issued and are outstanding as fully paid and non-assessable shares in the capital of the respective Subsidiaries and the Corporation is the registered and beneficial owner of all such shares with good and marketable title thereto free and clear of all Encumbrances. Annotation: This representation will give the Purchaser specific information about the corporate structure of the Business. (6) Authorized and Issued Capital. The authorized capital of the Corporation consists of . number of . shares and . number of . shares, of which (i) at the date hereof, " [class] shares and . [class] shares (and no more) have been duly issued and are outstanding as fully paid and non-assessable, and (ii) at the Closing Time, . [class] shares and . [class] shares (and no more) shall have been duly issued and shall be outstanding as fully paid and non-assessable. (7) Options. Except for the Purchaser's right hereunder, no person has any option, warrant, right, call, commitment, conversion right, right of exchange or other agreement or any right or privilege (whether by law, pre-emptive or contractual) capable of becoming an option, warrant, right, call, commitment, conversion right, right of exchange or other agreement for (i) the purchase from the Vendor of any of the Purchased Shares or for the purchase from the Corporation of any shares of the Subsidiaries; (ii) the purchase, subscription, allotment or issuance of any unissued shares or securities of the Corporation or the Subsidiaries; or (iii) other than in the ordinary course of the Business, the purchase or other acquisition from the Corporation or any Subsidiary of any of its undertaking, property or assets. (8) Title to Purchased Shares. The Purchased Shares are owned by the Vendor as the registered and beneficial owner thereof with good and marketable title thereto, free and clear of all Encumbrances. (9) Dividends and Distributions. Since the Audited Statements Date, the Corporation has not, directly or indirectly, declared or paid any dividends or declared or made any other distribution on any of its shares of any class and has not, directly or indirectly, redeemed, purchased or otherwise acquired any of its outstanding shares of any class or agreed to do so. Annotation: This representation assures the Purchaser that the Vendor has not removed cash or other assets from the Corporation via dividend or share redemption since the Audited Statements Date. Further, the requirement in Section 5.1(1) that the representations be true at Closing means that any dividend or share redemption after signing and before Closing will be caught by this representation. (10) Corporate Records. The corporate records of the Corporation and the Subsidiaries are complete and accurate and all corporate proceedings and actions reflected therein have been conducted or taken in compliance with all applicable Laws and with the articles and by-laws of the Corporation and the Subsidiaries, respectively, and without limiting the generality of the foregoing, (i) the minute books contain complete and accurate minutes of all meetings of the directors and shareholders of the Corporation and the Subsidiaries held since their respective dates of incorporation, and all such meetings were duly called and held; (ii) the minute books contain all written resolutions passed by the directors and shareholders of the Corporation and the Subsidiaries and all such resolutions were duly passed; (iii) the share certificate books, registers of shareholders and registers of securities transfers of the Corporation and the Subsidiaries are complete and accurate, and all transfers of securities have been duly completed and approved and any exigible tax payable in connection with the transfer of any securities of the Corporation and the Subsidiaries has been duly paid; and (iv) the registers of directors and officers are complete and accurate and all former and present directors and officers of the Corporation and the Subsidiaries were duly elected or appointed as the case may be. (11) Validity of Agreement. (a) The Vendor has all necessary corporate power to own the Purchased Shares and to enter into and perform its obligations under this Agreement, and each of the Vendor and the Corporation have all necessary corporate power to enter into and perform their respective obligations under any other agreements or instruments to be delivered or given by it pursuant to this Agreement. (b) The Vendor's execution and delivery of, and performance of its obligations under, this Agreement and the consummation of the Transactions have been duly authorized by all necessary corporate action on the part of each of the Vendor and the Corporation, respectively. (c) This Agreement or any other agreements entered into pursuant to this Agreement to which either of the Corporation or the Vendor is a party constitute legal, valid and binding obligations of each of the Corporation or the Vendor, as the case may be, enforceable against each of them in accordance with their respective terms, except as enforcement may be limited by bankruptcy, insolvency and other laws affecting the rights of creditors generally and except that equitable remedies may be granted only in the discretion of a court of competent jurisdiction. (12) No Violation. The execution and delivery of this Agreement by the Vendor, the consummation of the Transactions and the fulfilment by the Vendor of the terms, conditions and provisions hereof will not (with or without the giving of notice or lapse of time, or both): (a) contravene or violate or result in a breach or a default under or give rise to a right of termination, amendment or cancellation or the acceleration of any obligations of the Vendor, the Corporation or any Subsidiary under: (i) any applicable Law; (ii) any judgment, order, writ, injunction or decree of any Regulatory Authority having jurisdiction over the Vendor, the Corporation or any Subsidiary; (iii) the articles, by-laws or any resolutions of the board of directors or shareholders of the Vendor, the Corporation or any Subsidiary; (iv) any Consent held by the Vendor, the Corporation or any Subsidiary or necessary to the ownership of the Purchased Shares or the operation of the Business; or (v) the provisions of any Contract to which the Vendor, the Corporation or any Subsidiary is a party or by which any of them is, or any of their properties or assets are, bound; or (b) result in the creation or imposition of any Encumbrance on any of the Purchased Shares or any of the property or assets of the Corporation or the Subsidiaries. Annotation: This representation provides the Purchaser with assurance that the Transactions will not violate any applicable Law or Contract held by the Business. This representation does not deal with legal, regulatory or contractual matters generally, which are dealt with under other representations. Rather it focuses on the specific violations or defaults which would result from the completion of the Transactions. In this Agreement, "Transactions" is defined to mean not only the purchase and sale of the Purchased Shares, but also "all other transactions contemplated by this Agreement". This representation therefore covers all of the documents to be delivered and all actions to be taken before or after Closing in connection with the Agreement. This representation applies to the Vendor as well as the Corporation and the Subsidiaries and addresses the concern of the Purchaser that a violation of or default under any Laws or Contracts applicable to the Vendor might result in a challenge to the Transactions by a third party. The phrase "with or without the giving of notice or lapse of time, or both" means that the Vendor must disclose certain matters even though they are not yet technically violations or defaults. The defined terms of "Law", "Regulatory Authority", "Consent" and "Contract" used in this Agreement, including this representation, are very broad. "Law" for example, is defined to include not only statutes and regulations but also, among other things, rules, ordinances, by-laws, codes, policies, orders of any Regulatory Authority. The term "Regulatory Authority" includes not only a governmental authority, but includes an administrative authority, agency, commission, utility or board (domestic or foreign). It also includes any federal, administrative or arbitral court. "Consent" includes licenses, permits and approvals (and so on) made or issued by a Regulatory Authority or otherwise. Section 3.1(12)(a)(v) deals with the possible effects of the Transactions on Contracts. This representation covers not only Contracts to which the Vendor, the Corporation or a Subsidiary is party, but Contracts by which any of them or their assets are bound. This would include, for example, a contractual covenant which runs with the Real Properties. Generally, the transfer of shares of a corporation will not contravene a typical non-assignment clause. However, some Contracts contain change of control provisions which would be triggered by such a transfer. This representation covers that circumstance. (13) Shareholders' Agreements. There are no shareholders' agreements, pooling agreements, voting trusts or other similar agreements with respect to the ownership or voting of any of the shares of the Corporation or any Subsidiary. (14) Closely-Held Issuer. The Corporation is a closely-held issuer as that term is defined in the Rule. The aggregate proceeds received by the Corporation and any issuer (as defined in the Securities Act) engaged in common enterprise with the Corporation in connection with trades made in reliance on the exemption contained in Section 2.1 of the Rule do not exceed $3,000,000. No promoter (as defined in the Securities Act) of the Corporation has acted as a promoter of any other issuer that has issued a security in reliance upon such exemption in the twelve months preceding either the date hereof or the Closing Date. No selling or promotional expenses have been paid or incurred in connection with the Transactions except for services performed by a dealer (as defined in the Securities Act) registered under the Securities Act. Annotation: Pursuant to the Securities Act, the sale of previously issued shares (i.e. shares not being issued from treasury) of a corporation from the holdings of a person (or combination of persons), who holds a sufficient number of shares to affect materially the control of the corporation, is a "distribution" and therefore subject to the registration and prospectus requirements of the Securities Act. The purchase and sale of the Purchased Shares contemplated by this Agreement is therefore a "distribution". The Securities Act and Rule provide for a number of exemptions from those requirements. One of those exemptions is contained in Section 2.1 of the Rule, which provides that the registration and prospectus requirements do not apply to a trade in the shares of a "closely-held issuer" provided certain other additional requirements set out in Section 2.1 are met. The Rule defines a "closely-held issuer" to be an issuer whose (i) shares are subject to restrictions on transfer requiring the approval of either the board of directors or shareholders contained in the issuer's constating documents or in an agreement among the issuer and holders of its shares; and (ii) outstanding shares are beneficially owned by not more than 35 persons, exclusive of certain persons, including current and former employees. As noted above, in order for the "closely-held issuer" exemption to be available, certain other additional requirements must be met. This representation therefore includes statements with respect to related issuers, promoters and selling or promotional expenses which will give the Purchaser assurance that these additional requirements have been met. The exemption also requires that the Vendor must have, on reasonable inquiry, no grounds to believe that the Corporation will not be a "closely-held issuer" after giving effect to the trade, and so this Agreement includes a representation by the Purchaser in Section 3.2 (6) that that will be the case. (15) Regulatory and Contractual Consents. There is no requirement to make any filing with, give any notice to or obtain any Consent from any Regulatory Authority as a condition to the lawful consummation of the Transactions, except for: (a) the filings, notifications and Consents described in Schedule 3.1(15); (b) the application of the Competition Act (Canada); (c) the application of the Investment Canada Act (Canada); and (d) [any other legislative or regulatory requirements specific to the Transactions]. There is no requirement under any Contract relating to the Business or to which the Vendor, the Corporation or any Subsidiary is a party or by which any of them are bound to make any filing with, give any notice to, or to obtain the Consent of, any party to such Contract relating to the Transactions except for the filings, notifications or Consents described in Schedule 3.1(15). Annotation: Among other things, this representation refers to the Competition Act and the Investment Canada Act. The Competition Act contains a regime for mergers. The term "merger" includes the acquisition, by purchase of shares, of control over or a significant interest in the business of a competitor, supplier, customer or other person. Where, on application by the Commissioner of Competition, the Competition Tribunal finds that a merger or proposed merger prevents or lessens, or is likely to prevent or lessen, competition substantially, it may order, in the case of a completed merger, the disposal of the shares, or in the case of a proposed merger, the merger not proceed or part of the merger not be proceeded with. The Competition Act allows a party to a proposed merger to apply for a binding advance ruling from the Commissioner of Competition. The Competition Act requires that persons proposing a transaction which exceeds certain thresholds notify the Commissioner of Competition in advance of completion of the transaction. The first threshold is that the parties to the transaction, together with their affiliates, must have assets in Canada or annual gross revenues from sales in, from or into Canada that exceed $400 million. The second threshold (applicable to the acquisition of shares of a corporation carrying on an operating business) is that the value of the assets of the acquired corporation or the annual gross revenues from sales in or from Canada generated from those assets would exceed $50 million, and the acquirer is, in respect of a private corporation, acquiring at least a 35% interest (or if the acquirer held 35% prior to the transaction, a 50% interest). Once the parties give notice, the parties must wait for a period of not less than 14 days and not more than 42 days, before completing the transaction. The Investment Canada Act applies to, among other things, the acquisition of an existing business in Canada by non-Canadians. All transactions by non-Canadians must be reported to Industry Canada. However, only certain transactions will be reviewable. An investment is reviewable if the asset value of the Canadian business being acquired exceeds the following thresholds: (i) if the investor is a non-Canadian and is not a WTO member (i.e. from a country which is a member of the World Trade Organization), any investment over $5 million for a direct acquisition and over $50 million for an indirect acquisition. An indirect acquisition where the asset value is $5 million or more but less than $50 million is also reviewable where the Canadian assets acquired represent more than 50 per cent of the asset value of all businesses acquired in the transaction; (ii) if the investor or vendor (excluding Canadians) is a WTO member any direct investment in excess of $223 million (in 2003) is reviewable. An indirect acquisition is not reviewable unless the value of the assets of the business located in Canada amounts to more than 50% of the asset value of the transaction. However, if the asset value of the Canadian assets represents 50 per cent or more of the asset value of the transaction, the direct acquisition threshold applies. Even for WTO investors, the limits in paragraph (i) apply if the Canadian business: (a) engages in the production of uranium and owns an interest in a producing uranium property in Canada; (b) provides any financial service; (c) provides any transportation services; or (d) is a cultural business. If the acquisition falls below these thresholds, the investor must give notice to Industry Canada prior to the investment or within 30 days of closing. Notwithstanding these limits, any investment which is usually only notifiable and which falls within a specific business category listed in Schedule IV of the Regulations Respecting Investment in Canada may be reviewed in certain circumstances. Categories listed in Schedule IV include the publication, distribution or sale of books, magazines and newspapers and similar activities related to film or video products, music recordings and print music. For reviewable transactions the investor must submit an application to Industry Canada prior to closing. Within 45 days of receipt of the application, the Minister must notify the investor that it is (i) satisfied the investment is likely to be of net benefit to Canada; (ii) unable to complete the review and it requires a further 30 days (or longer if agreed to by the investor) to complete the review; or (iii) not satisfied that the investment is likely to be of net benefit to Canada. There are a number of factors which the Minister may take into account in making a determination, including economic activity, Canadian participation, competition and compatibility with government policies. (16) Financial Statements. The Audited Financial Statements, the Interim Financial Statements and the Closing Date Financial Statements: (a) have been prepared and, in the case of the Closing Date Financial Statements, will be prepared, in accordance with GAAP on a basis consistent with that of prior fiscal periods; (b) are, and in the case of the Closing Date Financial Statements will be, complete and accurate; and (c) present, and in the case of the Closing Date Financial Statements will present, fairly the assets, liabilities (whether accrued, absolute, contingent or otherwise) and financial condition of the Corporation and the Subsidiaries on a consolidated basis as at their respective balance sheet dates, and the consolidated results of operations of the Corporation and the Subsidiaries. Annotation: A representation with respect to financial statements is a key part of the Purchaser's evaluation of the Business. The Closing Date Financial Statements are used to finally determine the Purchase Price pursuant to Section 2.4 of the Agreement. The Vendor may object to the statement in the representation that the financial statements are "complete and accurate" as that goes beyond the assurances provided by accountants. The Vendor may also object that it is inappropriate to make the statement that the Interim Financial Statements and the Closing Date Financial Statements are presented fairly in accordance with GAAP because these statements do not include year-end adjustments or notes and may seek to qualify the representation in this respect. (17) Records. The Records have been duly maintained in accordance with all applicable legal requirements and contain full and accurate records of all material matters relating to the Business. All material financial transactions relating to the Business