Authors: Alex Gorka and Brett Anderson
Liabilities imposed on purchasers
Asset acquisitions
Successor liability
In Canada, in contrast to the U.S., there is no general legal theory under which a purchaser of assets would be found to have assumed successor liability in respect of general liabilities of the target business — for example, on the basis that the purchaser will be operating the business as the successor to the seller or has acquired substantially all of the assets of the seller.
However, there are a number of instances in which liabilities of the target business may follow the assets when acquired by the purchaser, at least generally to the extent of the value of the assets acquired. To address this contractually, the purchaser can seek indemnities from the seller with respect to any such liabilities, although the value of those indemnities will be dependent on the creditworthiness of the seller.
Fraudulent conveyances
Where the seller is insolvent or it is established that the seller is transferring assets to avoid, hinder or defraud creditors, the transaction may be challenged under applicable bankruptcy or fraudulent conveyance legislation. Generally, where the purchaser can establish that it paid fair value for the purchased assets, it will have a defence to such an action.
Other obligations
Under employment standards legislation in all provinces, credit for length of service and other related minimum statutory entitlements must be recognized for all employees. Where there are unionized employees of the target business, Canadian law will generally require the purchaser to assume existing collective agreements and responsibility for other rights of unionized employees to the extent it is determined to be a successor employer. In Québec, there are Civil Code provisions that could have the effect of making the purchaser responsible for all terms of employment of non-unionized employees as well.
A purchaser can mitigate liability risks by obtaining representation and warranty insurance to provide coverage for indemnification claims a purchaser may have for losses resulting from breaches of a seller’s representations and warranties in the acquisition agreement.
If any interests in real property are being acquired (including leasehold interests), Canadian environmental law may operate to make the purchaser responsible for any prior environmental liabilities associated with the affected real property.
Share transactions
Successor liability
In a share acquisition, the purchaser effectively acquires all of the liability of the target corporation along with its assets. Any reallocation of that liability back to the seller must be effected through representations, warranties, covenants and indemnities in the share purchase agreement or other transaction documents. As with asset purchase transactions, the value of any indemnities will be dependent on the creditworthiness of the seller.
Representation and warranty insurance
In both an asset acquisition and a share acquisition, a purchaser can mitigate liability risks by obtaining representation and warranty insurance to provide coverage for indemnification claims a purchaser may have for losses resulting from breaches of a seller’s representations and warranties in the acquisition agreement. Sellers may also obtain representation and warranty insurance, but this is uncommon.
