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Annotated Version
ASSET PURCHASE AGREEMENT BETWEEN [NAME OF PURCHASER CORPORATION] and [NAME OF VENDOR CORPORATION] and [NAME OF PRINCIPAL SHAREHOLDER OF VENDOR] Prepared by A. Paul Mahaffy, Jordan E. Dolgin and David R. Street ASSET PURCHASE AGREEMENT THIS AGREEMENT made as of the . day of ., 20., BETWEEN:
Annotation: 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 acquisition. 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. A. The Vendor carries on the business of . under the name . (the "Business"). B. The Purchaser wishes to purchase, and the Vendor wishes to sell, substantially all of the assets, property and undertaking of the Business on the terms and conditions herein contained. C. The Shareholder controls the Vendor. The Parties agree as follows: ARTICLE 1 1.1 Definitions In this Agreement and in the schedules, 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) "Assumed Liabilities" means all the debts, liabilities (whether accrued, absolute or contingent or whether liquidated or unliquidated) and obligations of the Vendor relating to the Business or the Purchased Assets existing as at the Closing Date other than the Excluded Liabilities, but including all customer product warranties listed in Schedule 3.1(33) and all other warranties, express or implied, relating to products manufactured or sold or services performed by the Vendor in connection with the Business on or before the Closing Date to the extent they are not Excluded Liabilities; Annotation: This definition attempts to make the Purchaser responsible for all of the liabilities incurred by the Vendor in operating the Business which are not itemized in the definition of Excluded Liabilities. Although it makes specific mention of product or service warranties being assumed by the Purchaser, it could also mention bank indebtedness, employee benefits, or any other liability which the Purchaser is prepared to assume but which would ordinarily be excluded in an asset transaction. Since it includes many contractual and other liabilities which are not specifically recorded in the Audited Financial Statements or Interim Financial Statements, the Purchaser will attempt to determine the extent of such liabilities in its due diligence review prior to signing the Agreement. Considering that many purchasers prefer to structure their business acquisitions as asset transactions for the sole purpose of avoiding vendor liabilities, the list of specifically assumed liabilities is generally shorter than the list of specifically excluded liabilities. However, for those purchasers concerned about the possible defection of existing customers or suppliers once the Business has changed hands, while recognizing the advantages of maintaining direct contact with them afterwards, assuming certain liabilities may be necessary. For example, since the Vendor may not be as inclined as the Purchaser to promptly pay off trade creditors, or as capable as the Purchaser to effectively deal with warranty claims from disgruntled customers, after Closing, the Purchaser may be prepared to assume all of the payables and warranties in order to ensure that the suppliers and customers remain loyal to the Business. (a) "Audited Financial Statements" means the audited financial statements of the Vendor 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 accompanying notes and the opinion of the Vendor's auditors thereon, a copy of which is attached as Schedule 3.1(10); 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 Vendor's most recent fiscal year before signing the Agreement, especially if it is the Vendor'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 Vendor's latest annual financial statements and the Closing Date Financial Statements are to be audited. (b) "Audited Statements Date" means the date of the balance sheet included in the Audited Financial Statements; (c) "Business" means the business carried on by the Vendor at the Closing Date which primarily involves . and all operations related thereto; (d) "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; (e) "Claim" has the meaning ascribed in Section 7.3; (f) "Closing" means the completion of the Transactions pursuant to this Agreement at the Closing Time; (g) "Closing Date" means . or such other date as the Parties may agree upon; (h) "Closing Date Financial Statements" means the balance sheet of the Vendor 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 Vendor'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. (i) "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; (j) "Closing Time Year" means the taxation year of the Vendor ending at the Closing Time; (k) "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); (l) "Contract" means any agreement, understanding, indenture, contract, lease, deed of trust, license, option, instrument or other commitment, whether written of oral; (m) "Deposit" has the meaning ascribed in Section 2.3; (n) "Employee Plans" has the meaning ascribed in Section 3.1(32)(a); (o) "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; (p) "Environmental Consents" has the meaning ascribed in Section 3.1(31)(a)(ii); (q) "Environmental Laws" has the meaning ascribed in Section 3.1(31)(a)(i); (r) "ETA" means the Excise Tax Act (Canada); (s) "Excluded Assets" means: Annotation: Although this definition attempts to exclude from the Purchased Assets only cash, possible income tax refunds and the Vendor's minute book and other corporate records, and may reflect the Vendor's desire to end up merely as a "corporate shell" after Closing with only cash to be distributed to the Shareholder, the Parties may decide otherwise. The Vendor may