If you are an entrepreneur or business owner looking to sell your business, you may or may not be familiar with the “Bulk Sales Act”. Below is a convenient summary of the act posted by Jordan Dolgin of DPC Law Firm.
Selling Your Business: How to Navigate the Bulk Sales Act
Odds are that, unless you are a lawyer or experienced with M&A transactions, the words “Bulk Sales Act” will mean nothing to you. However, if you are preparing to sell your business by way of a sale of assets and you operate in the Province of Ontario, you’ll come to respect (and possibly dread) the Bulk Sales Act (Ontario).
This blog post is designed to educate those of you who may be planning to sell your Ontario business via asset sale and want to prepare better for the process and not feel intimidated or clueless when the lawyers start throwing around the “BSA” acronym. Note this is Ontario, Canada focused. Ex. US equivalent of The Bulk Sales Act is the IRS Form 8594.
In a nutshell, here’s why you should care about the BSA and how it can impact your deal:
- the BSA’s purpose is to protect creditors of the seller upon the sale of part or all of the business;
- no comparable legislation exists elsewhere in Canada;
- failure to comply enables creditors of the seller to void the deal after closing forcing the buyer to possibly pay twice;
- the BSA’s scope is fairly wide and applies to every sale of goods (such as inventory, fixtures, equipment or chattels) in bulk outside of the ordinary course of business;
- the BSA does not apply if no tangible personal properly is involved in the sale; for example, a sale of IP rights, receivables and goodwill which does not involve any sale of “desks and chairs” or other physical items will generally be outside the application of the BSA; this type of sale of “intangibles” is more likely for services businesses rather than manufacturing or distribution businesses;
- the BSA does not apply to share sales;
- the BSA does not apply to sales by receivers, liquidators or trustees in bankruptcy;
- in some cases, the parties can apply for a court order exemption the deal from the BSA;
- in some cases, creditors may specifically provide waivers of their right to be paid as part of closing (for example, related party loans owing to the shareholders of the seller);
- BSA compliance involves: (i) the seller providing the buyer with a closing affidavit listing all secured/unsecured creditors who are owed amounts at closing (rather than after closing), (ii) the buyer filing the seller’s affidavit (and related materials) with the applicable court house relating to the sale within 5 calendar days of closing and (iii) arrangements being made for payment of such claims in connection with closing (which could involve either the direct assumption by the buyer of such liabilities as part of the deal and/or funding creditor claims from the closing proceeds);
- the parties are free to waive BSA compliance and the buyer can accept an indemnity from the seller in cases where the seller will remain creditworthy after closing and is very likely to discharge all closing liabilities to its creditors; for example, in the case of a divisional asset sale by a larger enterprise (rather than the sale of the entire business), there will likely not be enough cash due on closing to payout all creditors such that the parties will likely agree to either seeking a court exempting order or waiving compliance (with the associated seller indemnity); and
- failure to comply with the BSA can lead to severe consequences – i.e., a seller’s creditors can apply to a court (without the benefit of any limitation period) to void the sale such that the buyer becomes personally liable to account to the seller’s creditors for the value of the assets purchased (or their proceeds if such assets are subsequently sold).
From a buyer’s perspective, the BSA is important legislation to address in an asset sale transaction where it seeks comfort that the seller’s creditors will have no claim against the assets purchased after closing.
For this reason, it is important to assess as early as possible both (A) whether the BSA applies to your asset deal (i.e., essentially is tangible personal property being sold out of the ordinary course) and (B) how the parties wish to approach compliance or non-compliance in light of the deal terms/cash paid on closing and expected closing liabilities of the seller which are not being expressly assumed by the buyer under the deal.
If closing seller’s liabilities that need to be discharged for BSA compliance purposes are, for example, $500,000 but there is only $400,000 cash payable by the buyer at closing with no assumption of seller’s balance sheet liabilities, then the deal may need to be restructured to address BSA compliance.
The above is just a summary intended to get you up to speed on the main features of the BSA so you can have a meaningful discussion with your legal counsel early on about how it affects your deal and avoid late stage hiccups which can delay (or worse … kill) your deal.
As with most things in life, the proverb “chance favours the prepared mind” is alive and well.
For the original article click here.
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