have been accurately recorded in the Records in accordance with GAAP. No Records are in the possession of, recorded, stored, maintained by, or otherwise dependent on, any other person. (18) No Material Adverse Change. Since the Audited Statements Date, no material adverse change has occurred in any of the assets, business, financial condition, earnings, results of operations or prospects of the Corporation or any Subsidiary nor has any other event, condition, or state of facts occurred or arisen which might have a material adverse effect on the assets, business, financial condition, earnings, results of operations or prospects of the Corporation and the Subsidiaries on a consolidated basis. Annotation: The first part of this representation relates to material adverse changes which have occurred in respect of any of the assets, business, financial condition and so on of the Corporation or any Subsidiary. The Vendor may object that this is overly broad and should be modified to capture matters which are materially adverse to the Business as a whole. This argument would be consistent with the second part of the representation which relates to events or facts which might have a material adverse effect on the assets, business or financial condition of the Corporation and the Subsidiaries on a consolidated basis. (19) Absence of Undisclosed Liabilities. Except to the extent reflected or reserved against in the balance sheet (including the notes thereto) forming part of the Audited Financial Statements or incurred subsequent to the date thereof and disclosed in Schedule 3.1(19) and except normal trade creditors payable in the ordinary course of the Business, the Corporation and the Subsidiaries do not have any outstanding indebtedness or any liabilities (whether accrued, absolute, contingent or otherwise) nor any outstanding commitments or obligations of any kind. (20) Consents. The Corporation and the Subsidiaries have conducted the Business in compliance with, and hold all Consents necessary for the lawful operation of the Business, pursuant to all applicable Laws, all of which Consents are listed on Schedule 3.1(20) and all of which are valid and subsisting and in good standing with no violations in respect thereof as of the date of this Agreement. All such Consents are renewable by their terms or in the ordinary course of the Business without the need for the Corporation or any Subsidiary to comply with any special qualification or procedures or to pay any amounts other than routine filing fees. The Vendor has provided a true and complete copy of each Consent and all amendments thereto to the Purchaser. Annotation: The term "Consents" is defined broadly to include licenses, permits and approvals made or issued by a Regulatory Authority or otherwise. This representation will be particularly important where the Business is subject to extensive regulation. This representation gives the Purchaser comfort that not only are the Consents valid and in good standing, but that they can be routinely renewed. Where Consents are important to the Purchaser, this representation should be supplemented by a thorough due diligence investigation of the Consents, their terms, conditions and expiry dates and the requirements (including fees) for renewal. (21) Compliance with Laws. The Corporation and each of the Subsidiaries has complied, and the Business is now being conducted in compliance, with all Laws applicable to the Business, the Corporation or the Subsidiaries. Annotation: This representation speaks to both present and historical compliance with Laws. The Vendor may wish to amend this representation so that it refers to compliance since a certain date based on the argument that non-compliance prior to that date certain is not relevant. It may also argue, if it has not owned the Business for an extended period, that non-compliance prior to the relevant date is beyond its knowledge. The Parties should consider carefully the potential consequences of making disclosure in the Agreement or schedules of actual or potential violations of Laws as these documents may become available to third parties or Regulatory Authorities. (22) Conduct of Business in Ordinary Course. Since the Audited Statements Date the Business has been carried on in the ordinary course consistent with past practice. The Business is the only business operation carried on by the Corporation or the Subsidiaries, and the property and assets owned or leased by the Corporation and the Subsidiaries are sufficient to carry on the Business. (23) Location of Tangible Personal Property. With the exception of inventory in transit, all the tangible assets of the Corporation and the Subsidiaries are situate at the locations set out in Schedules 3.1(37)(a) and 3.1(37)(c). (24) Condition of Assets. All material tangible personal property used by the Corporation and the Subsidiaries in or in connection with the Business or any part thereof is in good operating condition, repair and proper working order, having regard to the use and age thereof, except only for reasonable wear and tear. (25) Title to Personal and Other Property. The property and assets of the Corporation and the Subsidiaries (other than the Real Properties) are owned by the Corporation or the Subsidiaries, as the case may be, as the beneficial owner thereof with a good and marketable title thereto, free and clear of all Encumbrances other than the Permitted Encumbrances. (26) Litigation. Except as disclosed in Schedule 3.1(26), there are no actions, suits or proceedings, judicial or administrative, (whether or not purportedly on behalf of the Corporation or a Subsidiary) pending or threatened, by or against or affecting the Corporation or any Subsidiary, at law or in equity, or before or by any Regulatory Authority. Except for the matters referred to in Schedule 3.1(26), there are no grounds on which any such action, suit or proceeding might be commenced with any reasonable likelihood of success. Except as disclosed in Schedule 3.1(26), there is not presently outstanding against the Corporation or any Subsidiary any judgment, injunction or other order of any Regulatory Authority. Annotation: The Vendor may request that this representation as it relates to threatened litigation be modified by reference to the Vendor's knowledge. See the general annotations with respect to Section 3.1. The Purchaser should carefully examine with counsel any disclosed litigation to determine, if possible, the likely outcome and potential liability of the Corporation. As part of its due diligence, the Purchaser should also determine whether any potential liability of the Corporation is covered by the Corporation's insurance and, if so, confirm that it will continue to have the benefit of that insurance following Closing. (27) Capital Expenditures. None of the Corporation or the Subsidiaries is committed to make any capital expenditures, nor have any capital expenditures been authorized by the Corporation or the Subsidiaries at any time since the Audited Statements Date, except for capital expenditures made in the ordinary course of the Business which, in the aggregate, do not exceed $.. (28) Inventories. The inventories of the Corporation and the Subsidiaries do not include any material items that are slow moving, below standard quality or of a quality or quantity not useable or saleable in the ordinary course of the Business, the value of which has not been written down on its books of account to net realizable market value. The inventory levels of the Corporation and the Subsidiaries have been maintained at such amounts as are required for the operation of the Business as previously conducted and as proposed to be conducted, and such inventory levels are adequate therefor. (29) Accounts Receivable. The accounts receivable due or accruing to the Corporation or the Subsidiaries reflected in the Interim Financial Statements and all accounts receivable of the Corporation and the Subsidiaries arising since the date of the Interim Financial Statements arose from bona fide transactions in the ordinary course of the Business and are valid, enforceable and fully collectible accounts (subject to a reasonable allowance, consistent with past practice, for doubtful accounts as reflected in the Interim Financial Statements in accordance with GAAP or as previously disclosed in writing to the Purchaser). Such accounts receivable are not subject to any defence, set off or counterclaim. Annotation: This representation includes the assurance that the accounts receivable are collectible, subject to a reasonable allowance consistent with past practice for doubtful accounts. In some circumstances the Purchaser will want this representation to provide that the accounts receivable will be fully collected, subject to a reserve, by a date certain. There are other ways in which the Purchaser can get comfort that it can collect the accounts receivable. The Purchaser could require that the Vendor repurchase from the Corporation any accounts receivable uncollected by a specified date, net of appropriate reserves. This may raise a concern with the Purchaser because the Vendor will then be attempting to collect accounts receivable from the Corporation's customers. Another alternative would be for the Purchaser/ Corporation to covenant to collect the accounts on behalf of the Vendor, which would retain title to them. The problem with this is it involves the additional complications of a sale of assets by the Corporation to the Vendor as part of the Closing. Clearly, the simplest mechanism is for the Purchaser to be able to apply the value of uncollected accounts against any holdback or instalment promissory notes. (30) Material Contracts. The contracts listed in Schedule 3.1(30) constitute all the material Contracts of the Corporation and the Subsidiaries. Without limiting the generality of the foregoing, and except as otherwise set out in Schedules 1.1(ii) and 3.1(30), none of the Corporation or the Subsidiaries is a party to or bound by any: (a) distributor, sales, advertising, agency or manufacturer's representative Contract; (b) collective bargaining agreement or other Contract with any labour union; (c) continuing Contract for the purchase of materials, supplies, equipment or services involving more than $. in respect of any such Contract; (d) employment or consulting Contract or any other Contract with any officer, employee or consultant other than oral Contracts of indefinite hire terminable by the employer without cause on reasonable notice; (e) profit sharing, bonus, stock option, pension, retirement, disability, stock purchase, medical, dental, hospitalization, insurance or similar plan or agreement providing benefits to any current or former director, officer, employee or consultant; (f) trust indenture, mortgage, promissory note, loan agreement, guarantee or other Contract for the borrowing of money, the provision of financial assistance of any kind or a leasing transaction of a type required to be capitalized in accordance with GAAP, or any Contract creating an Encumbrance relating thereto; (g) commitment for charitable contributions; (h) Contract for capital expenditures in excess of $. in the aggregate; (i) Contract for the sale of any assets, other than sales of inventory to customers in the ordinary course of the Business; (j) Contract pursuant to which the Corporation or any Subsidiary is a lessor of any machinery, equipment, motor vehicles, office furniture, fixtures or other personal property material to the Business; (k) confidentiality, secrecy or non-disclosure Contract (whether the Corporation or a Subsidiary is a beneficiary or obligor thereunder) relating to any proprietary or confidential information or any non-competition or similar Contract; (l) license, franchise or other Contract that relates in whole or in part to any Intellectual Property; (m) agreement of guarantee, support, indemnification, assumption or endorsement of, or any other similar commitment with respect to, the obligations, liabilities (whether accrued, absolute, contingent or otherwise) or indebtedness of, or any agreement to provide financial assistance of any kind to, any other person (except for cheques endorsed for collection); (n) Contract that expires, or may expire if the same is not renewed or extended at the option of any person other than the Corporation or a Subsidiary, more than one year after the date of this Agreement; (o) Contract with any officer, director, employee, shareholder or any other person not dealing at arm's length with the Corporation or any Subsidiary (within the meaning of the ITA) except for Contracts of employment; or (p) Contract entered into by the Corporation or any Subsidiary other than in the ordinary course of the Business. The Corporation and the Subsidiaries have performed all of their obligations required to be performed by them and are entitled to all of the benefits under any Contract relating to the Business to which any of them is a party or by which any of them is bound. The Contracts listed in Schedule 3.1(30) are all in full force and effect unamended and no default exists in respect thereof on the part of any of the parties thereto. None of the Corporation or the Subsidiaries is in default or in breach of any Contract to which it is a party and there exists no condition, event or act which, with the giving of notice or lapse of time or both would constitute such a default or breach and all such Contracts are in good standing and in full force and effect unamended and either the Corporation or the applicable Subsidiary is entitled to all benefits thereunder. The Vendor has provided to the Purchaser a true and complete copy of each Contract listed in Schedule 3.1(30) and all amendments thereto. Annotation: In addition to requiring the disclosure of material Contracts, this representation requires the disclosure of specific types of Contracts. Although this may result in some overlap, the listing of specific types of Contracts gives the Purchaser additional comfort that it has been made aware of important commitments of the Business. The term "material" is not defined in the Agreement and therefore may be subject to dispute. Parties wishing more certainty could define materiality by reference to a monetary amount. See the introductory annotation to Section 3.1. The definition of "Contracts" is broad and includes, for example, oral agreements and commitments. (31) Insurance. The Corporation has all of its and the Subsidiaries' property and assets insured against loss or damage by all insurable hazards or risks on a replacement cost basis and such insurance coverage will be continued in full force and effect to and including the Closing Time. Schedule 3.10 sets out all insurance policies (specifying the insurer, the amount of the coverage, the type of insurance, the policy number and any claims thereunder) maintained by the Corporation on its and the Subsidiaries' property and assets or personnel as of the date hereof and true and complete copies of the most recent inspection reports, if any, received from insurance underwriters or others as to the condition of the property and assets of the Corporation and the Subsidiaries. None of the Corporation or the Subsidiaries is in default with respect to any of the provisions contained in any such insurance policy, nor has failed to give any notice or present any claim under any such insurance policy in a timely fashion, and none of the Corporation or the Subsidiaries has received notice from any insurer denying any claim. The Vendor has provided to the Purchaser a true copy of each insurance policy referred to in Schedule 3.10 and all amendments thereto. (32) Bank Accounts and Powers of Attorney. Schedule 3.1(32) is a correct and complete list showing (i) the name of each bank, trust company or similar institution in which the Corporation or a Subsidiary has an account or safe deposit box, the number or designation of each such account and safe deposit box and the names of all persons authorized to draw thereon or to have access thereto; and (ii) the names of any persons holding powers of attorney from the Corporation or a Subsidiary and a summary of the terms thereof. (33) Brokers. None of the Vendor, the Shareholder, the Corporation or the Subsidiaries has engaged any broker or other agent in connection with the Transactions and, accordingly, there is no commission, fee or other remuneration payable to any broker or agent who purports or may purport to act or have acted for the Vendor, the Shareholder, the Corporation or the Subsidiaries. (34) Competition Act. The Vendor and its affiliates have assets in Canada with an aggregate value of $., and annual gross revenues from sales in, from or into Canada with an aggregate value of $., as determined in accordance with the Competition Act (Canada). The Corporation and the Subsidiaries have assets in Canada with an aggregate value of $.. Annotation: See the annotation with respect to Section 3.1(15) for a discussion of the requirements of the Competition Act. This representation will assist the Parties to determine whether the pre-notification thresholds have been met. Because the threshold set out in Section 109 of the Competition Act relates to the aggregate assets and revenues of the Parties and their affiliates, both the Purchaser and the Vendor make representations in this Agreement with respect to those matters as they relate to their respective corporate group. The Purchaser's representation is set out in Section 3.2(4). (35) Customers and Suppliers. Schedule 3.1(35) sets out the major customers and suppliers of the Corporation (being those customers and suppliers of the Corporation and the Subsidiaries each accounting for more than .