In a recent decision, Gestion F. Lessard inc. v. Bournival, 2016 QCCS 2537, the Superior Court of Québec observed the potential liabilities involved in share purchase transactions — such as threats of litigation by unsatisfied customers, employee conflicts and software malfunction — and reminded us that not all potential liabilities can be imputed on the seller for fraud.
Summary of facts
This case deals with a share purchase transaction, where the defendant sold its corporation to the plaintiffs, holding companies owned by the two individuals intervened in the proceedings. Following the sale of the corporation, a series of problems appeared, including disputes with unsatisfied customers, conflicts between employees, and defects of a software. As such, the plaintiffs instituted an action against the defendant and claimed that such problems should have been disclosed by the defendant, and that the plaintiffs were induced into the transaction by the defendant's fraud.
Court findings
The Court found that the plaintiffs' claim with respect to unsatisfied customers was not grounded in fact. When the transaction took place, there was no pending litigation between the corporation and its customers. Moreover, it appears from the testimony that the corporation had good relationships with its customers. Therefore, the plaintiffs cannot succeed in their claim with respect to the costs assumed by the corporation to settle the disputes with unsatisfied customers.
Further, the Court noted that the conflicts between employees occurred after the transaction had closed. Thus, such problem cannot be deemed a conflict that should have been disclosed by the defendant in the share purchase agreement ("SPA").
Regarding the defect of the software, the Court found that the defendant had omitted to declare important defects of the software. As a result, his representation and warranty in respect of the condition of equipment contained in the SPA was inaccurate, and he is obliged to pay the damages sustained by the plaintiffs in accordance with the SPA.
Comments
Buying a business is different from buying assets of a business. One of the fundamental differences is that, unless the agreement stipulates otherwise, the buyer is bound to take over the current liabilities and potential liabilities of the target business. Therefore, as a prudent buyer, it is extremely important to familiarize yourself with the operation and the assets/liabilities of the target business by conducting a due diligence review of the target business.
Gowling WLG can assist you in conducting the due diligence review and help uncover potential liabilities that can be addressed prior to the closing of the acquisition. Gowling WLG can also help prepare the transactional documents, such as the assets/share purchase agreement, to provide you with maximum protection whenever a representation and warranty made by your counterpart is false or inaccurate.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
