In the context of an asset acquisition, both the seller and the buyer need to consider whether the proposed transaction triggers shareholder approval requirements under corporate legislation.

Legislative requirements

Subsection 189(3) of the Canada Business Corporations Act (the CBCA) states that "a sale, lease or exchange of all or substantially all the property of a corporation other than in the ordinary course of business of the corporation" requires special resolution of shareholders, being not less than two-thirds of the votes cast by shareholders who voted in respect of the resolution. The Ontario Business Corporations Act has similar provision.

It should also be noted that minority shareholders who were entitled to vote on the special resolution have dissent right which entitles them to be paid "fair value" for their shares if the asset sale proceeds.

"All or substantially all"

So what constitutes "all or substantially all" of the property of a corporation? The Canadian courts conduct both the quantitative and the qualitative analysis when interpreting the phrase, with the qualitative test being ultimately determinative.

The quantitative analysis is mathematical and it involves determining what percentage of the total assets of the corporation is being sold. Courts will examine all relevant factors to establish corporate value, including book value, net asset value, market value, EBITDA, and gross and net earnings. If the value of the assets being sold exceeds 75% of the corporation's consolidated assets, then it is presumed that the sale is "all or substantially all" of the corporations' property. The presumption can be rebutted under the qualitative analysis described below.

The qualitative analysis looks at whether the transaction would "transform the fundamental nature of the corporation" while taking the purpose of the statutory provision (to protect shareholders from fundamental changes occurring without their consent) into account. The court will consider, among other things, whether the transaction:

  • is tantamount to a liquidation or winding up of the corporation;
  • constitutes a significant change to the line of business historically carried on by the corporation; or
  • divests the corporation of its key resources of revenue thus putting the future viability of the corporation in question.

Given that obtaining shareholder approval can be a time consuming and costly process, both parties should conduct analysis to determine whether the proposed asset acquisition triggers shareholder approval under corporate legislation as early as possible.

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