% of sales of or to the Corporation and the Subsidiaries on a consolidated basis, for the period . to .) and there has been no termination or cancellation of, and no modification or change in, the Corporation's or any Subsidiary's business relationship with any major customer, supplier or group of major customers or suppliers since .. The benefits of all relationships with the major customers or suppliers of the Corporation or the Subsidiaries will continue after the Closing Date in substantially the same manner as prior to the date of this Agreement. Annotation: The importance of this representation will depend on whether the Business has key customers or suppliers. This representation will not be relevant to a Purchaser if the Business has no large customers and it has immediately available alternative sources of supply. The Vendor may resist making the statement in the last sentence of this representation on the basis that it cannot look into the future, especially with respect to matters involving third parties. A compromise might be to qualify this representation by reference to the Vendor's and the Corporation's knowledge. See the introductory annotation to Section 3.1. (36) Tax Matters. (a) For purposes of this Section 3.1(36), the following definitions shall apply: (i) "Tax" and "Taxes" shall mean any or all Canadian federal, provincial, local or foreign (i.e. non-Canadian) income, gross receipts, real property gains, goods and services, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental, customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, or other taxes, levies, governmental charges or assessments of any kind whatsoever, including, without limitation, any estimated tax payments, interest, penalties or other additions thereto, whether or not disputed. (ii) "Tax Return" shall mean any return, declaration, report, estimate, information return or statement, or claim for refund relating to, or required to be filed in connection with any Taxes, including information returns or reports with respect to withholding at source or payments to third parties, and any schedules or attachments thereto or amendments of any of the foregoing. (b) The Corporation and each Subsidiary have filed on a timely basis all Tax Returns required to be filed. All such Tax Returns are complete and accurate in all respects. All Taxes due from or payable by the Corporation and each Subsidiary for periods (or portions thereof) ending on or prior to the date hereof and the Closing Date, as applicable, have been paid or will be provided for in the Closing Date Financial Statements. All instalments or other payments on account of Taxes that relate to periods for which Tax Returns are not yet due have been paid on a timely basis. None of the Corporation or the Subsidiaries is currently the beneficiary of any extension of time within which to file any Tax Return. Schedule 3.1(36) contains a complete and accurate summary of all Canadian federal or provincial income tax assessments that have been issued to the Corporation and each Subsidiary covering all past periods up to and including the fiscal years ended on or before the Closing Date that remain open for reassessment. All amounts disclosed on Schedule 3.1(36) have been paid or settled in full. Schedule 3.1(36) contains a complete and accurate summary of all fiscal periods that remain open for assessment of additional Taxes. Assessments for all other applicable Canadian federal or provincial Taxes of the Corporation and each Subsidiary that are levied by way of assessment have been issued and any amounts owing thereunder have been paid, and only the time periods described in Schedule 3.1(36) remain open for reassessment of additional Taxes. There are no actions, objections, appeals, suits or other proceedings or claims in progress, pending or threatened by or against the Corporation or any Subsidiary in respect of any Taxes, and in particular there are no currently outstanding assessments or written enquiries which have been issued or raised by any Regulatory Authority relating to any such Taxes. No claim has ever been made by a Regulatory Authority of any jurisdiction where the Corporation or any Subsidiary does not file Tax Returns that the Corporation or such Subsidiary, as the case may be, is or may be subject to taxation by that jurisdiction. There are no Encumbrances pending on or with respect to any of the assets of the Corporation or any Subsidiary that arose in connection with any failure (or alleged failure) to pay any Tax. (c) The Corporation and each Subsidiary have withheld, collected and paid to the proper Regulatory Authorities all Taxes required to have been withheld, collected and paid in connection with (i) amounts paid, credited or owing to any employee, independent or dependent contractor, creditor, shareholder, non-resident of Canada or other third party, and (ii) goods and services received from or provided to any person. (d) No steps are being taken by any Regulatory Authority to assess any additional Taxes against the Corporation or any Subsidiary for any period for which Tax Returns have been filed and there are no actual or pending investigations of the Corporation or any Subsidiary relating to Taxes. The Purchaser has been provided with correct and complete copies of all Tax Returns of the Corporation and each Subsidiary, together with any notices of assessment, examination reports or statements of deficiencies assessed against or agreed to by any of the Corporation or any Subsidiary, for all taxable periods for which the statute of limitations has not yet closed and any correspondence relating thereto. (e) None of the Corporation or the Subsidiaries has waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to an assessment or deficiency. (f) At the Closing Time, the unpaid Taxes of the Corporation and each Subsidiary attributable to all periods (or portions thereof) ending on or prior to the Closing Date will not exceed the reserve for Tax liability set forth in the Closing Date Financial Statements. (g) None of the Corporation or the Subsidiaries (i) is a party to any Tax allocation or sharing agreement, (ii) has been a member of an affiliated, combined or unitary group filing a combined, unitary, or other return for Canadian federal, provincial, local or foreign (i.e. non-Canadian) Tax purposes reflecting the income, assets, or activities of affiliated companies, or (iii) has any liability for the Taxes of any person or entity other than the Corporation or the Subsidiaries under any provision of Canadian federal, provincial, state, local or foreign (i.e. non-Canadian) law, or as a transferee or successor, or by Contract, or otherwise. (h) None of the Corporation or the Subsidiaries is a party to any joint venture, partnership or other arrangement or Contract that could be treated as a partnership for Tax purposes. (i) The Vendor is not a non-resident person within the meaning of the ITA. (j) The Tax basis of the assets of the Corporation and the Subsidiaries by category, including the classification of such assets as being depreciable or amortizable as reflected in their respective Tax Returns and related work papers, is true and correct. (k) There are no circumstances existing at or prior to the Closing Date which could, in themselves, result in the application of any of Sections 80 to 80.03 of the ITA or any equivalent provincial provisions to the Corporation or any Subsidiary; none of the Corporation or the Subsidiaries has made (and none will, at or prior to the Closing Time, make) any election pursuant to Section 80.04 of the ITA or any equivalent provincial provision in which it is an eligible transferee; none of the Corporation or the Subsidiaries has filed, or will file in respect of its Closing Time Year an agreement pursuant to Section 191.3 of the ITA or any equivalent provincial provision; and none of the Corporation or the Subsidiaries has claimed and none will in their returns for the Closing Time Year claim any reserve under any of Sections 40(1)(a)(iii) or 20(1)(n) of the ITA or any equivalent provincial provision of any amount that could be included in its income for any period ending after the Closing Date in respect of any such reserve. Annotation: Consideration will need to be given to whether it is appropriate to have representations as to the tax consequences of any reorganization or other transactions happening prior to or concurrently with Closing. With respect to the representation as to the Vendor's residency status, other provisions are necessary to deal with the need to obtain section 116 certificates pursuant to the ITA in the case of a non-resident Vendor. See Section 2.5 of the Agreement. From the Purchaser's perspective, these representations should be reviewed by all other persons, such as accountants, conducting tax due diligence for the Purchaser, to ascertain whether any clarification or adaptation is appropriate. (37) Real Properties and Leased Premises. (a) Schedule 3.1(37) (a) attached hereto lists all Real Properties owned in whole or in part by the Corporation or any Subsidiary and sets forth the legal descriptions thereof. There are no Contracts to sell, transfer or otherwise dispose of any of the Real Properties, or to purchase or acquire any real properties other than the Real Properties, or which would restrict the ability of the Corporation or any Subsidiary, as applicable, to transfer any of the Real Properties. (b) The Corporation or a Subsidiary is the absolute beneficial owner of, and has good and marketable title in fee simple to each of the Real Properties, free and clear of any and all Encumbrances, except for the Permitted Encumbrances. Complete and correct copies of all documents creating those Permitted Encumbrances which affect the Real Properties have been provided to the Purchaser. Except as otherwise disclosed in Schedule 3.1(37)(b), none of the Real Properties is leased or licenced, in whole or in part, to any other person. (c) Schedule 3.1(37)(c) describes all Leases under which the Corporation or any Subsidiary leases or subleases any real property as lessee or sublessee (hereinafter in this Section 3.1(37) referred to as the "Lessee"). Other than the Leases, none of the Corporation or the Subsidiaries is a party to or is bound, as Lessee, by any lease, sublease, license or other instrument relating to real property. Complete and correct copies of the Leases have been provided to the Purchaser. The Leases are in full force and effect, unamended. The Lessee under each Lease is exclusively entitled to all rights and benefits as Lessee under such Lease, and no Lessee has sublet, assigned, licensed or otherwise conveyed any rights in any of the Leased Premises or in any of the Leases to any other person. (d) All rental and other payments and other obligations required to be paid and performed by the Lessee pursuant to each of the Leases have been duly paid and performed. The Lessee is not in default of any of its obligations under any of the Leases and none of the landlords or other parties to the Leases are in default of any of their obligations under any of the Leases. No waiver, indulgence or postponement of the Lessee's obligations under any of the Leases has been granted by the landlord thereunder. There exists no event of default under any Lease or event, occurrence, condition or act which, with the giving of notice, the lapse of time or the happening of any other event or condition, would become a default under the Lease. None of the terms and conditions of any of the Leases will be affected by, nor will any of the Leases be in default as a result of, the completion of the Transactions, and all Consents of landlords or other parties to the Leases required in order to complete the Transactions have been obtained, or will have been obtained by the Closing Time, and are, or once obtained will be, in full force and effect. (e) The use by the Corporation or any Subsidiary, as applicable, of each of the Real Properties and Leased Premises is not in breach of any Laws, including any building, zoning or other statutes or any official plan, or any covenants, restrictions, rights or easements, affecting such Real Property or Leased Premises. All buildings, structures and improvements situated on any of the Real Properties, and those situated on any of the Leased Premises, are located wholly within the boundaries of such Real Property or Leased Premises, as applicable, and comply with all Laws, covenants, restrictions, rights and easements affecting the same. There are no outstanding work orders, non-compliance orders, deficiency notices or other such notices relative to any of the Real Properties or Leased Premises. No part of any of the Real Properties or Leased Premises has been condemned, taken or expropriated by any Regulatory Authority, nor has any notice or proceeding in respect thereof been given, commenced or threatened. Each of the Real Properties and Leased Premises is fully serviced by utilities having adequate capacities for the normal operations of the Business. Each of the Real Properties and Leased Premises has adequate rights of access to and from public streets or highways for the normal operations of the Business thereon and there is no fact or circumstance which could result in the termination or restriction of such access. There is no defect or condition affecting any of the Real Properties or Leased Premises (or the soil or subsoil thereof) or any adjoining property which would impair the current use of such Real Property or Leased Premises. (f) No amounts including, without limitation, municipal property Taxes, local improvement Taxes, levies or assessments, are owing by the Corporation or any Subsidiary in respect of any of the Real Properties or the Leased Premises to any Regulatory Authority or public utility, other than current accounts which are not in arrears. There are no outstanding appeals on assessments which have been issued or raised by any Regulatory Authority or by the Corporation or any Subsidiary concerning any realty, business or other Taxes with respect to any of the Real Properties or Leased Premises. All amounts for labour or materials supplied to or on behalf of the Corporation or any Subsidiary relating to the construction, alteration or repair of or on any of the Real Properties or Leased Premises have been paid in full and no one has filed or has a right to file any construction, builders', mechanics' or similar liens in respect thereof. (g) The buildings and structures comprising the Real Properties and the Leased Premises are free of any structural defect. The heating, ventilating, plumbing, drainage, electrical and air conditioning systems and all other systems used in any of the Real Properties or the Leased Premises are in good working order, fully operational and free of any defect, except for normal wear and tear. Annotation: This representation in Section 3.1(37)(b) that the Corporation or a Subsidiary is the absolute beneficial owner of each of the Real Properties forces the Vendor to fully disclose, as an exception to this representation, any ownership structure in which a bare nominee holds registered title for an otherwise undisclosed beneficial owner. If the Vendor makes a disclosure of this nature, the Purchaser should ensure that it obtains and reviews any trust declaration or trust agreement between the bare nominee and the beneficial owner. The provisions of such a trust declaration or agreement may be relevant to the Purchaser's consideration of whether all necessary Consents to the Transactions have been obtained. In addition, the Purchaser may wish to ensure that representations and indemnities which survive Closing are obtained from any beneficial owner as well as from such beneficial owner's nominee. The Vendor will seek to include in many of the representations contained in Section 3.1(37) the qualification that they are made to the best of the Vendor's knowledge. In particular, where the representation is made with respect to both Real Properties and Leased Premises, the Vendor may take the position that it is not reasonable to expect a tenant occupying only a portion of a building to have complete knowledge about such things as whether the building complies with zoning setbacks or whether there are any structural defects in the building. However, where the Vendor is a long-term tenant of all or substantially all of a building, it may be reasonable to require it to make the same unqualified representations as the building's owner would be expected to make. It may be useful for the Purchaser and the Vendor to agree to separately identify those buildings with substantial leases as "Major Leased Premises". The Vendor may then agree to provide unqualified representations with respect to Major Leased Premises if the Purchaser agrees to accept qualified representations with respect to all other Leased Premises. (38) Environmental Matters. (a) For the purposes of this Agreement, the following terms and expressions shall have the following meanings: (i) "Environmental Laws" means all Laws applicable to the environment, occupational health and safety, product safety, product liability and public safety. (ii) "Environmental Consents" includes all Consents issued by or issuable by any Regulatory Authority under Environmental Laws. (iii) "Hazardous Substance" means, any material or substance that may impair the quality of the environment or which under Environmental Laws is deemed to be "hazardous", a "pollutant", "toxic", "deleterious", caustic", "dangerous", a "waste", a "hazardous material", a "source of contamination" or analogous substance including, without limitation, petroleum and petroleum products, asbestos, polychlorinated biphenyls, and flammable and radioactive materials. (iv) "Release" means any release, spill, leak, emission, discharge, leach, dumping, migration, pumping, pouring, emitting, emptying, injecting, spraying, burying, abandoning, incinerating, seeping, escape, disposal or similar or analogous act as defined in any Environmental Laws. (b) Except as disclosed in Schedule 3.1(38), the Corporation and the Subsidiaries, the operation of the Business and the assets owned or used by the Corporation and the Subsidiaries have been and are in compliance with all Environmental Laws, including all Environmental Consents. (c) Except as disclosed in Schedule 3.1(38): (i) the Corporation and the Subsidiaries have not been charged with or convicted of any offence for non-compliance with Environmental Laws, or been fined or otherwise sentenced or settled any prosecution short of conviction; and (ii) there are no notices of judgment or commencement of proceedings of any nature and the Corporation and the Subsidiaries have never been investigated relating to any breach or alleged breach of Environmental Laws. (d) The Corporation and the Subsidiaries have obtained all Environmental Consents necessary to conduct the Business and to own, use and operate their respective properties and assets. All such Environmental Consents are listed in Schedule 3.1(38) and complete and correct copies thereof have been provided to the Purchaser. (e) Except as disclosed in Schedule 3.1(38), there are no Hazardous Substances located on or in or under the surface of any Real Properties or Leased Premises of the Corporation or any Subsidiary, and no Release of any Hazardous Substances has occurred on, in or from any Real Properties or Leased Premises or has resulted from the operation of the Business and the conduct of activities thereon. (f) Except as disclosed in Schedule 3.1(38), none of the Corporation or the Subsidiaries has used any of its Real Properties or Leased Premises to produce, generate, manufacture, treat, store, handle, transport or dispose of any Hazardous Substances except in compliance with Environmental Laws. (g) Except as disclosed in Schedule 3.1(38), there are no underground or above-ground storage tanks or associated piping or appurtenances (active or abandoned), or urea formaldehyde foam insulation, asbestos, polychlorinated biphenyls or radioactive substances located on or in or under the surface of any of the Real Properties or Leased Premises or other assets used thereon. (h) Except as disclosed in Schedule 3.1(38), none of the Corporation or any Subsidiary is, and there is no basis upon which the Corporation or any Subsidiary could become, responsible for any clean-up or corrective action under any Environmental Laws. The Corporation has provided the Purchaser with copies of any environmental audits, site assessments and studies (including all drafts thereof) concerning any of the Real Properties and Leased Premises, or that are in any way related to the Business, that it has ever conducted or that are in its possession or control. Annotation: The defined term "Environmental Laws" includes Laws related to areas other than strictly environmental matters, and includes, for example, health and safety laws. This representation confirms compliance with all of those Laws. The statement in Section 3.1 (38)(h) with respect to responsibility for any clean-up or corrective action captures the Vendor's and Corporation's and any Subsidiary's potential liability with respect to properties or businesses they no longer own or operate and to liabilities which they may have under agreement or by operation