wish to retain ownership of certain Real Properties or the Intellectual Property, and lease or license them to the Purchaser instead. The Purchaser may wish to avoid acquiring certain machinery and equipment because of excess manufacturing capacity it already has at another facility, or certain inventory because of obsolescence, or certain receivables because of serious doubts over collectibility. The Purchaser may also wish to avoid any the "frills" which the Vendor enjoys in running the Business by excluding aircraft, luxury cars, executive condominiums, artwork, etc. Given that cash is often excluded, the Vendor should be restricted in its ability to convert the Purchased Assets into cash during the Interim Period other than in the ordinary course, with the restrictions in Section 4.1(1) possibly expanded to deal with specific assets. (i) all cash on hand or in banks or other depositories held by or for the account of the Vendor; (ii) all income tax instalments paid by the Vendor and the right to receive any refund of income taxes paid by the Vendor under the ITA, including the right to claim scientific research and experimental development credits under the ITA for expenses incurred by the Business up to the Closing Date; and (iii) all corporate, financial, taxation and other records of the Vendor not pertaining exclusively or primarily to the Business or Purchased Assets; (t) "Excluded Liabilities" means: (iv) any liability of the Vendor to any bank or other financial institution by way of loan or other credit facility; (v) any liability of the Vendor for any personal injuries claims arising by reason of the occurrence on or before the Closing Date of any injury, accident or other alleged damage-causing event with respect to the operations of the Vendor on or prior to the Closing Date or relating to products manufactured or sold or services performed by the Vendor on or before the Closing Date that provide the basis for a personal injury claim after the Closing Date; (vi) any liability of the Vendor to its shareholders, affiliates or associates or any other person not dealing at arm's length with any of them; (vii) any liability of the Vendor for any claims, demands, actions or proceedings relating to the Excluded Assets: (viii) any liability of the Vendor for any breach by the Vendor of any Laws, including Environmental Laws, relating to the operation of the Business or use of the Purchased Assets up to the Closing Date; (ix) any liability of the Vendor for any deferred income tax, or for any other taxes, duties or similar charges (including penalties, fines and interest); and (x) any liability of the Vendor for wages, salary, bonus, vacation pay or other remuneration, or under the Employee Plans, or for any claims pursuant to workers' compensation or similar legislation, relating to any employee while employed by the Vendor in the Business; (u) "GAAP" means the generally accepted accounting principles so described and promulgated by the Canadian Institute of Chartered Accountants which are applicable on the date on which any calculation is to be effective or at the date of any financial statements referred to herein, as the case may be; (v) "Hazardous Substance" has the meaning ascribed in Section 3.1(31)(a)(iii); (w) "Indemnified Party" has the meaning ascribed in Section 7.3; (x) "Indemnifying Party" has the meaning ascribed in Section 7.3; (y) "Intellectual Property" has the meaning ascribed in Section 3.1(34); (z) "Interim Financial Statements" means the unaudited financial statements of the Vendor for the . month period ended . consisting of a balance sheet and an income statement, a copy of which is attached as Schedule 3.1(10); Annotation: Depending on the length of time which has elapsed since the date of the Vendor'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(23) for accounts receivable which specifically refers to the amounts recorded on the Interim Financial Statements. (aa) "Interim Period" means the period from and including the date of this Agreement to and including the Closing Date; (bb) "ITA" means the Income Tax Act (Canada); (cc) "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; (dd) "Leased Premises" means the premises leased or subleased by the Vendor under the Leases; (ee) "Leases" means the leases, subleases, agreements to lease and tenancy agreements included in the Purchased Assets under which the Vendor leases or subleases any real property as lessee or sublessee, as listed in Schedule 3.1(30)(c); (ff) "Lessee" has the meaning ascribed in Section 3.1(30)(c); (gg) "Net Worth" of the Vendor as determined from any balance sheet means the amount by which the aggregate value of all of the Purchased Assets as shown on such balance sheet exceeds the aggregate value of all of the Assumed Liabilities as shown on such balance sheet; Annotation: As also discussed in the annotation below for Section 2.4, the Parties may decide to adjust the Purchase Price based upon changes in the "net worth" of the Business, described in this definition as the difference between the value of the Purchased Assets less the value of the Assumed Liabilities as recorded on the Vendor's balance sheet. Or the Parties may prefer to use changes in something else, such as changes to the "working capital" of the Business, which might be defined as the difference between the current assets included in the Purchased Assets and current liabilities included in the Assumed Liabilities. If an alternative benchmark is selected, a definition for it should be inserted in place of the definition of "Net Worth". (hh) "Parties" means the Vendor, the Purchaser, the Shareholder and any other person that may become a party to this