If you are considering an M&A transaction involving an Ontario establishment that holds a Liquor Sales License (a License), don’t forget to consider legally-mandated License transfer requirements. In Ontario, the sale of liquor is regulated by the Alcohol and Gaming Commission of Ontario (theAGCO) under the authority of the Liquor License Act and accompanying regulations (the Act). If the proper License transfer process is not followed you could end up with a business that is no longer allowed to sell liquor, and thereby lose an important source of revenue.
The Act requires a License to be transferred in a number of circumstances, including when:
- the licensee’s business structure changes;
- a new officer or director of the licensee corporation is appointed;
- a new partner joins the licensee partnership;
- a new 10% or more shareholder of the licensee corporation, or of the corporation that effectively controls the licensee, is created;
- a person or partnership other than the licensee becomes entitled to profits or liable for obligations from the sale of liquor at the licensed establishment; or
- a licensee dies and the licensed establishment is passed to someone else.
License transfers can be effected in a number of ways, including:
- Acquirer applies for a new license. Until the new License is issued, the vendor continues to operate using the existing License. Once the new License is issued, the vendor surrenders the old License and the acquirer takes over. Although this approach is the simplest, timing may be a problem, as the acquirer cannot sell liquor until the new License is issued (which may not coincide with closing of the transaction).
- Transfer with Authorization to Contract Out. Allows establishment to continue selling liquor, with the acquirer and vendor both legally responsible, until the complete transfer is made, rejected or the License expires.
- Corporate rollover. Used when licensee wishes to convert into a different business structure (e.g. from sole-proprietor to corporation).
- Temporary one year transfer. May be granted in special situations where the business must be disposed of in an orderly fashion (e.g. bankruptcy).
In M&A transactions, a transfer with Authorization to Contract Out is often the best option because it allows for a seamless transfer of ownership with an uninterrupted sale of liquor. If the transaction closes before the AGCO makes its final License transfer determination, the establishment can still sell liquor under the Authorization to Contract Out.
A transfer with Authorization to Contract Out requires payment of a $1,000 fee and submission of a number of documents to the AGCO. Extensive disclosure regarding the entities and individuals that will be involved in managing and owning the licensed establishment is required. If everything is in order, the AGCO typically issues an Authorization to Contract Out within 10-15 days, with the final License transfer determination made in 8-10 weeks from the date of application.
Upon the successful transfer of a License, the new License holder should conduct a review of the licensed establishment’s practices to identify any deficiencies regarding compliance with the requirements of relevant statutes, regulations and policies of the AGCO. There are many issues to consider, including but not limited to hours of operation, pricing of drinks, advertising, required signage, staff training, inventory management and ensuring that no underage patrons are served.
Since 2007, the AGCO has adopted a ‘risk-based’ licensing approach for the issuance and regulation of Licenses. This involves the AGCO determining whether an existing or proposed License should have a Level I, II, III or no risk designation. If a risk designation is imposed, the AGCO may require the License holder to comply with specific conditions or submit plans to minimize potential risks. However, if the License applicant poses a lower risk, one key principle of the risk-based licensing approach is to reduce the administrative burden of licensing, where possible. Factors considered by the AGCO include the type of business, location, past history and experience of the licensee.
Given the highly-regulated environment of liquor licensing and the negative business impact of losing a License, seeking professional assistance with this process is recommended.