Treiber Law: L&E Considerations in Buying and Selling A Business

If you are buying or selling a business and that business has Ontario-based employees you need to speak to an Ontario labour and employment lawyer.  Seems simple enough, right?  Not quite.  

I am often asked to advise on transactions at the 11th hour when the deal is almost at the finish line.  This can be an extremely costly mistake because sometimes labour and employment law considerations (er… liabilities) may even alter whether a deal is viable.  

Outlined below are some key considerations for your business when considering the sale or purchase of another business: 

Due Diligence Considerations

As a purchaser, conducting effective due diligence is critical to conducting an accurate valuation of the seller.  It also helps identify risks and helps the purchaser assess the requirements for operations going forward.

In tailoring your due diligence requests, you will need to consider the following:

• What provinces does the seller operate in?
• Is the seller provincially or federally regulated?
• Is the seller’s workforce unionized?  (Note the successor provisions in the Labour Relations Act!)
• Is the deal a share purchase or an asset purchase?
• Is the purchaser willing to assume the seller’s labour and employment-related liabilities?

A purchaser’s diligence requests will be dependent on a wide number of factors, including the scope of review, budget, any materiality threshold or temporal restrictions, but the below are a list of key things that a purchaser may wish to seek diligence from a seller:

1. organizational charts;
2. an employee census (including position types, employment status, all forms remuneration, seniority and union status);
3. information related to recently terminated employees;
4. a list of employees on a leave of absence (the reasons and expected return date);
5. a list of employees on temporary layoff;
6. pension plans and any unfunded liabilities;
7. employment contracts and review of any termination clauses or restrictive covenants;
8. issues related to employment standards legislation (i.e. hours of work, overtime, vacation, holidays, workplace violence & harassment, Accessibility for Ontarians with Disabilities Act, pay equity, misclassification, workplace injuries etc.)
9. litigation history and any pending claims.

Structuring The Deal

How the deal is structured will have important implications on what happens with the employees and related labour and employment liabilities.

In a share purchase, ownership of the business transfers, but the corporate identity, and that of the employer, stays the same.  This means that from an employee perspective there are no changes as the purchaser steps into the seller’s shoes.  For the new purchaser, this also means that you will be purchasing the employer’s obligations to the employees on termination of employment, which can be significant if the employees do not have employment contracts or their contracts do not contain valid or enforceable termination provisions.

In an asset purchase, technically, the employment relationship ends at common law.  The purchaser and the seller will typically agree in advance who will “hold the bag” on termination liabilities and this will typically be addressed in the purchase agreement.  There will likewise typically be a requirement in the purchase agreement that the purchaser will make comparable offers of employment to any of the seller’s employees the purchaser wishes to carry on with the purchaser.

Beware of Litigation Risks

The case law is replete with examples where costly mistakes were made during a transaction that sellers and purchasers ought to be aware of.  

Beware of pre-closing misrepresentations

In Gascon v. Newmont Goldcorp, 2022 ONSC 2511, the seller made a number of pre-closing misrepresentations to an employee that post-sale his employment would be continuing with the new employer.  The employee was terminated shortly after the sale took place and the seller was ordered by a court to pay the terminated employee $50,000 in moral or exemplary damages after failing to fulfill its common law duty of honest performance.

Offers of comparable employment do not mean any employment

In Dussault v. Imperial Oil Limited, 2019 ONCA 448, the Ontario Court of Appeal found that two employees did not fail to mitigate their damages when they refused offers of employment from the purchaser of a former employer as the employment offered was not comparable.  The terms of the offers of employment stated that their salaries would be reduced after a period of 18 months and their prior service would not be recognized at common law.  The Ontario Court of Appeal upheld the award of the plaintiffs 26 months’ notice each.

Beware of fixed-term contracts for key employees

In McGuinty v. 1845035 Ontario Inc. (McGuinty Funeral Homes), 2020 ONCA 816, the Ontario Court of Appeal upheld the award of 9 years worth of liquidated damages to an employee and former owner of a business who sold his interest in a funeral home to a group of buyers who put the employee on a 10-year fixed term contract.  The Ontario Court of Appeal upheld the trial judge’s finding that the employee had been constructively dismissed after just 11 months into the contract and that in the absence of an early termination provision in the fixed-term contract, the employee was owed compensation for the entire 10-year term.

Takeaway for Businesses

If you are buying or selling a business in Ontario that has Ontario-based employees you need to consult a labour and employment lawyer. If you have any questions about buying and selling a business, please contact Treiber Law at info@treiberlaw.ca 

This article should not be relied upon as legal advice or opinion.