Agreement, and Party means any one of them; (ii) "Permitted Encumbrances" means: (xi) 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); (xii) servitudes, easements, restrictions, rights of parties in possession, zoning restrictions, encroachments, reservations, rights-of-way and other similar rights in real property or any interest therein, provided the same are not of such nature as to materially adversely affect the validity of title to or the value, marketability or use of the property subject thereto by the Vendor; (xiii) liens for Taxes either not due and payable or due but for which notice of assessment has not been given; (xiv) undetermined or inchoate liens, charges and privileges incidental to current construction or current operations and Encumbrances claimed or held by any Regulatory Authority that have not at the time been filed or registered against the title to the asset or served upon the Vendor pursuant to law or that relate to obligations not due or delinquent; (xv) assignments of insurance provided to landlords (or their mortgagees) pursuant to the terms of any Lease and liens or rights reserved in any Lease for rent or for compliance with the terms of such Lease; (xvi) security given in the ordinary course of the Business to any Regulatory Authority in connection with the operations of the Business, other than security for borrowed money; (xvii) the reservations in any original grants from the Crown of any real property or interest therein and statutory exceptions to title that do not materially detract from the value of the real property concerned or materially impair its use in the operation of the Business; and (xviii) the Encumbrances described in Schedule 1.1(ll); (jj) "person" includes any individual, corporation, partnership, firm, joint venture, syndicate, association, trust, government, governmental agency and any other form of entity or organization; (kk) "Purchased Assets" means all of the property and assets used in connection with or otherwise relating to the Business (other than the Excluded Assets) as a going concern, whether real or personal, tangible or tangible, of every kind and description and, wheresoever situate, including, without limitation: Annotation: This definition attempts to include in the Purchased Assets all of the assets used by the Vendor in carrying on the Business, whether or not they are listed in the applicable schedules, unless they are specifically mentioned in the definition of Excluded Assets. As mentioned above in the annotation to Section 1.1(v) Excluded Assets, the Vendor and Purchaser may have quite different ideas over what assets should be included and what assets should be excluded. For example, considerable time can be spent negotiating whether the accounts receivable should stay with the Vendor or be transferred to the Purchaser, and if they are transferred, how much the Purchaser should have to pay for them. While the Vendor may insist that the Purchaser pay the full face value of the receivables and thereby assume the responsibility of collecting them, the Purchaser may prefer to take them only on an agency basis and remit to the Vendor only the amount collected within a certain period of time after Closing, less any applicable collection expenses. Any which then remain uncollected can be returned to the Vendor to deal with. Alternatively, the Purchaser may acquire the receivables for their full face value, or perhaps at a discount, but on a "recourse" basis, requiring the Vendor to buy back any uncollectible receivables after a certain period of time. Although the Vendor and Purchaser may agree upon which assets are to be transferred, some assets may not be transferable due to the lack of a required Consent, particularly Leases and Contracts. While a landlord may be prepared to consent to the transfer of a leasehold interest by the Vendor upon being satisfied as to the creditworthiness of the Purchaser, a customer may not be prepared to allow the assignment of a long-term service agreement if the customer has reservations about the Purchaser's ability to comply with the agreement's performance standards. For those agreements which cannot be transferred, the Vendor may be required to retain the Purchaser to perform them as a "subcontractor" on the Vendor's behalf, with the Vendor holding in trust and eventually remitting to the Purchaser the revenues earned under them. (xix) Real Property - all real property, together with the buildings, structures, improvements and appurtenances situated thereon, including, without limitation, the real property described in Schedule 3.1(30)(a); (xx) Leases - all rights (whether as lessee or lessor) under leases of real property, together with all leasehold improvements relating thereto, including, without limitation, all rights under the leases described in Schedules 3.1(30)(a) and (b); (xxi) Equipment - all machinery, equipment, fixtures, furniture, furnishings, parts, tooling molds, dies, jigs or patterns and other fixed assets, including, without limitation, the machinery and equipment described in Schedule 1.1(nn)(iii); (xxii) Vehicles - all trucks, cars and other vehicles, including, without limitation, the vehicles described in Schedule 1.1(nn)(iv); (xxiii) Inventories - all inventories, including, without limitation, raw materials, work-in-process, finished goods and replacement parts; (xxiv) Accounts Receivable - all accounts receivable, trade accounts, notes receivable, book debts and other debts due or accruing due to the Vendor and the benefit of all security for such accounts, notes and debts; (xxv) Prepaid Expenses - all prepaid expenses; (xxvi) Agreements - all rights under leases of personal property, orders