of law. The Vendor may wish to qualify this representation by reference to its knowledge. The Purchaser may resist this on the basis that as between it and the Vendor, the risk of such liability should be borne by the Vendor. In cases of industrial or commercial properties or businesses giving rise to specific environmental concerns, independent environmental due diligence investigations may be advisable to supplement this representation. (39) Labour and Employee Matters. (a) Schedule 3.1(39) identifies each retirement, pension, bonus, stock purchase, profit sharing, stock option, deferred compensation, severance or termination pay, insurance, medical, hospital, dental, vision care, drug, sick leave, disability, salary continuation, legal benefits, unemployment benefits, vacation, incentive or other compensation plan or arrangement or other employee benefit plan that is maintained or otherwise contributed to, or required to be contributed to, by the Corporation or the Subsidiaries for the benefit of employees or former employees of the Corporation or the Subsidiaries (the "Employee Plans") and a true and complete copy of each Employee Plan has been furnished to the Purchaser. Each Employee Plan has been maintained in compliance with its terms and with the requirements prescribed by any and all Laws that are applicable to such Employee Plan. The Vendor has delivered to the Purchaser the actuarial valuations, if any, prepared for each Employee Plan during the past . years. Except as described in Schedule 3.1(39): (i) all contributions to and payments from each Employee Plan that may have been required to be made in accordance with the terms of any such Employee Plan, or with the recommendation of the actuary for such Employee Plan, and, where applicable, with the Laws that govern such Employee Plan, have been made in a timely manner; (ii) all material reports, returns and similar documents (including applications for approval of contributions) with respect to any Employee Plan required to be filed with any Regulatory Authority or distributed to any Employee Plan participant have been duly filed on a timely basis or distributed; (iii) there are no pending investigations by any Regulatory Authority involving or relating to an Employee Plan, threatened or pending claims (except for claims for benefits payable in the normal operation of the Employee Plans), suits or proceedings against the Corporation or any Subsidiary in respect of any Employee Plan or assertions of any rights or claims to benefits under any Employee Plan that could give rise to a liability nor are there any facts that could give rise to any liability in the event of such investigation, claim, suit or proceeding; (iv) no notice has been received by the Corporation or any Subsidiary of any complaints or other proceedings of any kind involving the Corporation or any Subsidiary or any of the employees of the Corporation or any Subsidiary before any pension board or committee relating to any Employee Plan or to the Corporation or any Subsidiary; and (v) the assets of each Employee Plan are at least equal to the liabilities of such Employee Plans based on the actuarial assumptions utilized in the most recent valuation performed by the actuary for such Employee Plan, and neither the Purchaser nor any of its associates or affiliates (other than the Corporation) will incur any liability with respect to any Employee Plan as a result of the Transactions. (b) Except as described in Schedule 3.1(39), none of the Corporation or any Subsidiaries has made any Contract with any labour union or employee association nor made commitments to or conducted negotiations with any labour union or employee association with respect to any future agreements and, except as set out in Schedule 3.1(39), there are no current attempts to organize or establish any labour union or employee association with respect to any employees of the Corporation or any Subsidiary, nor is there any certification of any such union with regard to a bargaining unit. There are no grievances against the Corporation or any Subsidiary for which the Corporation or any Subsidiary has received written notice under any collective agreement. (c) Schedule 3.1(39) contains a complete and accurate list of the names of all individuals who are employees of the Corporation or any Subsidiary specifying: (i) with respect to the unionized employees, the rate of hourly pay, whether or not such employee is absent for any reason such as lay-off, leave of absence or workers' compensation; and (ii) with respect to salaried employees, the length of service, age, title, rate of salary and commission or bonus structure for each such employee. No notice has been received by the Corporation or any Subsidiary of any complaint filed by any of the employees against the Corporation or any Subsidiary claiming that the Corporation or any Subsidiary has violated any Laws applicable to employee or human rights, or of any complaints or proceedings of any kind involving the Corporation or any Subsidiary or any of the employees of the Corporation or any Subsidiary before any labour relations board, except as disclosed in Schedule 3.1(39). All levies, assessments and penalties made against the Corporation or any Subsidiary pursuant to any Laws applicable to workers' compensation have been paid by the Corporation or any Subsidiary and neither the Corporation nor any Subsidiary has been assessed under any such legislation during the past . years. (d) All accruals for unpaid vacation pay, premiums for employment insurance, health premiums, Canada Pension Plan premiums, accrued wages, salaries and commissions and employee benefit plan payments have been reflected in the Records. (40) Product Warranties. Attached hereto as Schedule 3.1(40) is a complete and accurate list of all express, written warranties given to purchasers of products supplied by the Corporation or any Subsidiary. (41) Intellectual Property. Attached hereto as Schedule 3.1(41) is a complete and accurate list of all (a) domestic and foreign patents, trade-marks, trade names, copyrights, industrial designs, business names, certification marks, service marks, distinguishing guises, business styles and other industrial or intellectual property, whether or not registered, that are owned by or licensed to the Corporation or any of the Subsidiaries, and all applications in respect thereof; (b) all trade secrets, know-how, inventions, formulas, processes and technology pertaining to the Business; and (c) all computer systems and application software, including all documentation relating thereto and the latest revisions of all related object and source codes therefor, owned or used by the Corporation or any Subsidiary, (collectively the "Intellectual Property"), including particulars of any registration thereof, details of all applications for registration in respect thereof and, where unregistered, the date of first use thereof. Either the Corporation or a Subsidiary is the sole owner of the Intellectual Property except in the case of Intellectual Property licensed to the Corporation or a Subsidiary. Complete and correct copies of all Contracts whereby any rights in respect of Intellectual Property have been granted or licensed to the Corporation or any Subsidiary have been provided to the Purchaser. Except as disclosed in Schedule 3.1(41), the Corporation or a Subsidiary has the exclusive right to use all of the Intellectual Property and has not granted any licence or other rights to any other person in respect of the Intellectual Property. The Intellectual Property is free and clear of any Encumbrances other than the Permitted Encumbrances. The Intellectual Property comprises all patents, trade-marks, trade names, copyrights, industrial designs, business names, certification numbers, inventions, know-how, service marks, formulae, processes, technology, trade-secrets, computer systems and application software and other industrial or intellectual property necessary to conduct the Business. None of the Corporation or the Subsidiaries has used or enforced, or failed to use or enforce, any of the Intellectual Property in any manner which could limit its validity or result in its invalidity. Except as disclosed in Schedule 3.1(41), there has been no infringement or violation of the Corporation's or any Subsidiary's rights in and to the Intellectual Property or any trade secrets or confidential information, nor any claim of adverse ownership, invalidity or other opposition to or conflict with any of the Intellectual Property. None of the Corporation or the Subsidiaries is or has engaged in any activity that violates or infringes any intellectual property rights of any other person. (42) Privacy Matters.The Corporation and the Subsidiaries have conducted and are conducting the Business in compliance with all Laws applicable to privacy and the protection of personal information. Annotation: Laws with respect to privacy and the protection of personal information are wide in scope, in transition and may be difficult to comply with in all respects.. The Vendor and its counsel must therefore consider carefully whether this representation should be qualified, or given at all. 3.2 Representations and Warranties of the Purchaser The Purchaser hereby makes the following representations and warranties to the Vendor and acknowledges that the Vendor is relying on such representations and warranties in entering into this Agreement and completing the Transactions: Annotation: These representations by the Purchaser are much less extensive than those given by the Vendor. To the extent representations are made, they are parallel to those made by the Vendor and Shareholder. The Vendor is concerned primarily with the corporate status, power and authority of the Purchaser and a limited number of other matters. To the extent that a significant part of the Purchase Price is not paid at Closing, the Vendor will legitimately be entitled to further assurances with respect to the Purchaser's financial capability and debt structure. Further, if the Vendor is to receive shares in satisfaction, or partial satisfaction, of the Purchase Price (and will therefore become, in effect, an investor in the Purchaser), it may wish to ask for much more extensive representations which would more closely parallel those given by it to the Purchaser. (1) Incorporation and Existence. The Purchaser is a corporation incorporated and existing under the laws of .. (2) Validity of Agreement. (a) The Purchaser has all necessary corporate power to own the Purchased Shares. The Purchaser has all necessary corporate power to enter into and perform its obligations under this Agreement and any other agreements or instruments to be delivered or given by it pursuant to this Agreement. (b) The execution, delivery and performance by the Purchaser of this Agreement and the consummation of the Transactions have been duly authorized by all necessary corporate action on the part of the Purchaser. (c) This Agreement or any other agreements entered into pursuant to this Agreement to which the Purchaser is a party constitute legal, valid and binding obligations of the Purchaser, enforceable against the Purchaser in accordance with their respective terms, except as enforcement may be limited by bankruptcy, insolvency and other laws affecting the rights of creditors generally and except that equitable remedies may be granted only in the discretion of a court of competent jurisdiction. (3) No Violation. The execution and delivery of this Agreement by the Purchaser, the consummation of the Transactions and the fulfilment by the Purchaser of the terms, conditions and provisions hereof will not (with or without the giving of notice or lapse of time, or both): (a) contravene or violate or result in a breach or a default under or give rise to a right of termination, amendment or cancellation or the acceleration of any obligations of the Purchaser, under: (i) any applicable Law; (ii) any judgment, order, writ, injunction or decree of any Regulatory Authority having jurisdiction over the Purchaser; (iii) the articles, by-laws or any resolutions of the board of directors or shareholders of the Purchaser; (iv) any Consent held by the Purchaser; or (v) the provisions of any Contract to which the Purchaser is a party or by which it is, or any of its properties or assets are, bound. (4) Competition Act. The Purchaser and its affiliates have assets in Canada with an aggregate value of $., and gross revenues from sales in, from and into Canada with an aggregate value of $., as determined in accordance with the Competition Act (Canada). (5) Investment Canada Act. The Purchaser is not a "non-Canadian" within the meaning of the Investment Canada Act (Canada). Annotation: If the Purchaser is a "non-Canadian", the Parties must consider the implications of the Investment Canada Act. See the annotation to Section 3.1 (15). (6) Closely-Held Issuer. The Corporation will be, after giving effect to the Transactions, a closely-held issuer as that term is defined in the Rule. Annotation: As noted in the annotation to Section 3.1(14), a requirement to fit within the "closely-held issuer" exemption in the Rule is that the Vendor have, on reasonable inquiry, no grounds to believe that the Corporation will not be a "closely-held issuer" after giving effect to the Transactions. To come within the definition of "closely-held issuer", the outstanding shares of the Corporation must not be beneficially owned by more than 35 persons, excluding certain persons. Therefore, if the Purchaser is not acquiring all of the issued and outstanding shares of the Corporation pursuant to the Agreement, it will require assurances from other shareholders with respect to beneficial ownership of their shares. (7) Brokers. The Purchaser has not engaged any broker or other agent in connection with the Transactions and, accordingly, there is no commission, fee or other remuneration payable to any broker or agent who purports or may purport to have acted for the Purchaser. (8) Consents. There is no requirement for the Purchaser to make any filing with, give any notice to or obtain any Consent from any Regulatory Authority as a condition to the lawful consummation of the Transactions. 3.3 Survival of Covenants, Representations and Warranties of the Vendor and Shareholder To the extent that they have not been fully performed at or prior to the Closing Time, the covenants, representations and warranties of the Vendor and the Shareholder contained in this Agreement and any agreement, instrument, certificate or other document executed or delivered pursuant to this Agreement shall survive the Closing and shall continue for the benefit of the Purchaser for a period of . years notwithstanding such Closing, nor any investigation made by or on behalf of the Purchaser or any knowledge of the Purchaser, except that: (1) the representations and warranties set out in Sections 3.1(1) to and including 3.1(8), and in Section 3.1(11), and the corresponding representations and warranties set out in the certificates to be delivered pursuant to Section 5.1(1), shall survive the Closing and continue in full force and effect without limitation of time; (2) the representations and warranties set out in Section 3.1(36) and the corresponding representations and warranties set out in the Closing Certificates shall survive the Closing and continue in full force and effect until, but not beyond, the expiration of the period, if any, during which an assessment or other form of recognized document assessing liability for Tax, interest or penalties under Laws applicable to Tax in respect of any taxation year to which such representations and warranties extend could be issued under such Laws to the Corporation or any Subsidiary, including any additional period resulting from the Corporation or such Subsidiary filing a waiver or other document extending such period prior to the Closing; and (3) a claim for breach of any such representation or warranty, to be effective, must be asserted in writing on or prior to the applicable expiration time set out in this Section 3.3, provided that a claim for any breach of any of the representations and warranties contained in this Agreement or in any agreement, instrument, certificate or other document executed or delivered pursuant hereto involving fraud or fraudulent misrepresentations may be made at any time following the Closing Date, subject only to applicable limitation periods imposed by Law. Annotation: Determining survival periods is a matter of risk allocation and will reflect the circumstances of the Transactions, the relative bargaining strength of the Parties and the subject matter of the particular representation or covenant. The Purchaser will prefer to have indefinite recourse to the Vendor and the Shareholder. The Vendor will want certainty with respect to when its liabilities will end. Regardless, the Parties and their counsel need to consider how their agreements on these issues will be affected by Ontario's new Limitations Act which will be in force on January 1, 2004. Sections 4, 15(1) and 22(1) of that Act merit special attention, raising as they do interesting and as of yet unresolved issues concerning the ability of the Parties to vary or exclude by agreement the limitation periods set out in the Act. Section 3.3(1) provides that the representations with respect to fundamental matters, including corporate existence, authority and qualification, share capital, title and enforceability survive indefinitely. Section 3.3(2) provides that the representations with respect to tax matters survive until the expiry of any assessment period. The survival period for the covenants and all representations is addressed in the introductory paragraph to Section 3.3. Typically this period ranges from six months to two years. The Purchaser may take the view that these representations should survive at least until the completion of the Corporation's next audit, which would be fourteen to eighteen months following Closing. 3.4 Survival of Covenants, Representations and Warranties of the Purchaser To the extent that they have not been fully performed at or prior to the Closing Time, the covenants, representations and warranties of the Purchaser contained in this Agreement and in any agreement, instrument, certificate or other document delivered pursuant to this Agreement shall survive the Closing and shall continue for the benefit of the Vendor and the Shareholder for a period of . years notwithstanding such Closing, nor any investigation made by or on behalf of the Vendor or the Shareholder or any knowledge of the Vendor or the Shareholder, except that: (1) the representations and warranties set out in Sections 3.2(1) and 3.2(2), and the corresponding representations and warranties set out in the certificates to be delivered pursuant to Section 5.3(1), shall survive the Closing and shall continue in full force and effect without limitation of time; and (2) a claim for breach of any such representation or warranty, to be effective, must be asserted in writing on or prior to the applicable expiration time set out in this Section 3.4, provided that a claim for any breach of any of the representations and warranties contained in this Agreement or in any agreement, instrument, certificate or other document executed or delivered pursuant hereto involving fraud or fraudulent misrepresentations may be made at any time following the Closing Date, subject only to applicable limitation periods imposed by Law.
