|
|
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. |