or Contracts for the provision of goods or services (whether as buyer or seller), distribution and agency agreements, employment and collective agreements, agreements and instruments relating to employee pension or benefit plans and other Contracts not otherwise referred to in this Section 1.1(nn)(viii), including, without limitation, the Contracts described in Schedule 3.1(24). (xxvii) Consents - all Consents, including, without limitation, the Consents described in Schedule 3.1(14); (xxviii) Intellectual Property - all trade or brand names, business names, trade marks, trade mark registrations and applications, service marks, service mark registrations and applications, copyright registrations and applications, patents, patent registrations and applications and other patent rights (including any patents issued on such applications or rights), trade secrets, proprietary manufacturing information and know-how, equipment and parts lists and descriptions, instruction manuals, inventions, inventors' notes, research data, unpatented blue prints, drawings and designs, formulae, processes, technology and other intellectual, industrial or proprietary rights, together with all rights under licences, registered user agreements, technology transfer agreements and other agreements or instruments relating to any of the foregoing, including, without limitation, the Intellectual Property described in Schedule 3.1(34); (xxix) Computer Hardware and Software - all computer hardware and software, including all rights under licenses and other agreements or instruments relating thereto; (xxx) Records - all Records (other than those required by law to be retained by the Vendor, copies of which will be made available to the Purchaser); and (xxxi) Goodwill - all goodwill, together with the exclusive right for the Purchaser to represent itself as carrying on the Business in succession to the Vendor and the right to use any words indicating that the Business is so carried on, including the exclusive right to use the name ., or any variation thereof, as part of the name or style under which the Business or any part thereof is carried on by the Purchaser; (ll) "Purchase Price" has the meaning ascribed in Section 2.2; (mm) "Real Properties" means the real properties included in the Purchased Assets which are owned by the Vendor and which are described in Schedule 3.1(30)(a); (nn) "Records" means all technical, business and financial records relating to the Business, including, without limitation, 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), but not including those records which are part of the Excluded Assets; (oo) "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; (pp) "Release" has the meaning ascribed in Section 3.1(31)(a)(iv); (qq) "Replacement Plans" has the meaning ascribed in Section 4.6; (rr) "Tax" and "Taxes" have the meaning ascribed in Section 3.1(29)(a)(i); (ss) "Tax Return" has the meaning ascribed in Section 3.1(29)(a)(ii); (tt) "Transactions" means the purchase and sale of the Purchased Assets and all other transactions contemplated by this Agreement ; and (uu) "Transferred Employee" has the meaning ascribed in Section 4.6. 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 documents 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 Vendor, 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(10)(a) in this Agreement will have to be amended to refer to any exception. 1.10 Calculation of Time Periods Where a time period is expressed 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 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 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 Assets On the terms and subject to the fulfilment of the conditions of this Agreement, 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 Assets. 2.2 Purchase Price The aggregate purchase price (the "Purchase Price") payable by the Purchaser to the Vendor for the Purchased Assets 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: Annotation: : How the Purchase Price is to be paid, and how its payment is to be secured if payment is spread out over a number of instalments, need to be set out if applicable to the Transactions. This Agreement provides for a deposit to be paid on signing 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. It also provides for payments to be made in two later instalments under a promissory note which is secured by a charge over the Purchaser's assets, including the Purchased Assets, pursuant to a General Security Agreement. And it provides for the assumption of the Assumed Liabilities pursuant to an Assumption Agreement. Since the Vendor will remain contractually liable to the creditors of the Business under the trade payables and other obligations being assumed by the Purchaser, and thereby runs the risk that the Purchaser may fail to pay such creditors after Closing, the General Security Agreement used to provide security for the payment of the promissory note can also be used to provide security for performance of the Assumption Agreement. 