ARTICLE 4 Annotation: Article 4 contains covenants by the Parties, but primarily the Vendor, to take or refrain from taking certain actions during the Interim Period and, in the case of Section 4.4 dealing with records retention, after Closing. Compliance by each of the Parties with their covenants is a condition of Closing. The condition may be waived by the Party in whose favour the covenant was made. Alternatively, the non-breaching Party may use the failure to satisfy the condition to terminate the Agreement and not complete the Transactions. Further, subject to Sections 3.3 and 3.4, the failure of a Party to comply with its covenants may give rise to liability to the non-breaching Party pursuant to the indemnification provisions of Article 7. 4.1 Conduct During Interim Period During the Interim Period, without in any way limiting any other obligations of the Vendor and the Shareholder hereunder: (1) Conduct Business in the Ordinary Course. The Vendor shall cause the Corporation to conduct the Business and the operations and affairs of the Corporation and the Subsidiaries only in the ordinary course of the Business consistent with past practice, and the Vendor shall ensure that none of the Corporation or the Subsidiaries shall, without the prior written consent of the Purchaser, enter into any transaction or refrain from doing any action that would constitute a breach of any representation, warranty, covenant or other obligation of the Vendor or the Shareholder contained herein, and provided further that, without limiting the generality of the foregoing, the Vendor shall cause the Corporation to ensure that none of the Corporation or the Subsidiaries: (i) amends its articles, by-laws, constating documents or other organizational documents; (ii) amalgamates, merges or consolidates with, or acquires all or substantially all the shares or assets of any person; (iii) transfers, leases, licenses, sells or otherwise disposes of any of its assets except for inventory, or permits any Encumbrance to attach to or affect any of its assets, other than in the ordinary course of the Business consistent with past practice; or (iv) does any act or thing of the kind described in Sections 3.1(9), 3.1(27), or 3.1(33) or enters into any Contract of the kind described in Sections 3.1(7), 3.1(13), 3.1(30), 3.1(36)(h), 3.1 (37)(a), or 3.1(37)(c). Annotation: Section 4.1(1) gives the Purchaser some assurance that the Vendor will not take any action or refrain from taking any action which would, in effect, adversely affect the value of the Business prior to Closing. The matters referred to in Sections 4.1(1)(i) to (iv) are examples of prohibited actions which the Purchaser may wish to supplement if it has specific concerns about the management of the Business during the Interim Period. (2) Continue Insurance. The Vendor shall cause the Corporation and each Subsidiary to continue to maintain in full force and effect all policies of insurance or renewals thereof now in effect, and shall take out, at the expense of the Purchaser, such additional insurance as may be reasonably requested by the Purchaser, and shall give all notices and present all claims under all policies of insurance in a timely fashion. (3) Regulatory Consents. The Vendor shall use its best efforts to make, give or obtain or cause the Corporation or any relevant Subsidiary to make, give or obtain, as applicable, at or prior to the Closing Time, with, to or from all appropriate Regulatory Authorities, the filings, notifications and Consents described in Schedule 3.1(15). Annotation: The critical point in Sections 4.1(3) and 4.1(4) is that the obligation of the Vendor is qualified, not absolute. It must use its best efforts to obtain the Consents. If it fails to obtain a Consent, the Purchaser may, if the Consent is necessary to the Closing of the Transactions or relates to a material Contract, terminate the Agreement and not complete the Transactions. See Section 5.1 (4) and the annotation thereto. Provided that the Vendor has used its best efforts to obtain the Consents, the Purchaser will have no claim against the Vendor for breach of contract. The term "best efforts" is not easily defined but clearly requires the Vendor to make good faith attempts to obtain the Consents. While it requires the Vendor to use the internal resources it has available, it does not require the Vendor to make a material expenditure of funds. See Section 8.5. If material expenditures or external resources are required, the Purchaser will want to ensure that the covenant specifically requires the Vendor to make those expenditures and obtain those resources. The Vendor will obviously resist any requirement to incur significant and/ or undetermined additional costs. In any case, it is in both Parties' interest that this issue be thoroughly canvassed prior to execution of the Agreement. See Sections 8.5, 8.6 and related annotations for further discussion of these topics. (4) Contractual Consents. The Vendor shall use its best efforts to make, give or obtain or cause the Corporation or any relevant Subsidiary to make, give or obtain, as applicable, at or prior to the Closing Time the filings, notifications and Consents described in Schedule 3.1(15) in respect of Contracts, on such terms as are acceptable to the Purchaser, acting reasonably. (5) Preserve Goodwill. The Vendor shall use its best efforts to preserve intact, and cause the Corporation to preserve intact, the Business and the property, assets, operations and affairs of the Corporation and the Subsidiaries and to carry on the Business and the affairs of the Corporation and the Subsidiaries as currently conducted, and to promote and preserve for the Purchaser the goodwill of suppliers, customers and others having business relations with the Corporation or the Subsidiaries. (6) Discharge Liabilities. The Vendor shall cause the Corporation and each Subsidiary to pay and discharge the liabilities of the Corporation and the Subsidiaries in the ordinary course of the Business in accordance and consistent with the past practice of the Corporation and the Subsidiaries, except those contested in good faith by the Corporation or the Subsidiaries. (7) Corporate Action. The Shareholder and the Vendor shall take and cause the Corporation to take all necessary corporate action, steps and proceedings to approve or authorize, validly and effectively, the execution and delivery of this Agreement and the other agreements and documents contemplated hereby and to complete the transfer of the Purchased Shares to the Purchaser free and clear of all Encumbrances and to cause all necessary meetings of directors and shareholders of the Vendor and the Corporation to be held for such purpose. (8) Exclusive Dealing. Neither the Vendor nor the Shareholder shall take any action, directly or indirectly, to encourage, initiate or engage in discussions or negotiations with, or provide any information to any person, other than the Purchaser, concerning any purchase of any shares in the capital of the Corporation, the material assets of the Corporation or any Subsidiary, a controlling interest in the Vendor or the Corporation or any merger, sale of substantial assets or similar transaction involving the Corporation, any Subsidiary or the Business, and the Vendor shall ensure that the Corporation does not take any such action. Annotation: This "no-shop" provision gives the Purchaser assurance that the Vendor will not attempt to back out of the Agreement in favour of another transaction, which may or may not involve the Purchased Shares. As a matter of contract law, this covenant is unnecessary. The Agreement (without regard to this covenant) requires the Vendor, subject to the terms and conditions of the Agreement, to sell the Purchased Shares to the Purchaser and prohibits the Corporation from selling material assets prior to Closing. If the Vendor fails to comply with its obligations in the Agreement, the Purchaser will have an action for breach of contract. Nonetheless, the Purchaser may obtain additional comfort from such a covenant with the view that it will prevent the Vendor from pursuing an alternative transaction and later finding a pretext for termination of the Agreement. 4.2 Access to Information The Vendor shall at all times during the Interim Period make available to the Purchaser and its representatives and advisers for examination all Records and corporate records of the Corporation and the Subsidiaries in its possession or under its control, including environmental and health and safety reports. The Vendor shall at all times during the Interim Period give the Purchaser and its representatives and advisers access to the premises of the Corporation and the Subsidiaries during normal business hours and upon reasonable notice, in order to make such investigations as the Purchaser shall deem necessary or advisable, including for purposes of conducting any environmental audits, environmental site assessments (including soil and groundwater testing) or other investigations. The Vendor shall give such persons all means necessary to effect such examinations and investigations and shall cause its agents, employees, officers and directors to use their best efforts to aid such persons in such examinations and investigations. The Vendor authorizes and consents to the release by any Regulatory Authority having jurisdiction of any information, and shall sign any documents or forms of consent incidental thereto. The exercise of any rights of access, inspection or examination by or on behalf of the Purchaser shall not effect or mitigate the Vendor's covenants, representations and warranties in this Agreement. The Vendor shall provide the Purchaser and its representatives and advisers at all times during the Interim Period with an opportunity to meet with the auditors and any employees, advisers or personnel of the Corporation or any Subsidiary. Annotation: Section 4.2 gives the Purchaser the right to continue its due diligence up to Closing. The Purchaser's rights are very broad. The Vendor may argue that they are overly so and will disrupt the Vendor's conduct of the Business during the Interim Period. If the Vendor is in a position of strength, the Vendor may try to require the Purchaser's due diligence to terminate on a date certain prior to Closing. This Agreement does not give the Purchaser a due diligence "out". The Purchaser cannot rely on this Section, or any other Section, to terminate the Agreement and decline to close the Transactions if it discovers facts about the Business which make the acquisition less attractive unless those facts would constitute breaches of representations or covenants which are not remedied by the Vendor prior to Closing. Nonetheless, the Vendor will want certainty as early as possible that the Purchaser is not going to find a reason or excuse to walk from the Transactions. See the annotation following Section 5.1(5)(g) for further discussion of the due diligence out. The Vendor will want to consider carefully whether it wishes to allow the Purchaser to contact applicable Regulatory Authorities. Again, this may be disruptive to the Business and, if the Transactions do not for any reason close, may affect relations with those authorities. It may also result in the loss of confidentiality with respect to the Transactions. The same concerns apply to contact by the Purchaser with the employees of the Business. See also Section 8.3 and the related annotation in this regard. The express statement in Section 4.2 that the Purchaser's due diligence will not affect the Vendor's representations and covenants means that if, prior to Closing, the Purchaser discovers a fact which will constitute a breach of a representation or covenant, it can choose to close and then sue the Vendor for damages resulting from the breach. The Purchaser's knowledge of the breach prior to Closing will not insulate the Vendor from liability. Nevertheless, the date on which the Purchaser "discovered" the breach pursuant to the terms of Ontario's new Limitations Act will always be an important issue in these circumstances. A Vendor in a strong bargaining position may require that the Purchaser make disclosure of all breaches or potential breaches as soon as they are discovered in order to give the Vendor an opportunity to cure them and avoid the Purchaser walking from the Transactions or closing and seeking indemnity for damages. See also in this regard Sections 3.3, 3.4, 7.5 and the related annotations. 4.3 Satisfaction of Closing Conditions The Vendor and the Shareholder jointly and severally agree to use their best efforts to ensure that the conditions set forth in Section 5.1, and the Purchaser agrees to use its best efforts to ensure that the conditions set forth in Section 5.3, are fulfilled at or prior to the Closing Time. Each of the Parties agrees use its best efforts to ensure that the conditions set forth in Section 5.5 are fulfilled at or prior to the Closing Time. 4.4 Delivery of Records At the Closing Time, the Vendor shall deliver to the Purchaser all the Records and corporate records of the Corporation and the Subsidiaries. The Purchaser agrees that it will preserve such records so delivered to it for a period of six years from the Closing Date, or for such longer period as is required by any applicable Law, and will permit the Vendor or its authorized representatives reasonable access thereto in connection with the affairs of the Vendor, but the Purchaser shall not be responsible or liable to the Vendor for or as a result of any accidental loss or destruction of or damage to any such records.
