The Sale of a Business: One Giant ‘Beauty Contest’ | Scarfone Hawkins LLP

Posted by | November 29, 2013 | Tips | No Comments


Beauty contests are competitions where judges scrutinize the personality, talent, appearance and logic of its contestants using a combination of rigid and subjective criteria, to determine, which entrant best exemplifies “beauty.”

While business law is not often correlated to spectacles filled with baton twirling or snippets of autobiographical monologues, there are times when a business will want to parade its attractiveness to a third party, such as a financing bank, much like a beauty contestant will want to win the favour of a panel of judges. When regarded in this manner, the business world is, in a sense, a “giant beauty contest” where players in both the private and public sectors use whatever means at their disposal (i.e. financial statements, client lists, and intellectual property) to gain advantage over competitors, only without peacocking in ostentatious evening gowns.

Take for example a common situation where a corporation and its goodwill are targeted by a non-arm’s length, third party purchaser. In many instances the purchaser will hedge its prospects and engage more than one target entity in sale discussions. Part of this process will involve the purchaser performing its own due diligence of each business organization, using rigid and subjective criteria, akin to a beauty pageant judge comparing the attributes of certain contestants.

If you are a controlling shareholder determined to divest your interest in the corporation, you will want to ensure that the corporation’s warts do not deter a potential purchaser into acquiring the other targeted entity.

Below are some common examples that a purchaser’s due diligence will uncover in a share purchase transaction, which may be regarded as an ugly mole, if not dealt with prior to discussions or expeditiously thereafter.


In a share purchase transaction, the targeted entity continues, including its obligations to employees. A purchaser may be unwilling to continue the employment of certain employees. Accordingly, termination pay will be an obligation of the purchaser unless otherwise dealt with prior to closing. Further, as a general rule, employees with many years of service will require greater termination pay, which may deter a purchaser who has allocated certain amount of proceeds to the buyout and may be unwilling to assume further financial burden if the targeted entity has several employees with long tenures.

Pending Litigation

Litigation or pending litigation can often sour a potential purchaser, particularly since an entity’s probability of success in a civil matter cannot be guaranteed. A selling shareholder can offer to indemnify the corporation and purchaser, for any judgment. This means the legal exposure will be carved out of the transaction and remain with the selling shareholder; however, in most instances, the financial risk of an indemnity may be too burdensome for the purchaser. As such, if practical, a corporation should make its best efforts to ensure that all litigation or pending litigation is attended to prior to engaging the purchaser.

Shareholders’ Agreements

If a prospective purchaser is only willing to purchase a controlling interest, a unanimous shareholders’ agreement may be an obstacle, particularly if there are clauses, which govern the sale of any of the corporation’s shares to a non-arm’s length third party. In such instances, the non-selling shareholder may have rights enumerated in the shareholders’ agreement, such as the pre-emptive right to purchase the shares of the selling shareholder or the right to “piggy-back” an offer made to any other shareholder (i.e. the purchaser must extend the same offer on the same terms to the other shareholders).

Corporate Records

Due diligence in any share purchase transaction will almost always involve examining a corporation’s records, such as its minute book, to amongst other things, ensure that all corporate activity has had the requisite authority. A prospective purchaser may be weary if a minute book cannot be located or has large intervals of time that are undocumented, particularly if the corporation cannot provide a history of its business or ownership, after a corporation has had an opportunity to bring its records up-to-date.

To ensure that your corporation receives top scores, a proactive shareholder will always ensure that moles are removed prior to strutting its potential in front of a judging, prospective purchaser.

Adam J. Savaglio is an associate at Scarfone Hawkins LLP practicing in business law and employment law and can be reached at 905-523-1333/

As published in the Hamilton Spectator on May 16, 2013




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