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 fees". The Party entitled to be reimbursed runs the risk of being unable to collect from the other. While the placing in escrow of a certain portion of the Purchase Price may be requested by a Purchaser to provide a dedicated fund against which Claims for indemnification may generally be made, some of the Purchase Price might also be placed in escrow to be used to satisfy a liability which is not quantifiable at the Closing Date, such as the amount needed to effectively remediate a polluted Real Property or the amount to be remitted to the Canada Revenue Agency in the absence of a certificate issued under section 116 of the ITA. As an alternative to placing funds in escrow, the Agreement may provide the Purchaser with a right to set-off any Claims for indemnification against any amounts due under the promissory note. As an alternative to, or in addition to, securing payment of the promissory note with a general security agreement from the Purchaser, the Vendor may request a guarantee from the controlling shareholder of the Purchaser (which might in turn be secured by a general security agreement covering that shareholder's assets) or a letter of credit from a financial institution. If a general security agreement is taken from the Purchaser to secure the promissory note, the Vendor will in all likelihood not only have to subordinate its security position to the security taken by the bank which is providing purchase or working capital financing but also postpone its rights to payment under the promissory note if the Purchaser goes into default with the bank. (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 to the Vendor 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 (which have not been waived in writing) 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 (which have not been waived in writing) 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. (d) The release from trust and payment of the Deposit to either Party in accordance with this Section 2.3(1) shall not prejudice the enforcement of any rights either Party may otherwise have under this Agreement. (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 1.3(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 Purchaser will pay to the Vendor $. of the balance of the Purchase Price in two equal instalments due on . and . respectively, which obligation shall be evidenced by delivery at the Closing Time of a promissory note of the Purchaser in favour of the Vendor in the form set out in Schedule 1.3(4)A, payment of which note shall be secured by the execution and delivery by the Purchaser at the Closing Time of a general security agreement in the form of the agreement annexed hereto as Schedule 1.3(4)B. (5) The Purchaser will assume the Assumed Liabilities pursuant to an assumption agreement in the form set out in Schedule 2.3(5) executed and delivered by the Purchaser at the Closing Time. 2.4 Final Determination of Purchase Price Annotation: : As mentioned in the Annotation dealing with Section 1.1(jj), the Parties may decide to adjust the Purchase Price based upon any differences between the Net Worth of the Business recorded on the Audited Financial Statements and the Net Worth recorded on the Closing Date Financial Statements. If the Net Worth goes up, the Purchaser pays the amount of the increase to the Vendor, and if the Net Worth goes down, the Vendor pays the amount of the decrease to the Purchaser. Depending upon the size of the adjustment expected and the time limits set for its calculation and payment, the Parties may agree that interest accruing from the Closing Date should also be payable on any adjustment amount. 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 note delivered for the remaining instalments. (1) Within 90 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 shall be final and binding upon the Parties, absent manifest error, unless the Purchaser notifies the Vendor in writing that it disputes any amounts shown therein within 10 Business Days after receipt by the Purchaser of the Closing Date Financial Statements. (3) If 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 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 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 2 Business Days following the later of (a) the 10 Business Day period referred to in Section 2.4(2) or (b) the resolution of any dispute in accordance with Section 2.4(3), 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. 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 those Purchased Assets to which Section 116 of the ITA applies containing a certificate limit for the Vendor at least equal to that portion of the Purchase Price allocated hereunder to such Purchased Assets, 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 real property. 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 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 value of the Real Properties 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(29)(d) of this Agreement). If the Vendor is a non-resident, and given the significant tax consequences to the Purchaser, the Purchaser will generally withhold on Closing sufficient funds from the Purchase Price in the absence of a section 116 certificate to ensure that the Purchaser can remit the requisite amount of withholding to the Canada Revenue Agency. Even though the Parties may agree that the payment of the Purchase Price be made 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. 