ARTICLE 5 Annotation: Sections 5.1 and 5.3 create "walk rights" in favour of the Purchaser and Vendor respectively. In other words, each of the Purchaser and Vendor has the right, which it may waive if it so chooses, to terminate the Agreement and not complete the Transactions if one of the conditions in its favour specified in those Sections is not satisfied. These rights need to be contrasted with Section 5.5 which results in automatic termination of the Agreement if the conditions specified therein are not satisfied. For obvious reasons, the conditions precedent in Section 5.5 are not unilaterally waivable. Understandably, the accuracy of the representations and compliance with the covenants set out in this Agreement constitute important conditions precedent for both the Purchaser and Vendor. Frequently, conditions of closing are used in order to compliment and/or supplement the representations and covenants in the Agreement. 5.1 Conditions for the Benefit of the Purchaser The obligation of the Purchaser to complete the Transactions will be subject to the fulfilment of the following conditions at or prior to the Closing Time: Annotation: Although arguably not strictly necessary, the Purchaser may wish to include a provision in this Section or Section 5.2 explicitly stating its right to sue the Vendor and/or Shareholder for damages if a condition is not satisfied due to the breach of a covenant or representation by the Vendor or Shareholder. This provision would confirm the existence of an additional remedy, which exists at law absent an exclusive remedies provision in the Agreement. On the other hand, the Purchaser may be satisfied with its express indemnity right under Section 7.1(4) (1) Representations, Warranties and Covenants. The representations and warranties of the Vendor and the Shareholder made in or pursuant to this Agreement shall be true and accurate at the Closing Time with the same force and effect as though such representations and warranties had been made as of the Closing Time. The Vendor and the Shareholder shall have complied with all covenants and agreements herein agreed to be performed or caused to be performed by them at or prior to the Closing Time. In addition, the Vendor and the Shareholder shall have delivered to the Purchaser a certificate confirming the foregoing. The receipt of such certificate and the completion of the Transactions shall not be deemed to constitute a waiver of any of the representations, warranties or covenants of the Vendor and the Shareholder contained in this Agreement. Such representations, warranties and covenants shall continue in full force and effect as provided in Section 3.3. (2) No Material Adverse Change. Except as has been specifically permitted in this Agreement, since the date of this Agreement there shall not have been: (a) any material adverse change in any of the assets, business, financial condition, earnings, results of operations or prospects of the Corporation or any of the Subsidiaries that has, or threatens to have, a material adverse effect on the assets, business, financial condition, earnings, results of operations or prospects of the Corporation on a consolidated basis or which might materially adversely affect the ability of the Corporation or any Subsidiary to carry on the Business after the Closing substantially as such Business is being conducted upon the date hereof; or (b) any damage, destruction or loss, or other event, development or condition of any character (whether or not covered by insurance) which would have a material adverse effect on the assets, business, financial condition, earnings, results of operations or prospects of the Corporation on a consolidated basis. Annotation: In Sections 5.1(2) and 5.1(3), the Purchaser may wish to include language stating that any material adverse effect shall in each case be "in the Purchaser's opinion". The Purchaser's objective clearly in inserting this language would be to subjectivize the test and bring it within the Purchaser's discretion. The Vendor will usually resist changes of this type on the basis that the test should be more objective. The relevant bargaining powers of the Parties will determine this issue and frequently the Parties will agree to a compromise position providing that the Purchaser must act reasonably in forming its opinions. (3) No Action to Restrain/No Adverse Law. No Law shall have been made, and no action or proceeding shall be pending or threatened, which is likely to result in an order, decision or ruling imposing any limitations or conditions which may have a material adverse effect on the Transactions, the right of the Purchaser to own the Purchased Shares, or the assets, business, financial condition, earnings, results of operations or prospects of the Corporation on a consolidated basis. Annotation: The Vendor will seek to narrow this "walk right" in several respects. For example, the Vendor may feel that it is inequitable that the Purchaser be entitled to walk away from the Agreement in respect of Laws or proceedings which existed at the time the Purchaser entered into the Agreement. Hence, the Vendor will look to include language limiting the scope of this provision to Laws and proceedings which arise "since the date of this Agreement". Further, the Vendor will have trouble accepting that "threatened litigation" should be a basis for the Purchaser to terminate. Such threatened litigation could be meritless, frivolous or orchestrated by the Purchaser. Likewise, the Vendor will strongly oppose any attempt by the Purchaser to expand this Section to capture "proposed laws". The definition of "Law" in this Agreement does not extend to proposed laws. (4) Consents. All filings, notifications and Consents with, to or from Regulatory Authorities and third parties, including the parties to the material Contracts listed on Schedule 3.1(30) and the lessors of the Leased Premises listed on Schedule 3.1(37)(c), required to permit the change of ownership of the Purchased Shares contemplated hereby without resulting in the violation of or a default under or any termination, amendment or acceleration of any obligation under any licence, permit, lease, or material Contract affecting the Business or otherwise adversely affecting the Business, the Corporation or any Subsidiary, shall have been made, given or obtained on terms acceptable to the Purchaser acting reasonably. Annotation: A Vendor with leverage (for example, in an auction situation) can insist on a definitive list of Consents which must be obtained in order for the Transactions to close. However, more commonly, the Purchaser will insist on including more general language to the effect that all Consents necessary or material to the Business must be tabled. Such a position is reasonable, but the Vendor must be satisfied that the language does not give the Purchaser an excuse not to close if a trivial Consent is not obtained. A Purchaser with superior bargaining power may wish to negotiate the inclusion of Consents which apply to itself. For example, the Purchaser may want to make completion of the Transactions conditional on it obtaining satisfactory financing or the Consent of one of its lenders. (5) Deliveries. The Vendor shall have delivered to the Purchaser the following in form and substance satisfactory to the Purchaser: (a) a favourable opinion of counsel to the Vendor, the Shareholder and the Corporation substantially in the form set forth in Schedule 5.1(5)(a); Annotation: The opinion to be delivered by counsel to the Vendor et al. pursuant to Section 5.1(5)(a) can be addressed in several different ways. If the Parties have sufficient time and wish to avoid the possibility of a dispute later on, they may elect to attach a draft form of opinion as a schedule and indicate that the Vendor's counsel will deliver an opinion "substantially in the form set out in Schedule "". Alternatively, the Parties frequently are comfortable just listing the major issues to be addressed in the opinion and including "basket language" to the effect that the opinion also will cover matters incidental to the foregoing and such other matters typically addressed in a transaction of the type contemplated by the Agreement. Finally, the Purchaser may simply wish to say that the opinion shall be in form and substance satisfactory to it. An interesting issue arises should counsel to the Vendor issue an opinion which is qualified in an unusual manner. The seriousness of the qualification will usually determine whether or not the Purchaser has a right to terminate the Agreement. If serious, the qualification will enable the Purchaser to say the form of opinion is not satisfactory to it. But what if the qualification is minor and represents only a slight deviation from the form of opinion that might be attached to the Agreement? If the opinion fails to conform in a material respect, the Purchaser will likely have a right to terminate the Agreement on the basis that one or more representations and/or conditions are not satisfied. If material agreements are to be delivered by Parties other than the Vendor and Shareholder, the Purchaser may wish to request opinions from counsel to such Parties. (b) non-competition agreements duly executed by the Vendor, the Shareholder and . substantially in the form of the agreement attached as Schedule 5.1(5) (b); Annotation: If more than one non competition agreement is being delivered pursuant to Section 5.1(5)(b), the Parties would be prudent to note any differences in duration and/or geographic scope between such agreements. (c) employment agreements duly executed by . on terms and conditions satisfactory to the Purchaser; Annotation: This condition can be a source of serious disagreement and uncertainty if the form of each employment agreement is not attached to the Agreement. Often the form cannot be settled in advance and employees may be difficult or self-interested at such times. (d) duly executed resignations effective as at the Closing Time of each director and officer of the Corporation specified by the Purchaser; Annotation: With respect to resignations to be delivered under this Section and releases to be delivered under Section 5.1(5)(e), the Vendor should consider whether there are any which will be problematic to obtain for whatever reason. With the Purchaser's consent, these could be expressly excluded from the obligation, or included only on a "best efforts" basis. (e) releases from each of the Vendor, the Shareholder and each of the individuals specified in Section 5.1(5)(d) of all claims they may have against the Corporation or any of the Subsidiaries substantially in the terms of the release attached as Schedule 5.1(5)(e); (f) all Records and all corporate records of the Corporation and the Subsidiaries and other documents referred to in this Agreement or any Schedule hereto; and (g) all documentation and other evidence reasonably requested by the Purchaser in order to establish the due authorization and consummation of the Transactions, including the taking of all corporate proceedings by the boards of directors and shareholders of the Vendor and the Corporation required to effectively carry out the obligations of the Vendor and the Corporation pursuant to this Agreement. Annotation: Depending on the circumstances of the Transactions, it may be essential that the Purchaser receive certain key agreements or reports of professionals in respect of environmental, tax or financial matters. If the Purchaser is aware of documentation or evidence which it requires in order to feel comfortable about Closing, it should specifically list such materials, rather than trying to rely on the "basket language" in Section 5.1(5)(g). Heavy reliance by the Purchaser on this Section may result in difficult issues arising at or before Closing. Conversely, the Vendor should be careful about agreeing to table deliverables which are vague and/or subjective in nature. For example, the Purchaser may want comfort satisfactory to it that a material customer will continue to do business with the Corporation following completion of the Transactions. What does this really mean and what can the Vendor reasonably expect to deliver? The Purchaser often wishes to make it a condition of Closing that it has completed and is satisfied with the results of its due diligence. The Vendor will frequently oppose the inclusion of a due diligence out, on the basis that it is too subjective and vague. Such a condition has not been included in this Agreement on the basis that it perhaps tips the scales too much in favour of the Purchaser. The Purchaser should be able to adequately protect itself by expanding on any specific due diligence concerns which it may have and adjusting the other conditions of Closing to address such due diligence concerns. This being said, a Purchaser in a superior bargaining position will often succeed in securing such an out. 5.2 Waiver or Termination by the Purchaser The conditions contained in Section 5.1 hereof are inserted for the exclusive benefit of the Purchaser and may be waived in whole or in part by the Purchaser at any time without prejudice to any of its rights of termination in the event of non-performance of any other condition in whole or in part. If any of the conditions contained in Section 5.1 hereof are not fulfilled or complied with by the time as herein provided, the Purchaser may, at or prior to the Closing Time, terminate this Agreement by notice in writing after such time required to the Vendor and the Shareholder. In such event the Purchaser shall be released from all obligations hereunder (except as set out in Section 5.6) and, unless the condition or conditions which have not been fulfilled are reasonably capable of being fulfilled or caused to be fulfilled by the Vendor, the Shareholder or the Corporation, then the Vendor and the Shareholder shall also be released from all obligations hereunder (except as set out in Section 5.6). Annotation: It should be noted in respect of Sections 5.2 and 5.4 that fault of a Party associated with non fulfillment of a condition is not relevant to the rights of the Purchaser or Vendor, as applicable, to terminate the Agreement. These rights are without qualification. They are not subject to any materiality test. Tests of materiality and reasonableness, if any, are already factored into the representations, covenants and conditions of Closing. Each of Sections 5.2 and 5.4 allow the beneficiary of a condition to terminate this Agreement before the Closing Time if it is a relative certainty that a specified condition cannot be fulfilled at any future time. More specifically, the words "at or prior to the Closing Time" are intended to permit immediate termination of the Agreement, without the relevant Party having to wait until the Closing Time in such circumstances. For example, if it is a condition of Closing that the Purchaser enter into an employment agreement with a key employee of the Corporation and the key employee dies between the date of the Agreement and the Closing Time, the condition is incapable of being satisfied. An interesting issue which often is negotiated relates to whether any cure rights should be permitted with respect to a condition, such as the accuracy of a representation, which may become unfulfilled between the date of signing the Agreement and the Closing Time. The Purchaser may argue that no such cure right should be allowed as it has purchased the "truth" of the Vendor's representations. On the other hand, the Vendor may argue that it should be allowed to cure an unfulfilled condition prior to the Closing Time provided that the cure is effected within a set time period following notice from the Purchaser and provided the Purchaser is not otherwise prejudiced. The latter argument, being more equitable, generally prevails. 5.3 Conditions for the Benefit of the Vendor and Shareholder Notwithstanding anything herein contained, the obligations of the Vendor and the Shareholder to complete the Transactions will be subject to the fulfilment of the following conditions at or prior to the Closing Time: (1) Representations, Warranties and Covenants. The representations and warranties of the Purchaser made in or pursuant to this Agreement shall be true and accurate at the Closing Time with the same force and effect as though such representations and warranties had been made as of the Closing Time. The Purchaser shall have complied with all covenants and agreements herein agreed to be performed or caused to be performed by it at or prior to the Closing Time. In addition, the Purchaser shall have delivered to the Vendor and the Shareholder a certificate confirming the foregoing. The receipt of such certificate and the completion of the Transactions shall not be deemed to constitute a waiver of any of the representations, warranties or covenants of the Purchaser contained in this Agreement. Such representations, warranties and covenants shall continue in full force and effect as provided in Section 3.4. Annotation: Apart from the condition relating to the accuracy of representations and the performance of covenants in Section 5.3(1), conditions are generally few and far between in favour of the Vendor and Shareholder. Examples of additional conditions in favour of the Vendor might be a legal opinion of Purchaser's counsel, or a release of guarantees provided by the Vendor and/or Shareholder. To the extent any additional conditions are permitted by the Purchaser, it will endeavour to make sure they are as narrowly drafted as possible. It is quite reasonable for the Vendor to require an opinion from the Purchaser's counsel, especially in circumstances where there are continuing obligations of the Purchaser relating to indemnities, price adjustments and holdback amounts. The delivery of Consents in respect of material Contracts is not generally an acceptable condition in favour of the Vendor, unless of course the Vendor and/or Shareholder has in some way guaranteed obligations in respect of the material Contracts in question. 5.4 Waiver or Termination by the Vendor and Shareholder The conditions contained in Section 5.3 hereof are inserted for the exclusive benefit of the Vendor and the Shareholder and may be waived in whole or in part by the Vendor and the Shareholder at any time without prejudice to any of their rights of termination in the event of non-performance of any other condition in whole or in part. If any of the conditions contained in Section 5.3 hereof are not fulfilled or complied with by the time as herein provided, the Vendor may, on behalf of itself and the Shareholder, at or prior to the Closing Time, terminate this Agreement by notice in writing after such time to the Purchaser. In such event the Vendor and the Shareholder shall be released from all obligations hereunder (except as set out in Section 5.6) and, unless the condition or conditions which have not been fulfilled are reasonably capable of being fulfilled or caused to be fulfilled by the Purchaser or the Corporation, then the Purchaser shall also be released from all obligations hereunder (except as set out in Section 5.6). Annotation: See the annotation to Section 5.2. 5.5 Conditions Precedent The purchase and sale of the Purchased Shares is subject to the following conditions to be fulfilled at or prior to the Closing Time, which conditions are true conditions precedent to the completion of the Transactions: (1) No Legal Action. No action or proceeding shall be pending or threatened by any person to enjoin, restrict or prohibit any of the Transactions or the right of the Corporation and the Subsidiaries to conduct the Business after Closing on substantially the same basis as heretofore conducted. Annotation: If legal proceedings have been commenced to prevent the Transactions from being completed, or which will materially restrict the right of the Corporation to carry on the Business or otherwise result in dramatic adverse changes to the Business, the Parties will usually want to be able to walk away and have the Agreement automatically terminate. The Parties do not want to become embroiled in nasty, lengthy litigation which may be harmful to them and the Corporation. Likewise, the Purchaser does not want to be forced to purchase the Business if it may be materially adversely affected by the legal proceedings, a situation which would in turn likely result in the Purchaser suing the Vendor for damages. This being said, the Parties may want to allow exceptions to this general rule, such as litigation which both Parties consider to be frivolous or without merit. Further, the Parties may reject the notion that "threatened" litigation of this nature alone should result in automatic termination. (2) Investment Canada Act. Investment Canada shall have provided a receipt to the Purchaser pursuant to the Investment Canada Act or the Purchaser shall have received evidence satisfactory to it indicating that the acquisition of the Purchased Shares by the Purchaser is not a reviewable investment under the Investment Canada Act and such receipt or other evidence shall be in full force and effect at the Closing Time. Annotation: Certain Transactions cannot proceed by law if Consents from certain Regulatory Authorities are not obtained. As such Consents go to the root of the Transactions, they are listed as "true conditions precedent" which cannot be waived by the Parties, except in the unlikely event that the Parties unanimously agree otherwise. Investment Canada Act and Competition Act Consents are the most commonly cited true conditions precedent. However, depending on the nature of the Parties and the Corporation, the receipt of other Consents from other persons may be appropriate for inclusion (e.g. Office of the Superintendent of Financial Institutions, Hart Scott Rodino administrators or one or more securities regulators). If the Purchaser's representation in Section 3.2(5) is included, then clearly the Investment Canada Act condition precedent in Section 5.5(2) will be unnecessary. (3) Competition Act. The Vendor and the Purchaser each have filed all notices and information required under Part IX of the Competition Act (Canada), satisfied any request for additional information thereunder and the applicable waiting periods and any extensions thereof shall have expired without the threat of restraint or challenge, or the Parties shall have received an Advance Ruling Certificate pursuant to the Competition Act (Canada) setting out that the Commissioner of Competition under such Act is satisfied he would not have sufficient grounds on which to apply for an order in respect of the Transactions. If any conditions precedent shall not have been fulfilled at or prior to the Closing Time, this Agreement shall be terminated and the Parties shall be released from all obligations hereunder, except as set out in Section 5.6. Annotation: In addition to the other events of termination, the Purchaser and the Vendor may wish to also specify that the Agreement may be terminated on their mutual written consent. Frequently, the Parties do not consider it necessary to include such a provision as it basically amounts to a written amendment which the Parties can effect any time in any case. Nevertheless, it may be prudent to include such a provision where there are third party beneficiaries of the Transactions (e.g. key employees, minority shareholders, customers or suppliers) who may have a lot at stake. 5.6 Survival following Termination In the event of termination of this Agreement at or prior to the Closing Time pursuant to Sections 5.2, 5.4 or 5.5, the provisions of Articles 1, 7 and 8 and Sections 2.3(1), 5.2, 5.4 or 5.5 shall survive such termination indefinitely. Upon such termination, the Purchaser shall promptly deliver to the Vendor all copies of all Records and corporate records of the Corporation and the Subsidiaries and other written material obtained by the Purchaser from the Vendor, the Shareholder, the Corporation or any Subsidiary in connection with this Agreement. Annotation: Sections 5.2, 5.4, 5.5 and 5.6 deal with the effect of termination as between the Parties and not the remedies of the Parties where there is fault on the part of one or more of them. In respect of remedies, the Parties should look to Article 7 dealing with indemnification and rights at law outside of the Agreement.
