A sponsor that only wants one segment of a target's business is asking the seller to do work it has no obligation to do. Where a seller agrees, the carve-out's timing and its tax treatment turn out to matter as much as the price.
Key takeaways
Buying a division is not simply a smaller version of buying a whole company. It requires the seller to first separate the piece a buyer wants from the piece it does not, and that separation — whether it happens before or after closing, and how the tax rules treat a partial transfer — changes both the risk profile and the price.
A treadstonelaw answer on whether a seller can refuse a carve-out is direct: “Yes — a seller has no legal obligation to reorganize their business to match what a particular buyer wants to buy.” It goes further: “a carve-out is a negotiated term, not something a buyer can simply require, and a seller is free to insist on selling the whole company, or a whole division, as a single unit.” Sellers decline carve-outs for their own reasons — often the tax consequences of splitting the business, or concern about whether what remains is still viable on its own. A buyer facing a refusal is generally left with three options: take the whole package, walk away, or buy everything and resell the unwanted piece separately afterward.
Where a seller does agree to carve out a division, when the separation actually happens changes the buyer's exposure. A treadstonelaw answer on carve-out timing draws the line clearly: completed before closing, “the unwanted asset or liability is already out of the target corporation by the time you buy its shares — you simply never own that piece, and there's nothing further to untangle after the fact.” Completed only after closing, “you now need a separate post-closing transaction to move it out… and during that entire period, you own the unwanted piece and whatever liability comes with it.” The safer sequencing, wherever the seller will agree to it, is separation before the buyer's money changes hands.
Section 167 of the Excise Tax Act does not require a whole-company sale to apply. Its own language covers “a supply of a business or part of a business,” relieving the transaction from tax where the buyer is “acquiring ownership, possession or use of all or substantially all of the property that can reasonably be regarded as being necessary for the recipient to be capable of carrying on the business or part as a business.” The test for a division sale is therefore the same all-or-substantially-all standard applied to the division itself, not to the seller's whole enterprise — the buyer needs what is necessary to run that segment, not everything the seller owns. Goodwill attributable to the division sits outside the tax base under section 167.1 on the same terms as it would in a whole-company sale.
On the seller's side, subsection 189(3) of the Canada Business Corporations Act requires shareholder approval for “a sale, lease or exchange of all or substantially all the property of a corporation other than in the ordinary course of business,” with every share carrying a vote on that resolution “whether or not it otherwise carries the right to vote.” A division sale that leaves the seller with a substantial continuing business behind may not meet that all-or-substantially-all threshold at all — and where it does not, the shareholder-vote and dissent-rights machinery in section 189 and section 190 may simply not be triggered. That is a real difference from selling the whole company as assets, where shareholder approval is close to unavoidable.
Ontario's employment continuity rule applies where the business, or the part of it an employee works in, is sold to a new owner and the employee keeps working for that new owner — the guide describes prior service as carrying forward rather than resetting to zero, as detailed in the continuity-of-employment guide. A buyer of a single division should expect the employees working in that division, if retained, to bring their accrued length of service with them, the same way a whole-company buyer would.
Once the division is separated, the same assumed-versus-excluded liability questions covered in assumed liabilities in an asset transaction apply to it, a partial carve-out can also be one leg of a wider hybrid structure that splits the difference, and what remains of the seller once the division is gone is exactly the question covered in buying assets and leaving the corporation behind.
A manufacturer runs two segments: an industrial-supply division generating $9 million in revenue and a smaller retail division generating $1.5 million. A buyer wants only the industrial-supply division. The seller agrees to the carve-out but insists on completing it before closing rather than after, transferring the retail division's assets to a company the seller retains personally in the weeks before signing. By the time the buyer's asset purchase closes, the retail segment was never part of what it bought, and the parties elect out of GST/HST under section 167 on the basis that the buyer is acquiring all or substantially all of what is necessary to run the industrial-supply business on its own. Because the seller retains the retail division and a meaningful continuing business, the sale of the industrial segment alone does not amount to all or substantially all of the seller's property, and no shareholder vote under section 189 is triggered on the seller's side.
No. A seller has no legal obligation to reorganize its business to match a buyer's preferred scope; a carve-out is a negotiated term, and a seller can insist on selling the whole company or nothing.
The same section 167 election is available for the supply of a business or part of a business, so a division sale can be relieved from tax on the same all-or-substantially-all test applied to what the buyer needs to carry on that division, with goodwill separately excluded from the tax base.
Possibly not on the seller's side. Shareholder approval under the CBCA is triggered by a sale of all or substantially all of a corporation's property; a division sale that leaves the seller with a real continuing business may fall outside that threshold.
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