2.6 Allocation of Purchase Price The Vendor and Purchaser agree to allocate the Purchase Price among the Purchased Assets in accordance with Schedule 2.6 and to report the sale and purchase of the Purchased Assets for all federal, provincial and local tax purposes in a manner consistent with such allocation, and shall not dispute such allocation in connection with any audit or other proceeding. Annotation: : In an effort to minimize their respective tax liabilities resulting from the Transactions, the Vendor and Purchaser will attempt to allocate the purchase price amongst the various asset categories which comprise the Purchased Assets, while recognizing that a high value allocated to a particular category may be advantageous to one party and disadvantageous to the other. While the Vendor may be concerned about the tax implications of such values for the year of the sale, the Purchaser may be more concerned about the tax implications for those years following the sale and the extent of various deductions then available. For example, a high value allocated to depreciable property may provide the Purchaser with greater deductions for capital cost allowance in subsequent years, but may trigger a recapture of capital cost allowance for the Vendor in the year of the sale. The Purchaser may prefer to allocate high values to inventory, whereas the Vendor may prefer to allocate high values to non-depreciable capital property. Although the Canada Revenue Agency may be entitled to reallocate the purchase price among the Purchased Assets pursuant to section 68 of the ITA if it deems the allocations made by the parties to be unreasonable, the allocations negotiated between arms-length parties are generally upheld. 2.7 ETA Election The Vendor and Purchaser shall, on the Closing Date, elect jointly under subsection 167(1) of the ETA, in the form prescribed for the purposes of that subsection, in respect of the sale and transfer of the Purchased Assets hereunder. The Purchaser shall file such election with the Canada Revenue Agency not later than the day on which it is required to file its GST return for its reporting period which includes the Closing Date and shall provide evidence of such filing to the Vendor. Annotation: : Subsection 167(1) of the ETA provides that the Vendor and Purchaser may elect upon the sale of all or substantially all of the assets of a business (using form GST 44) that GST does not to apply to such sale, provided that they are both GST registrants. "Substantially all" is defined to be 90%. The election is to be filed by the Purchaser with its GST return for the period in which the Closing takes place, and until the Purchaser does so, the Vendor remains liable for collecting and remitting GST on the Transactions. The Vendor should therefore require some evidence from the Purchaser that filing of the election has taken place. In the absence of such an election, the Vendor is generally required to collect GST on the purchase price paid for the assets supplied. Since it is important that the Parties be GST registrants, this Agreement contains warranties of both the Vendor and Purchaser in Sections 3.1 (2) and 3.2(8), respectively, regarding their respective GST registration numbers. An Internet-based GST registry operated by the Canada Revenue Agency allows each Party to confirm that the other Party is registered for GST and whether the GST number provided by that Party is valid. Should a Vendor fail to collect and remit any GST payable while relying on the Purchaser to do so, only to learn after Closing that the Purchaser was not registered despite the Purchaser's warranty to the contrary, the Vendor will not be able to escape liability for the GST despite the Purchaser's misrepresentation. This was the result of the decision of the Tax Court of Canada in Lee Hutton Kaye Maloff & Paul Henriksen v. Canada [2004] T.C.J. No. 429 (QL). 2.8 Transfer Taxes The Purchaser shall be liable for and shall pay all federal and provincial sales taxes (including any retail sales taxes and land transfer taxes) and all other taxes, duties, fees or other like charges of any jurisdiction properly payable in connection with the transfer of the Purchased Assets by the Vendor to the Purchaser. Annotation: : If the Purchased Assets include any Real Properties, provincial land transfer taxes will be payable on the portion of the Purchase Price allocated to the Real Properties. Provincial retail sales taxes generally apply to the transfer of tangible personal property, although inventory purchased for resale is often exempt. 2.9 Income Tax Election The Purchaser and the Vendor shall, on the Closing Date, elect jointly in the prescribed form under section 22 of the ITA as to the sale of the accounts receivable and other assets that are referred to in Section 1.1 (nn)(vi) and described in section 22 of the ITA and to designate in such election an amount equal to the portion of the Purchase Price allocated in Schedule 2.6 to such assets as the consideration paid by the Purchaser therefor. The Purchaser and the Vendor shall each file such election with the Canada Revenue Agency after the Closing Date. Annotation: : In the sale of all or substantially all of the assets of a business, Section 22 of the ITA allows the Vendor and Purchaser to jointly elect (using form T2022) what value is to be allocated to the Vendor's accounts receivable in order to reduce the amount of tax which might otherwise be paid by the Vendor if the face amount of the receivables was taken into the Vendor's income. A Purchase Price allocation to receivables which is for less than their face value creates a loss for the Vendor which can be deducted from its income, but which is included in the Purchaser's income.
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 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 Vendor 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 Vendor 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. 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), the Purchaser 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, and 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. A Vendor with relatively strong bargaining power may negotiate the right to update various disclosure schedules during the Interim Period and thereby allocate the risk of any Interim Period exposure to the Purchaser. 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(20)). 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(11) (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 |