ARTICLE 6 6.1 Place of Closing The Closing shall take place at the Closing Time at the offices of .. 6.2 Deliveries at the Closing At the Closing Time, upon fulfillment of all the conditions set out in Article 5 that have not been waived in writing by the Purchaser, the Vendor or the Shareholder, as applicable, the Vendor shall deliver to the Purchaser certificates evidencing all the Purchased Shares, duly endorsed in blank for transfer, the Vendor and the Shareholder shall deliver such documents as are required or contemplated to be delivered by the Vendor, the Shareholder or Vendor's counsel pursuant to this Agreement, the relevant portions of the Purchase Price shall be paid or delivered in the manner provided in Section 2.3, and the Purchaser shall deliver such documents as are required or contemplated to be delivered by the Purchaser or Purchaser's counsel pursuant to this Agreement. Annotation: Although this Section may require that the signatures on the share certificates or transfer forms be guaranteed by a bank or trust company, "insurance" of this nature is considered to be unnecessary in most Transactions.
ARTICLE 7 Annotation: These Sections dealing with indemnification are among the most intensely negotiated in the Agreement. The Purchaser wants protection relating to the representations and other continuing covenants of the Vendor. On the other hand, the Vendor wants no continuing responsibilities for the Business which it no longer owns. This negotiation can result in a wide variety of outcomes, depending on the relevant bargaining power and levels of sophistication of the Parties. Some Vendors will agree to give open-ended indemnification rights if selling an "unwanted" business to the only interested Purchaser. Much more frequently, each Party will want to put a ceiling on its total potential liabilities under the Agreement. Further, the Parties will sometimes agree to a fixed amount or formula in respect of certain classes of liability. As an indemnification covenant is only as valuable as the person who is giving it, the Indemnified Party needs to consider whether the indemnity should be buttressed by collateral provisions. For example, the Purchaser may believe it advisable to request a guarantee from an affiliate of the Vendor and/or Shareholder or include substantial holdbacks from the Purchase Price. Similarly, if the Vendor feels sufficiently insecure about payment of deferred portions of the Purchase Price in the form of holdbacks or earnouts, it may request that the Purchaser provide security for those continuing obligations. Where there is more than one Vendor, the Vendors may wish to bear different levels of liability, depending on whether they hold a controlling position or not, or are active or passive shareholders of the Corporation. This allocation of liability can be dealt with in the Agreement, or the Vendors can agree to be jointly and severally liable in the Agreement and then separately agree to reallocate responsibility among themselves. 7.1 Indemnification by the Vendor and the Shareholder Subject to Section 3.3, the Vendor and the Shareholder shall, jointly and severally, indemnify and save the Purchaser harmless for and from: (1) all debts and liabilities of the Corporation and the Subsidiaries, including liabilities for any Taxes, existing at the Closing Time and not disclosed on or included in the Audited Financial Statements or Interim Financial Statements, except liabilities accruing or incurred subsequent to the Audited Statements Date in the ordinary course of the Business, consistent with past practice and except liabilities disclosed in this Agreement or any Schedule hereto; (2) all contingent liabilities which the Corporation or any Subsidiary becomes obligated to pay and which exist at the Closing Time whether or not disclosed or reflected in the Audited Financial Statements or Interim Financial Statements, and whether or not the Vendor, the Corporation, a Subsidiary or the Shareholder or any of them have notice thereof or of the facts or circumstances which give rise thereto; (3) any assessment for Taxes for any period up to the Closing Date for which no adequate reserve has been provided and disclosed in the Audited Financial Statements or Interim Financial Statements; (4) any loss, damages or deficiencies suffered by the Purchaser or by the Corporation or any Subsidiary as a result of any breach of representation, warranty or covenant on the part of the Vendor or the Shareholder contained in this Agreement or in any certificate or document delivered pursuant to or contemplated by this Agreement; (5) any warranty, damage or similar claim made against the Corporation or any Subsidiary for or arising from defects in any goods, materials, service or workmanship, in each case provided by the Corporation or such Subsidiary on or prior to the Closing Date for which the Corporation or any Subsidiary is or is alleged to be liable; (6) any breach by the Vendor or the Shareholder of Laws applicable to privacy and the protection of personal information in connection with the Transactions; and (7) all claims, demands, costs and expenses, including legal fees, in respect of the foregoing. Annotation: The Purchaser may wish to expand the group of persons to be indemnified by the Vendor and the Shareholder such that it includes the Corporation, the Purchaser's other affiliates, and officers, directors or other representatives of any of the foregoing. Depending on the circumstances of the Transactions and the Business, the Purchaser may feel it necessary to include specific indemnity provisions relating to specific risks. These might include: (i) an unknowable environmental risk; (ii) a possible/probable change of Law; (iii) the outcome of a disclosed law suit; or (iv) the loss of a major customer of the Business. Sections 7.1(4) and 7.2(1) must be read with Section 7.5(1). The scope of Sections 7.1(4) and 7.2(1) is quite broad. In each case, the Indemnifying Party is responsible for damages resulting from breaches of representations and covenants not only contained in the Agreement, but also in any certificate or document delivered pursuant to or contemplated by the Agreement. Depending on a Party's circumstances, it may want to leave this language as is and argue that it extends to all documents, including documents reviewed during the due diligence process. Alternatively, a Party may wish to specify that this indemnity right is restricted to documents delivered at the Closing. As mentioned above, if environmental risk is a "hot" topic in the context of the particular Transactions, the Purchaser may wish to include a separate provision addressing only indemnification for environmental matters. Among other things, such provision would provide for the handling of environmental claims and control over clean-up situations. Environmental liability often merits special attention because the degree of risk is usually unknown, any environmental problem can be hugely disruptive to the Business and claims can come from government agencies or third parties who are not bound by the Agreement. Further, whereas many types of liability tend to decrease over time, environmental liabilities almost never do. Another reason why the Parties may elect to include a separate provision dealing with environmental indemnification may be the fact that the Vendor does not feel comfortable giving a representation about which it does not have sufficient knowledge in the circumstances. Alternatively, the Parties may elect to forego including a separate environmental indemnification and may deal with environmental liabilities by way of a price reduction or an increase in any escrow amount or holdback. 7.2 Indemnification by the Purchaser Subject to Section 3.4, the Purchaser shall indemnify and save the Vendor and Shareholder harmless for and from: (1) any loss, damages or deficiencies suffered by the Vendor as a result of any breach of representation, warranty or covenant on the part of the Purchaser contained in this Agreement or in any certificate or document delivered pursuant to or contemplated by this Agreement; and (2) all claims, demands, costs and expenses, including legal fees, in respect of the foregoing. Annotation: Counsel to the Purchaser will frequently not include a provision analogous to Section 7.2 in its first draft of the Agreement. If the Vendor is in a weak bargaining position and if the Purchaser has no surviving obligations or covenants of a material nature, this approach may be acceptable. However, sophisticated Vendors with experienced counsel will insist on the inclusion of such a provision in almost all circumstances. 7.3 Notice of Claim A Party entitled to and seeking indemnification pursuant to the terms of this Agreement (the "Indemnified Party") shall promptly give written notice to the Party or Parties, as applicable, responsible for indemnifying the Indemnified Party (the "Indemnifying Party") of any claim for indemnification pursuant to Sections 7.1 or 7.2 (a "Claim", which term shall include more than one Claim). Such notice shall specify whether the Claim arises as a result of a claim by a person against the Indemnified Party (a "Third Party Claim") or whether the Claim does not so arise (a "Direct Claim"), and shall also specify with reasonable particularity (to the extent that the information is available): (1) the factual basis for the Claim; and (2) the amount of the Claim, or, if any amount is not then determinable, an approximate and reasonable estimate of the likely amount of the Claim. Annotation: The Parties may wish to address the circumstance where the Indemnified Party does not give "prompt" notice to the Indemnifying Party of the existence of a Claim. Commonly, the Parties will resolve that such failure will not relieve the Indemnifying Party unless the delay has prejudiced such Party. 7.4 Procedure for Indemnification (1) Direct Claims. With respect to Direct Claims, following receipt of notice from the Indemnified Party of a Claim, the Indemnifying Party shall have 30 days to make such investigation of the Claim as the Indemnifying Party considers necessary or desirable. For the purpose of such investigation, the Indemnified Party shall make available to the Indemnifying Party the information relied upon by the Indemnified Party to substantiate the Claim. If the Indemnified Party and the Indemnifying Party agree at or prior to the expiration of such 30 day period (or any mutually agreed upon extension thereof) to the validity and amount of such Claim, the Indemnifying Party shall immediately pay to the Indemnified Party the full agreed upon amount of the Claim. If the Indemnified Party and the Indemnifying Party do not agree within such period (or any mutually agreed upon extension thereof), the Indemnified Party and the Indemnifying Party agree that the dispute shall be submitted to arbitration pursuant to the Arbitration Act, 1991 (Ontario). Such dispute shall not be made the subject matter of an action in a court by either the Indemnified Party or the Indemnifying Party unless the dispute has first been submitted to arbitration and finally determined in accordance with the provisions of Schedule 7.4(1). Any such action commenced thereafter shall only be for judgment in accordance with the decision of the arbitrators and the costs incidental to the action. In any such action the decision of the arbitrators shall be conclusively deemed to determine the rights and liabilities as between the Parties to the arbitration in respect of the matter in dispute. Annotation: Arbitration provisions are not appropriate for all clients and/or all Transactions. If technical disputes are anticipated, the Parties may wish to restrict the scope of an arbitration provision to such disputes and specify the types of experts who should be involved. Further, if it is critical that the Parties not be suing each other due to ongoing business relationships between them, an arbitration clause may be suitable. However, a Party in a position of superior bargaining strength (e.g. with significant resources or a substantial purchase price holdback in hand) will usually have no appetite for arbitration clauses. Such a Party will favour taking its chances with possible litigation or a non arbitrated, informal private settlement process. Some clients oppose arbitration on principle, based on unpleasant past experiences. Competing factors which each Party should consider are the high cost of litigation, whether a slow resolution process is problematic and how important it is to keep the dispute confidential. Ontario's new Limitations Act clearly impacts the operation of arbitration provisions and the Parties and their counsel should consider the effect of Section 11 thereof in particular. (2) Third Party Claims. With respect to any Third Party Claim, the Indemnifying Party shall have the right, at its own expense, to participate in or assume control of the negotiation, settlement or defence of such Third Party Claim and, in such event, the Indemnifying Party shall reimburse the Indemnified Party for all the Indemnified Party's out of pocket expenses incurred as a result of such participation or assumption. If the Indemnifying Party elects to assume such control, the Indemnified Party shall cooperate with the Indemnifying Party, shall have the right to participate in the negotiation, settlement or defence of such Third Party Claim at its own expense and shall have the right to disagree on reasonable grounds with the selection and retention of counsel, in which case counsel satisfactory to the Indemnifying Party and the Indemnified Party shall be retained by the Indemnifying Party. If the Indemnifying Party, having elected to assume such control, thereafter fails to defend any such Third Party Claim within a reasonable time, the Indemnified Party shall be entitled to assume such control and the Indemnifying Party shall be bound by the results obtained by the Indemnified Party with respect to such Third Party Claim. Annotation: When a Third Party Claim arises, the Indemnifying Party (usually, the Vendor) will frequently want a significant role in the defence of such Claim. The Indemnified Party may agree to cede control subject to certain limitations and qualifications. For instance, the Indemnified Party may not want the Indemnifying Party to have carriage of Claims involving tax and environmental matters. Further, the Indemnified Party may want to prevent the Indemnifying Party from assuming control where (i) a conflict of interest would appear to exist; (ii) the Indemnified Party has concerns about the financial capacity of the Indemnifying Party to properly conduct the defence; or (iii) the Indemnified Party has concerns about the counsel chosen by the Indemnifying Party. Finally, the Purchaser, as Indemnified Party, may want to prevent the Vendor from assuming carriage of a defence if the Vendor may at the same time dispute the fact that the proceedings represent an indemnifiable Claim. 7.5 General Indemnification Rules Annotation: This Section deals with a wide array of provisions concerning the operation of the indemnity obligations, including the duration of the obligations, threshold levels which must be satisfied before the obligations arise and means by which a Party can collect on its indemnity entitlement. Depending on the relative disposition of the Parties, they may wish to include a provision specifying that the indemnity rights under Article 7 represent the exclusive remedies of such Parties. This position would most frequently be advanced by a Vendor, as opposed to a Purchaser. Should the adoption of such a provision be accepted, certain complications may arise under the indemnity language which usually extends to documents delivered with the Agreement, which documents may contain additional separate remedies. The Purchaser will usually want to avoid an exclusive remedies provision in order to preserve its remedies outside of the Agreement relating to, among other things, breach of contract, fraud and certain statutory rights. In fact, the Purchaser may well insist that an express provision be included stating that the Purchaser's remedies are not limited to those set out in Article 7. The Purchaser will sometimes insert a provision stating that its rights to indemnification are not affected by its knowledge of a breach of the Agreement prior to Closing. A provision of this nature may be helpful in avoiding a lengthy factual debate between the Parties and prevent the Vendor from alleging that the Purchaser had knowledge in respect of the relevant matter each time a Claim is raised. Such a provision will produce strong debate, and will generally be much broader than the brief related provisions found in Section 4.2 and in the introductory paragraphs to Sections 3.3 and 3.4. The Purchaser may argue that provisions of this nature are appropriate in view of the fact that the Purchaser has bought the Vendor's promise as to the truth of the representations and can sue on it if it so wishes. The Purchaser will be concerned that if it does not include such a provision, the Vendor will argue that the Purchaser, seized with such knowledge, has waived its right to sue or has not relied on the wording of the relevant provision. There is a whole host of issues which are not dealt with in Article 7 and which may be of significance to the Parties in the particular circumstances. The Vendor may wish to specify that the Purchaser's damages are net of any insurance proceeds or payments which the Purchaser receives from other liable third parties. The Purchaser, as Indemnified Party, may feel that it is appropriate that an Indemnified Party be entitled to interest from the date on which it incurs or pays any indemnifiable expense. A provision such as this may be useful in deterring an Indemnifying Party from frivolously disputing its obligations or delaying payment. If there are escrow amounts, earnout amounts or holdbacks, the Purchaser may want to be able to set off against these amounts the amount of its Claims. Any set-off mechanics which are included in the Agreement will need to be dovetailed with related documentation such as promissory notes and any escrow agreement. Set-off is an important tool for an Indemnified Party which may otherwise have difficulty enforcing the indemnities. Consider, for example, the situation of a Purchaser who is attempting to collect from multiple Vendors or a non resident Vendor. Obviously, a holdback gives a Purchaser more leverage than an escrow arrangement, as escrow arrangements involve third parties, whereas a holdback is completely within the Purchaser's control. Alternatively, a Purchaser may consider taking security for the Vendor's indemnity obligations in the form of a letter of credit or security interest on collateral of the Vendor. A Vendor will want to limit the set-off rights of the Purchaser to situations where the dispute has been definitively resolved. On the other hand, the Purchaser will want to be able to exercise its rights of set-off when it in good faith believes that it has a Claim. Rights of set-off exist at common law. However, they can be fraught with difficulty and accordingly, it is best to include express rights of set-off. The obligations of the Indemnifying Party to indemnify the Indemnified Party in respect of Claims shall also be subject to the following: (1) Any Claim arising as a result of a breach of a representation or warranty shall be made not later than the date on which, pursuant to Sections 3.3 and 3.4, such representation and warranty terminated; Annotation: The timing for post-Closing Purchase Price instalment payments or escrow releases needs to be dovetailed with deadlines for making Claims in order that any set-off rights will be available. (2) The Indemnifying Party's obligation to indemnify the Indemnified Party shall only apply to the extent that the Claims in respect of which the Indemnifying Party has given an indemnity, in the aggregate, exceed $., and shall only apply in respect of such excess; Annotation: This provision creates a "floor", but not a "ceiling" for indemnification. The floor operates like a deductible in an insurance context and its prime purpose is to avoid Claims for and disputes over minor amounts. A Purchaser with leverage, or one which is more aggressive, will seek to recover all damages, not just damages in excess of the floor amount, once the floor is reached. Sometimes, the Parties will negotiate different floors for different types of liabilities. Concerning the ceiling or "cap", an experienced Vendor will try to limit its obligations to the total amount of the Purchase Price. The Vendor will argue that it should not be in a worse position than if it continued to own the Corporation and operate the Business. A Purchaser may accept this argument, but will want to exclude from the cap certain items (e.g. tax and environmental matters), or establish separate caps for different heads of liability. With respect to both caps and floors, the Parties may wish to specify that they don't apply in respect of breaches of representations of which the Indemnifying Party had knowledge or in respect of its wilful failure to perform covenants. (3) In the event that any Third Party Claim is of a nature such that the Indemnified Party is required by applicable law to make a payment to any person (a "Third Party") with respect to such Third Party Claim before the completion of settlement negotiations or related legal proceedings, the Indemnified Party may make such payment and the Indemnifying Party shall, forthwith after demand by the Indemnified Party, reimburse the Indemnified Party for any such payment. If the amount of any liability of the Indemnified Party under the Third Party Claim in respect of which such a payment was made, as finally determined, is less than the amount which was paid by the Indemnifying Party to the Indemnified Party, the Indemnified Party shall, forthwith after receipt of the difference from the Third Party, pay the amount of such difference to the Indemnifying Party; (4) Except in the circumstance contemplated by Section 7.5(5), and whether or not the Indemnifying Party assumes control of the negotiation, settlement or defence of any Third Party Claim, the Indemnified Party shall not negotiate, settle, compromise or pay any Third Party Claim except with the prior written consent of the Indemnifying Party (which consent shall not be unreasonably withheld); (5) The Indemnified Party shall not permit any right of appeal in respect of any Third Party Claim to terminate without giving the Indemnifying Party notice thereof and an opportunity to contest such Third Party Claim; (6) The Indemnified Party and the Indemnifying Party shall cooperate fully with each other with respect to Third Party Claims and shall keep each other fully advised with respect thereto (including supplying copies of all relevant documentation promptly as it becomes available); and (7) Notwithstanding Section 7.4(2), the Indemnifying Party shall not settle any Third Party Claim or conduct any related legal or administrative proceeding in a manner which would, in the opinion of the Indemnified Party, acting reasonably, have a material adverse impact on the Indemnified Party.
