In the Business takeover stream, due diligence protects two things at once: the money you are investing and the eligibility of your immigration file. A business that fails the program criteria, or whose liabilities surface after closing, can sink both. Here is how we approach it for a buyer coming from abroad.
Why the stakes are twofold for an immigrant buyer
The Business takeover stream sets conditions on the target business itself. Québec.ca states them as follows for stream 3:
- it must have been in operation for at least five years;
- it must not have been acquired, in the five years preceding the application, by a person selected under the Entrepreneur Program or by a group whose controlling holder was so selected;
- it must not operate in an ineligible sector, which includes real estate sales, rental, brokerage, development and land development;
- you must acquire control of it, alone or with the spouse included in your application.
Within the two years following your application you must also make an acquisition offer consistent with the succession plan and with the service offer of the organization supporting you, and demonstrate spending of at least $300,000 in the Montreal metropolitan community or $150,000 elsewhere in Quebec.
The ownership history of the past five years does not always show up in the public registers. It is reconstructed from the minute book and confirmed by a written statement from the seller.
The general method is set out in our piece on due diligence. What follows is added when the buyer is also an immigration applicant.
The corporate record
The statement of information
At the Registraire des entreprises: the company’s status, directors, declared shareholders and declared activities.
Each entry is compared with what the business actually is.
The minute book
Share issuances and transfers, registers, resolutions and any existing shareholders’ agreement.
It is where pre-emptive rights and the consents required to sell come to light.
The articles
Share classes and restrictions on transfer.
Related companies
Subsidiaries, holding companies and intragroup arrangements.
Debts and security interests
Liabilities are looked for where they are recorded. These are the sources to consult, the last of which is handled with an accountant.
| Where to look | What to look for |
|---|---|
| The Register of Personal and Movable Real Rights | Movable hypothecs, reservations of ownership and leasing. |
| The land register | Published rights, if the business owns an immovable. |
| Court dockets | Pending or anticipated litigation, together with any demand letters received. |
| The bank | The seller’s personal guarantees, which will have to be replaced at closing. |
| Revenu Québec and the Canada Revenue Agency | Notices of assessment, statements of account, GST, QST and source deductions. |
Contracts, permits and intangible assets
- The commercial lease: an assignment or change-of-control clause often requires the landlord’s consent. Check the remaining term and the renewal options as well.
- Customer and supplier contracts: change-of-control, exclusivity and termination clauses.
- Permits and licences: some do not transfer automatically. Their transferability and the applicable timelines have to be confirmed.
- Intellectual property: who owns the registered trademarks, the domain names and the software.
Employees
The sale of the business does not end the employment contracts: the new employer is bound by them (art. 2097 of the Civil Code of Québec). Due diligence therefore looks at the contracts, years of service, accrued vacation, any collective agreement, the CNESST file and the retention of key employees.
Shares or assets: a choice that changes the review
Buying the shares means taking the company with its entire history, so the review has to be broad. Buying the assets lets you choose what you take on, but every contract, every permit and every employee then has to be transferred.
In the Business takeover stream, the Quebec Immigration Regulation looks to legal control of the business (s. 57.1), which points towards a share purchase. Our article on the choice between shares and assets in an immigration context covers the question in detail.
The acquisition offer: where due diligence becomes contract
What the review turns up has to end up in the document that binds you. The mechanics of that document are set out in our piece on the acquisition offer in the Business takeover stream.
- clear conditions: satisfactory due diligence, financing, third-party consents such as the landlord’s, and a timetable compatible with your immigration steps;
- representations and warranties from the seller, including on the ownership history and the activities actually carried on;
- indemnification backed by a holdback on the price or a vendor take-back;
- an undertaking by the seller to assist during the transition;
- deadlines that respect the two-year window provided for by the program.
The notice required under the Investment Canada Act
Do not overlook the notice required under the Investment Canada Act: a non-Canadian who acquires control of a Canadian business files it before the acquisition or within the 30 days that follow.
How MEKA AVOCAT works on this
We carry out the legal due diligence and we draft the offer and the closing documents, in coordination with the supporting organization, the accountant handling the financial review and the broker. If the review reveals a problem that compromises your investment or your immigration file, we say so plainly, even where that means walking away from the deal.
Texts and sources
This article draws on the Civil Code of Québec, the Quebec Immigration Regulation, the Investment Canada Act and the official stream 3 page of the Entrepreneur Program published on Québec.ca. The registers referred to are those of the Registraire des entreprises, the Register of Personal and Movable Real Rights and the land register.
Frequently asked questions
Does the program require due diligence?
Not in those terms. It does impose conditions on the target business, such as years in operation, ownership history, sector and control, which cannot be confirmed without a review.
How much time should I allow?
A few weeks for a well-documented small business, longer if the minute book or the financial statements are incomplete. It has to be built into the timetable of the offer.
Can I rely on the review done by the broker or the supporting organization?
Their work is useful, but it does not replace a legal review carried out for you and under your responsibility.
Have a business in mind in the Business takeover stream?
Due diligence is planned before the offer is signed, not after. A meeting lets us frame the points to verify, the timetable and the conditions to be written into the document that binds you.
Next: the Business takeover stream, due diligence in its general form, and our work on buying a business.
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Lawyer, member of the Barreau du Québec since 2014, founder of MEKA AVOCAT. This text sets out general legal information: it describes rules that apply broadly, not the answer to a particular case, and does not replace advice on your own situation.
