ARTICLE
24 June 2025

How To Write A Share Purchase Agreement In Ontario: A Complete Guide.

Pacific Legal PC

Contributor

Pacific Legal is a corporate and commercial law firm dedicated to helping businesses succeed through expert legal counsel. Specializing in mergers and acquisitions, private equity, cross-border transactions, and complex contracts, the firm offers the capabilities of a large practice with the personalized service of a boutique. With a client-focused approach, Pacific Legal delivers tailored legal solutions that address immediate needs while supporting long-term growth. Clients benefit from strategic insight, efficient execution, and a strong commitment to lasting partnerships that deliver measurable results.

In Ontario's fast-paced business world, corporate takeovers are becoming a more popular growth strategy among entrepreneurs and investors.
Canada Ontario Corporate/Commercial Law

In Ontario's fast-paced business world, corporate takeovers are becoming a more popular growth strategy among entrepreneurs and investors. One key legal tool in these processes is the Share Purchase Agreement (SPA), a legally enforceable document controlling the conditions of acquiring shares in a company. It provides that the acquirer receives ownership of the corporation, its rights, obligations, liabilities, and assets, while offering the vendor protections and exit guarantees.

Whether you're a seasoned investor in Toronto's downtown or a new buyer probing into a business venture in Mississauga, it's essential to know how to write a Share Purchase Agreement to protect your investment, reduce risk, and be legally compliant. Inadequately written SPAs can result in lawsuits, broken deals, or unexpected liabilities that could otherwise be avoided through proper due diligence and astute legal consultation.

This article gives a detailed guide to preparing a Share Purchase Agreement in Ontario. It explains the agreement's essential elements, regulatory environment, due diligence process, typical pitfalls, and legal best practices reinforced by Ontario case law and statutory citations.

What is a Share Purchase Agreement?

A Share Purchase Agreement is a binding agreement among a buyer and seller for the sale of shares in a corporation. Acquisition of the shares by the buyer confers ownership interest in the company, which usually encompasses:

  • Voting rights,
  • Dividend rights,
  • Rights to the assets of the company upon dissolution,
  • Exposure to the liabilities and continuing obligations of the company.

In contrast to an Asset Purchase Agreement, by which specific assets and liabilities are sold, an SPA leads to the transfer of the legal entity itself, with continuity of contracts, employment arrangements, licenses, and goodwill being maintained.

Share Purchase vs. Asset Purchase: A Critical Distinction

It is crucial to comprehend the difference between the two acquisition forms prior to preparing an SPA:

Share Purchase:

  • Purchaser buys the whole corporate entity together with liabilities, ongoing contracts, employee obligations, and possible litigation.
  • Easier from the contractual perspective as less assignment of contracts or licenses is required.
  • Usually used when business continuity and reputation are crucial.

Asset Purchase:

  • Buyer selectively purchases assets (e.g., inventory, intellectual property, equipment) and takes certain liabilities.
  • Gives greater flexibility and risk reduction but calls for greater consents and documentation.

Also Read: Asset Purchase vs Share Purchase: A Comprehensive Analysis

Illustration:

If the buyer wants to purchase a software development business in Mississauga for its own proprietary codebase and engineering staff, a share purchase enables the buyer to inherit existing software licenses, development contracts, and employee relationships. With an asset purchase, however, there is re-negotiation of separate contracts and re-employment of employees under new contracts.

Key Components of a Share Purchase Agreement

A properly written SPA must be complete, prospective, and tailored to the particular transaction. The following are usually components of Ontario SPAs:

1. Parties to the Agreement

Identify clearly the legal persons or parties concerned: full names, addresses, incorporation numbers, and their capacity in the transaction (buyer, seller, guarantor, etc.).

2. Definitions and Interpretations

Define crucial terms such as:

  • "Closing Date,"
  • "Material Adverse Effect,"
  • "Disclosure Schedule,"
  • "Representations and Warranties," etc.

This provision reduces uncertainty and minimizes future controversy.

3. Purchase Price and Payment Terms

State:

  • Fixed or adjustable total purchase price,
  • Currency (most likely CAD),
  • Payment structure (lump sum, installments, or share for share),
  • Escrow arrangements (if any),
  • Adjustment to purchase price based on net working capital or debt amount

4. Conditions Precedent

Identify what must be fulfilled prior to closing, including:

  • Regulatory approvals (e.g., Competition Bureau),
  • Shareholder or board approvals,
  • Satisfactory due diligence completion,
  • No material breach of representation or warranty.

5. Representations and Warranties

These are the cornerstone of the SPA and contain statements by the seller (and in some cases, buyer) concerning:

  • Legal status of the company (valid formation, good standing),
  • Validity and ownership of shares,
  • Accuracy of financial statements,
  • Tax filings and compliance,
  • Compliance with labor laws and material agreements,
  • Lack of undisclosed liabilities or pending litigation.

Case Law:

Teixeira v. Markgraf Estate, 2017 ONCA 819: The Ontario Court of Appeal held that the misrepresentation by the seller about the title of the property gave rise to damages. Likewise, a misstatement in an SPA may give rise to liability for negligent or fraudulent misrepresentation.

1. Indemnities

Indemnity provisions distribute risk and financial liability for breaches or liabilities found after closing.

