Choosing between Acquiring Company Assets or Shares

When it comes to acquiring a company, it’s essential to determine the optimal structure for the operation. There are two main options: acquisition of assets and acquisition of shares. Each of these methods has its advantages and disadvantages, directly influencing the strategy and future results for the acquirer.

Understanding Asset Acquisition

Asset acquisition involves the purchase of some or all of a company’s assets. This can include real estate, equipment, inventory, and even intellectual property.

• Flexibility: You choose the specific assets you wish to acquire, potentially avoiding those that are not essential or that could result in unwanted liabilities.
• Protection against hidden liabilities: Acquiring assets offers some protection against the target company’s hidden liabilities or obligations. By buying only the assets, you generally don’t take on the liabilities unless specified in the agreement.
• Tax considerations: It is often possible to structure the acquisition of assets in such a way as to obtain tax advantages, particularly with regard to the depreciation of acquired assets.

Share Acquisition Explained

Share acquisition means buying the shares of a company, giving you control over the existing legal entity.

• Simplicity: Share purchase is generally simpler than asset purchase, as it does not require individual transfer of assets or contracts.
• Total acquisition: You get everything, including assets and liabilities. This can be advantageous if the company has undervalued assets or transferable tax benefits.
• Liability risks: A major concern is that the buyer generally assumes all the company’s debts and obligations, including those that were not known at the time of purchase.

Legal and tax implications in Canada

In Canada, tax and corporate laws have a considerable influence on the way acquisitions are structured. The Income Tax Code and the Canada Business Corporations Act (CBCA) are the two main pieces of legislation governing these transactions.

Tax considerations

• Section 85 of the Income Tax Code: This is a tax rollover that allows the transfer of assets from an individual to a corporation without triggering a taxable disposition. This provision is often used when acquiring assets to enable a tax-efficient transfer.
• Article 87 of the Income Tax Code: For corporate mergers, this provision allows two companies to merge their operations without triggering a taxable disposition. In the case of a share acquisition where a merger is planned, this provision is crucial.

Corporate considerations

• CBCA Section 184: This section deals with the amalgamation of two or more companies to form a single entity. Amalgamation may be a preferred method for some buyers, as it combines the assets and liabilities of the companies involved without requiring a transfer of assets or contracts.

Examples of Acquisitions in Canada

1. Scenario A – A technology-focused acquisition: Technology company A wishes to acquire start-up B for its intellectual property (IP). Since the value lies primarily in the IP and not in B’s corporate structure, A opts for an asset acquisition, specifically targeting the IP. By consulting the provisions of Section 85, they are able to structure the purchase in a tax-efficient manner.
2. Scenario B – Merger in the financial sector: Two banks, C and D, decide to merge in order to strengthen their market presence. They opt for a share acquisition followed by an amalgamation, relying on section 87 for tax reasons and section 184 of the CBCA to finalize the amalgamation.
3. Scenario C – Acquisition in the construction sector: A large construction company E wishes to buy a smaller company F, known for its lucrative contracts. E chooses to buy F’s shares in order to acquire the whole entity, including its contracts. However, E is aware of potential liabilities and carries out thorough due diligence prior to the purchase.

Expert advice

When it comes to acquisitions, every detail counts. Tax implications, potential liabilities and strategic advantages all need to be considered. It is therefore essential to work closely with a specialist lawyer to ensure that the acquisition is not only legal, but also beneficial to all parties involved.

1. The Canada Revenue Agency (CRA) website for the Income Tax Code.
2. The Justice Laws website for the Canada Business Corporations Act (CBCA).
3. Canadian Bar Association publications and articles.
4. Research portal of the Library of Parliament of Canada.