This post was contributed by Jean Allard, Partner, Norton Rose Canada
There are many business and tax reasons for acquiring the assets of a business instead of its shares.
From an employment and labour perspective, buying a business’s assets may be preferable to acquiring its shares because the buyer can clean house and recruit new staff.
Each Canadian province has its own legislation governing collective labour relations. This legislation contains provisions defeating the principle of privity of contract and, if the asset sale has the effect of transferring the business to the buyer, requiring that the collective agreement binding the seller will also be binding on the buyer.
In addition, this legislation transfers trade union bargaining rights from the seller to the buyer. Therefore, even if the seller’s collective agreement has expired by the time of the sale, for example, because of a hiatus in operations prior to the sale, the buyer may still be bound to the trade union’s bargaining rights. The buyer will then be obligated to negotiate with the union in good faith to form a new collective agreement.
The same principle applies when a severable part of a business has been transferred to the buyer. For example, when mining assets are acquired without interrupting mining operations, the acquisition is usually considered a business transfer. The same principle applies to a factory, hotel or retail business whose activities continue uninterrupted after the bulk of the assets are transferred.
For unionized employees, the Canadian Labour Code includes protection for trade union bargaining rights and collective agreements binding on the seller if the assets acquired mean the seller’s business essentially ends up in the buyer’s hands. The seller’s obligations to its unionized employees therefore pass to the buyer, as under provincial legislation.
In light of the above, we suggest that when valuing an asset transaction at the outset, a buyer must assess the workforce and the seller’s commitments to the employees, as these can significantly affect valuation.