  • Seller can indemnify the buyer against breaches of warranties, tax obligations, or litigation.
  • Indemnity clauses usually carry time limits (18-24 months, for example) and monetary ceilings.

These are highly negotiated parts, particularly in private company transactions.

2. Restrictive Covenants

These keep the seller from interfering with the business after the sale. Common covenants are:

  • Non-Compete – Seller is prohibited from opening or joining a competing business for a specific time frame within a geographic area.
  • Non-Solicit – Seller is not allowed to steal employees or customers of the business.

Ontario courts will only enforce restrictive covenants if they are reasonable as to scope, term, and geographic area.

3. Confidentiality Clauses

These clauses guarantee that proprietary information shared during negotiations will be confidential both prior to and subsequent to closing.

4. Governing Law and Jurisdiction

The SPA should provide that it is governed by Ontario law and specify the correct mechanism for resolving disputes:

  • Ontario courts (typically the Ontario Superior Court of Justice), or
  • Arbitration under the Arbitration Act, 1991.

5. Dispute Resolution Clause

Select one of:

  • Mediation,
  • Arbitration,
  • Litigation.

Arbitration is commonly used for privacy and expedition but restricts appeal rights.

The SPA Process: Step by Step

  1. Initial Negotiations – Negotiate intent, price range, structure.
  2. Letter of Intent (LOI) – A non-binding letter outlining the terms of the transaction.
  3. Due Diligence – Buyer reviews financial, legal, and operating status.
  4. Drafting the SPA – Legal advisors include negotiated terms and disclosures.
  5. Review and Negotiation – Parties trade markups until agreement is reached.
  6. Signing – SPA is signed but not yet operative.
  7. Fulfilment of Conditions – Approvals and documentation collected.
  8. Closing – Funds transferred and share certificates handed over.
  9. Post-Closing – Update government filings, shareholder registers, and inform CRA where necessary.

Due Diligence on Ontario Share Purchases

Good due diligence picks up red flags and prevents the buyer from assuming concealed liabilities. It involves:

1. Financial Due Diligence:

  • Audit reports,
  • Balance sheets, P&Ls, tax returns for 3–5 years.

2. Legal Compliance:

3. Contracts Review:

  • Customer agreements,
  • Supply/vendor contracts,
  • Loan agreements,
  • Leases.

4. Employment Matters:

  • Employee contracts,
  • Benefits and pension plans,
  • Severance obligations under the Employment Standards Act, 2000.

5. Intellectual Property:

  • Trademark and patent registrations,
  • IP assignment agreements,
  • Licensing arrangements.

Share Transfer Restrictions: What to Include

Even after the transaction, restrictions can control resale or share transfer for stability and safeguarding for current stakeholders:

  1. Right of First Refusal (ROFR)- Compels shareholders to sell to others first prior to selling to third parties.
  2. Tag-Along Rights– Entitles minority stakeholders to accompany a sale by majority holders.
  3. Drag-Along Rights– Lets majority stakeholders compel minority holders to sell in a complete takeover.
  4. Lock-In Periods- Prevents share transfers for a specified period after closing to ensure stability.

Case Law:

Savanta Inc. v. Hilditch, 2022 ONSC 1384-The court emphasized that ambiguous or vague share transfer prohibitions may make them unenforceable. Write with clarity.

Common Pitfalls to Avoid in Ontario SPAs

1. Vague Language

Vagueness invites litigation. Be specific and non-ambiguous with language.

2. Insufficient Disclosure

The seller must prepare a comprehensive disclosure schedule. Buyers must scrutinize all documents and request clarification.

3. Excessive Restrictive Covenants

Broad covenants can be unenforceable in Ontario. Restrict in time, geography, and scope.

4. Inadequate or Ambiguous Indemnity Limits

Specify survival periods (e.g., 18–36 months after closing) and liability limits (e.g., 50% of purchase price).

5. Failure to Consider Tax Liabilities

Make sure:

  • All tax returns are current,
  • CRA has issued tax clearance certificates,
  • Inclusion of gross-up or clawback provisions for tax where appropriate.

Case Law:

Frye v. Sylvestre, 2023 ONCA 796 held that there was no binding SPA since material terms (price, method) were never agreed to. Emphasizing once more, completeness and clarity are critical.

Key Statutes Regulating Share Purchases in Ontario

  • Ontario Business Corporations Act (OBCA)- Regulates issuance of shares, corporate administration, and books.
  • Securities Act (Ontario)– Applies in case of public share transactions or private placements.
  • Competition Act (Canada)-Big deals are subject to review if thresholds are crossed.
  • Employment Standards Act, 2000- Purchaser takes over employment commitments unless otherwise negotiated.
  • Arbitration Act, 1991 – Applies to arbitration clauses contained in the SPA.

Conclusion

Preparing a Share Purchase Agreement in Ontario is an advanced legal task that involves detail, forward thinking, and knowledge of statutory and common law. A defective SPA may leave you vulnerable to enormous financial, legal, and reputational consequences.

In conclusion, a good SPA should:

  • Evidently establish parties, price, and payment terms,
  • Contain detailed representations and warranties,
  • Consider and manage risks through indemnities and restrictive covenants,
  • Be based on thorough due diligence
  • Meet Ontario legislation and provide adequate mechanisms for dispute resolution.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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