A buyer closing an asset purchase is not just walking away from the seller's corporation — that corporation is exactly where the buyer's post-closing indemnity claim will land if something goes wrong, which makes what happens to the shell the buyer's problem too.
Key takeaways
An asset sale is often described from the buyer's side, but a sophisticated buyer has real reasons to understand what happens on the seller's side too. The corporation that sold the assets does not disappear at closing — it survives, holds the sale proceeds, and remains the entity standing behind whatever indemnities the buyer negotiated. If that shell cannot make good on a claim, the indemnity was never worth what it looked like on paper.
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,” and subsection 189(6) is explicit that “each share… carries the right to vote in respect of a sale, lease or exchange… whether or not it otherwise carries the right to vote” — so even non-voting preferred shares get a say on this specific resolution. Shareholders who oppose the sale can dissent under section 190: entitlement runs to “the fair value of the shares… determined as of the close of business on the day before the resolution was adopted,” with statutory clocks on both sides — the corporation must give notice of adoption within ten days, the dissenting shareholder must demand payment within twenty days of that notice, and the corporation must make a written offer, showing how fair value was determined, within seven days of the later of the sale becoming effective and receiving the demand. A buyer's closing checklist should confirm this process ran, not just that a signature exists on a board resolution.
A treadstonelaw answer on what happens when a carve-out leaves the seller's company unable to pay its debts puts the risk plainly: “If a carve-out strips valuable assets out of the corporation, leaving what remains unable to pay its existing debts, the seller's own creditors can pursue whatever remedies are available against that now-hollowed-out corporation, and the seller personally may face exposure if they were involved in structuring a transfer that left creditors unable to be paid.” More pointedly for a buyer: “transfers made specifically to put assets beyond the reach of creditors can, in some circumstances, be challenged and unwound after the fact.” An asset sale that leaves the seller's shell insolvent is not only the seller's problem — if the underlying transfer is later challenged and unwound, the buyer's own title to what it purchased can be drawn into the dispute. Confirming the seller's post-sale solvency, or that adequate reserves exist for known creditors, belongs in a buyer's diligence.
A seller near the small-supplier registration threshold might expect a large asset sale to push it over the line. It generally does not. Section 148 of the Excise Tax Act sets the small-supplier threshold at $30,000 (or $50,000 for a public service body) measured over the four preceding calendar quarters, and the measure “expressly excludes” both consideration attributable to goodwill under section 167.1 and “supplies by way of sale of capital property.” A one-time sale of the operating business, in other words, does not by itself convert a small supplier into a GST/HST registrant.
Once the sale proceeds are in the corporation, the seller's typical choices are to distribute the after-tax proceeds out to its shareholders, retain the corporation as an investment holding company, or wind it up entirely — a decision that turns on the seller's own tax and estate planning and is properly worked through with the seller's own advisors rather than assumed by the buyer. What does not go away regardless of that choice is the corporation's record-keeping obligation: section 230(4)(b) of the Income Tax Act requires records and books of account, “together with every account and voucher necessary to verify the information contained therein,” to be kept “until the expiration of six years from the end of the last taxation year to which the records and books of account relate.” The corporation still has to be capable of producing those records years after it has stopped operating the business it sold — which is also, not coincidentally, why a buyer's indemnity claim against that same corporation is only as good as its ability to still be found and to still have something to collect against.
This is the mirror image of buying a division rather than a whole company, which looks at the same shell-and-carve-out mechanics from the buyer's side of a partial sale; the assumed-liabilities schedule that decides what actually left the shell is covered in assumed liabilities in an asset transaction; and how the seller's after-tax proceeds compare to what a share sale would have delivered instead is worked through in pricing the difference between a share and asset deal.
Seller Co. sells substantially all of its operating assets for $5 million. Two of its shareholders hold non-voting preferred shares and, under subsection 189(6), still vote on the sale resolution alongside the common shareholders. One common shareholder dissents under section 190, and Seller Co. sends its written offer within seven days of the sale closing, showing how it determined fair value as of the day before the resolution. After the sale, Seller Co. retains $600,000 in a reserve against the buyer's negotiated indemnity period before distributing the balance of the proceeds to its shareholders — a step the buyer specifically asked for during negotiations, precisely because an indemnity against an empty shell is not worth negotiating for in the first place.
Yes. Subsection 189(6) of the CBCA gives every share the right to vote on a sale of all or substantially all of a corporation's property, regardless of whether that share otherwise carries voting rights.
A transfer structured specifically to put assets beyond the reach of creditors can, in some circumstances, be challenged and unwound after the fact, which is why a buyer should care whether the seller's remaining corporation stays solvent after the sale.
Yes. Income Tax Act record-retention rules require books and supporting accounts and vouchers to be kept for six years from the end of the relevant taxation year, regardless of whether the corporation is still actively carrying on business.
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