ARTICLE 8 Annotation: This Article typically contains provisions of a general nature relating to continuing covenants, rights and certain points of interpretation. It is also a suitable location to insert a post-Closing covenant that does not easily fit into any other Article. For example, it may be that the Vendor and its affiliates use names which are similar to or include words which are similar to the names of or used by the Corporation or its subsidiaries. In this circumstance, it would be appropriate for the Purchaser to require the Vendor and its affiliates to change such names and agree to no longer use such names or words within a certain number of days from the Closing Time. Likewise, for non reviewable, notifiable transactions under the Investment Canada Act, the Vendor may require the Purchaser to covenant to file the notice of acquisition required by that Act within 30 days of Closing. A general arbitration of disputes clause has not been included in this Article. See the annotation at Section 7.4. The Parties may wish to resort to arbitration for specific purposes, but otherwise generally prefer to avoid broad arbitration provisions. 8.1 Confidentiality. The Purchaser covenants and agrees that, except as otherwise authorized by the Vendor, neither the Purchaser nor its representatives, agents or employees will disclose to third parties, directly or indirectly, any confidential information or confidential data relating to the Vendor, any Subsidiary, the Corporation or the Business discovered by the Purchaser or its representatives, agents or employees as a result of the Vendor and the Corporation making available to the Purchaser and its representatives, agents or employees the information requested by them in connection with the Transactions. Annotation: The entire agreement provision (see Section 8.8) causes all prior agreements between the Parties to be superseded. Hence, any confidentiality agreement or legally binding confidentiality provision in a letter of intent between the Parties technically provides no further protection. Nevertheless, confidentiality will continue to be a concern for the Parties once the Agreement is signed, regardless of whether the Transactions close. Pursuant to Section 5.6, this Section, among others, survives termination of the Agreement. Section 8.1 is a relatively "bare-bones" provision and less sophisticated than many confidentiality provisions which one typically finds in confidentiality agreements. There are many issues which it does not address. However, it will be satisfactory in most instances as the Parties will have hopefully reached a higher level of trust, having largely completed their due diligence. Frequently, the Parties will want to be specific about what constitutes "confidential information". The Vendor will want it to encompass all information provided to the Purchaser or to which the Purchaser has had access in connection with the Transactions. At the other extreme, the Purchaser will want it to be limited to information which has been "stamped confidential". The Parties may also wish to spell out certain specific exceptions to what otherwise might constitute confidential information. These exceptions might include (i) information already in the public domain; (ii) information disclosed for purposes of obtaining Consents required for Closing; or (iii) information required to be disclosed in connection with legal proceedings. 8.2 Notices. (1) Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be delivered in person, transmitted by facsimile or similar means of recorded electronic communication or sent by registered mail, charges prepaid, addressed as follows: (a) if to the Vendor:
. (b) if to the Purchaser:
. (c) if to the Shareholder:
. (d) if to the Corporation:
. (2) Any such notice or other communication shall be deemed to have been given and received on the day on which it was delivered or transmitted (or, if such day is not a Business Day, on the next following Business Day) or, if mailed, on the third Business Day following the date of mailing; provided, however, that if at the time of mailing or within three Business Days thereafter there is or occurs a labour dispute or other event that might reasonably be expected to disrupt the delivery of documents by mail, any notice or other communication hereunder shall be delivered or transmitted by means of recorded electronic communication as aforesaid. (3) Any Party may at any time change its address for service from time to time by giving notice to the other Parties in accordance with this Section 8.2. Annotation: Occasionally, one will see notice provisions which also allow for notice by way of e-mail. This makes sense due to the prevalence of this means of communication and the ease with which attachments and scanned documents can be included. However, such provisions need to be carefully crafted and may not be appropriate for notice in respect of certain classes of issues. If there is a large group of Vendors, the Purchaser may want to insist that such Vendors appoint an agent for all notice purposes, such that the Purchaser only need deliver notice to the appointed agent. Conversely, the Purchaser will want to know that its receipt of a notice from the agent will bind all such Vendors. 8.3 Public Announcements and Disclosure. The Parties shall consult with each other before issuing any press release or making any other public announcement with respect to this Agreement or the Transactions and, except as required by any applicable Law or stock exchange having jurisdiction, no Party shall issue any such press release or make any such public announcement without the prior written consent of the others, which consent shall not be unreasonably withheld or delayed. Prior to any such press release or public announcement, none of the Parties shall disclose this Agreement or any aspect of the Transactions except to its board of directors, its senior management, its legal, accounting, financial or other professional advisors, any financial institution contacted by it with respect to any financing required in connection with the Transactions and counsel to such institution, or as may be required by any applicable Law or stock exchange having jurisdiction. Annotation: Section 8.3 allows public disclosure without consultation with, or the consent of, the other Parties when such disclosure is required by applicable Law or a stock exchange. Sometimes, the Parties will attempt to place some limits on this exception by requiring the Party obligated to disclose to use its best efforts, without contravening applicable Law, to consult with the other Parties prior to making such disclosure. The Parties may wish to get into specifics of how employees, customers and suppliers will be informed of certain matters or otherwise communicated with. Disclosure to these persons will usually be subject to mutual consultation of the Purchaser and the Vendor. The Purchaser may also insist on being present during the disclosure to these persons. Often, the Parties are comfortable addressing these sorts of details outside of the Agreement and will not feel it necessary to include a specific provision relating thereto. 8.4 Assignment. The Purchaser may assign its rights under this Agreement in whole or in part to any other person; provided, however, that any such assignment shall not relieve the Purchaser from any of its obligations hereunder. Neither the Vendor nor the Shareholder may assign its rights under this Agreement. Annotation: A Vendor with sufficient leverage may require the Purchaser to obtain the Vendor's prior written consent to any assignment of the Purchaser's rights or obligations under the Agreement. In this circumstance, the Vendor may also require that the assignee deliver a document confirming that such assignee will perform all obligations under the Agreement. A Vendor may have legitimate reasons for wanting to limit the Purchaser's rights of assignment. For example, if the Purchaser's assignee turns out to be a non resident, tax, Investment Canada Act and enforcement issues will likely ensue. Also, the Vendor may wish to prevent assignment to a "shell" corporation with only nominal assets with which to satisfy its obligations, or simply wish to deal with "the devil it knows rather than the one it does not". It should be understood that in the absence of express provisions limiting assignment, the Parties' rights are generally freely assignable at common law. 8.5 Best Efforts. The Parties acknowledge and agree that, for all purposes of this Agreement, an obligation on the part of any Party to use its "best efforts" to obtain any waiver, Consent or other document shall not require such Party to make any payment to any person for the purpose of procuring the same, other than payments for amounts due and payable to such person, payments for incidental expenses incurred by such person and payments required by any applicable law or regulation. 8.6 Expenses. Unless otherwise provided herein, each of the Vendor, the Shareholder and the Purchaser shall be responsible for the expenses (including fees and expenses of legal advisers, accountants and other professional advisers) incurred by them, respectively, in connection with the negotiation and settlement of this Agreement and the completion of the Transactions. In the event of termination of this Agreement, the obligation of each Party to pay its own expenses will be subject to any rights of such Party arising from a breach of this Agreement by another Party. Annotation: As the negotiations evolve, the Parties should consider how certain "big ticket" costs will be allocated. The wording in this Section may not be helpful in determining some of these issues, meaning that exceptions to the rule should be spelled out. For instance, the fee payable to the Competition Bureau's Merger Notification Unit for its review of filings and applications is $50,000. Environmental audit inquiries, which the Purchaser may insist on, can likewise be very expensive. The allocation of responsibility for these costs will reflect the relative bargaining power of the Parties. For example, the fee payable to the Competition Bureau is frequently split, but other allocations do occur depending on the relative leverage of the Parties. The Purchaser may wish to clarify that the Vendor and the Shareholder must pay their expenses with their own money and not that of the Corporation. The Vendor may push back to some extent on this issue and may legitimately argue that some expenses be incurred by the Corporation. As a compromise, the Parties frequently agree on a cap for expenses to be absorbed by the Corporation. The last sentence of Section 8.6 makes it clear that a judgment for damages due to breach of the Agreement overrides the general terms of Section 8.6 to the extent of a conflict. 8.7 Further Assurances. Each of the Parties shall promptly do, make, execute, deliver, or cause to be done, made, executed or delivered, all such further acts, documents and things as the other Parties hereto may reasonably require from time to time after Closing at the expense of the requesting Party for the purpose of giving effect to this Agreement and shall use reasonable efforts and take all such steps as may be reasonably within its power to implement to their full extent the provisions of this Agreement. Annotation: Section 8.7 serves two purposes. It helps ensure that each Party will assist in accomplishing certain collateral matters after Closing (often related to non critical Consents and discharges) and will not be obstructionist with a view to extracting additional consideration. It also addresses ancillary matters that can only be handled post-Closing and which cannot be treated as conditions precedent. It is prudent to only rely on the further assurances provision in respect of fairly minor post-Closing matters. For more material issues, such as environmental clean-ups, the provision by the Vendor of any services on a short-term basis, the discharge of liens and the payment of third party debts, the Parties should include separate covenants which are tied into relevant escrow and holdback provisions. 8.8 Entire Agreement. This Agreement, including all Schedules attached hereto, constitutes the entire agreement between the Parties with respect to the subject matter hereof and supersedes all prior agreements, understandings, negotiations and discussions, whether written or oral. There are no conditions, covenants, agreements, representations, warranties or other provisions, express or implied, collateral, statutory or otherwise, relating to the subject matter hereof except as herein provided. No reliance is placed by any Party hereto on any warranty, representation, opinion, advice or assertion of fact made by any Party hereto or its directors, officers, employees or agents, to any other Party hereto or its directors, officers, employees or agents, except to the extent that the same has been reduced to writing and included in this Agreement. Annotation: Both the entire agreement provision and the waiver and amendment provision may not be enforceable in all circumstances. Opinions in respect of share purchase agreements typically qualify the enforceability of provisions such as these. There has been some interesting Ontario case law recently which further buttresses the view that these opinion qualifications are necessary. See for example Shelanu v. Print Three (2003) 64 O.R.(3d) 533 and Gutierrez v. Tropic International Ltd., 2002 Carswell Ontario 2599 (Ontario Court of Appeal). 8.9 Waiver, Amendment. Except as expressly provided in this Agreement, no amendment or waiver of this Agreement shall be binding unless executed in writing by the Party to be bound thereby. No waiver of any provision of this Agreement shall constitute a waiver of any other provision, nor shall any waiver of any provision of this Agreement constitute a continuing waiver unless otherwise expressly provided. 8.10 Rights Cumulative. The rights and remedies of the Parties hereunder are cumulative and not alternative. 8.11 Counterparts. This Agreement may be executed in counterparts, each of which shall constitute an original and all of which taken together shall constitute one and the same instrument. Annotation: A counterparts provision can be particularly helpful where there is a large group of Vendors. IN WITNESS WHEREOF this Agreement has been executed by the Parties.
[NAME OF PURCHASER
Per:
[NAME OF VENDOR CORPORATION]
Per:
[NAME OF PRINCIPAL
Per:
A.
Paul Mahaffy
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