. Weak cybersecurity practices, past data breaches, or unclear data retention practices may reduce the value of the business or create post-closing exposure.<\/span><\/p>\nCross-border transactions add another layer of review. Foreign investment rules may apply if the buyer is not Canadian. Certain sectors, including telecommunications and transportation, may also have ownership restrictions or require additional approvals.<\/span><\/p>\nThe purchase agreement should state what happens if approvals are delayed, refused, or granted with conditions. It should also set out each party\u2019s cooperation obligations, information-sharing duties, and closing conditions tied to regulatory matters.<\/span><\/p>\nRegulatory compliance may change the price, delay closing, or give one party more leverage in the negotiation.<\/span><\/p>\nContractual and Structural Risks<\/span><\/h2>\nThe structure of the transaction determines which liabilities transfer to the buyer, which consents are required, and what protections each party has after closing.<\/span><\/p>\nIn a share purchase, the buyer usually acquires the company with its assets, contracts, obligations, and liabilities. Specific protections must be negotiated if the buyer does not want to assume certain risks.<\/span><\/p>\nIn an asset purchase, the buyer may have more control over which assets and liabilities are assumed. The tradeoff is that more third-party consents and separate transfers may be required.<\/span><\/p>\nThis choice may change the tax result, employment obligations, contract continuity, regulatory approvals, and post-closing liability.<\/span><\/p>\nThe main contractual issues usually involve:<\/span><\/p>\n\n- Indemnification clauses<\/span><\/li>\n
- Purchase price adjustment mechanisms<\/span><\/li>\n
- Earn-out provisions<\/span><\/li>\n
- Representations and warranties<\/span><\/li>\n
- Limitation of liability clauses<\/span><\/li>\n
- Closing conditions<\/span><\/li>\n
- Escrow or holdback arrangements<\/span><\/li>\n<\/ul>\n
Risk management in M&A often starts with these provisions because they determine how exposure is divided after closing. For example, an unlimited indemnity for tax liabilities can leave a seller exposed to large post-closing claims. On the buyer\u2019s side, weak indemnity language may offer little protection if a serious issue is discovered after closing.<\/span><\/p>\nIndemnity clauses should address caps, survival periods, claim procedures, thresholds, exclusions, and remedies.<\/span><\/p>\nPurchase price adjustments are another frequent source of disputes. If working capital, debt, cash, or normalized earnings are not clearly defined, the parties may disagree after closing about the final price. The agreement should specify the accounting standards, calculation method, review process, and dispute mechanism.<\/span><\/p>\nDebt treatment should also be settled before signing. The agreement should state whether the business is being sold on a cash-free, debt-free basis. It should also address shareholder loans, bank debt, equipment leases, and financing arrangements.<\/span><\/p>\nIf these mechanics are unclear, sellers may receive less than expected and buyers may assume more than intended.<\/span><\/p>\nEarn-outs need precise drafting. If part of the purchase price depends on future performance, the agreement should define the metric, revenue recognition rules, permitted expenses, reporting obligations, and level of control after closing. Without clear rules, earn-outs often become a source of disagreement.<\/span><\/p>\nRepresentations and warranties should reflect the actual condition of the business. Broad statements increase exposure. Vague statements create uncertainty. Accurate statements, supported by disclosure, help both parties understand the risk being allocated.<\/span><\/p>\nA strong contract does not remove every risk. It makes the risk visible enough to negotiate.<\/span><\/p>\nDue Diligence Failures<\/span><\/h2>\nDue diligence is where assumptions are tested.<\/span><\/p>\nBefore signing or closing, a buyer needs to understand what is being acquired, including liabilities that may not be apparent on the surface. For sellers, due diligence also matters because unresolved issues may reduce the price, delay closing, or lead to claims after closing.<\/span><\/p>\nIn a legal due diligence M&A review, counsel will usually examine:<\/span><\/p>\n\n- Corporate records<\/span><\/li>\n
- Financial statements<\/span><\/li>\n
- Material contracts<\/span><\/li>\n
- Customer and supplier agreements<\/span><\/li>\n
- Litigation history<\/span><\/li>\n
- Regulatory compliance<\/span><\/li>\n
- Intellectual property<\/span><\/li>\n
- Employment matters<\/span><\/li>\n
- Tax filings<\/span><\/li>\n
- Real estate and leases<\/span><\/li>\n
- Insurance coverage<\/span><\/li>\n
- Debt and security arrangements<\/span><\/li>\n<\/ul>\n
M&A due diligence should also test whether the review has missed issues such as:<\/span><\/p>\n\n- Customer concentration risk<\/span><\/li>\n
- Change-of-control clauses<\/span><\/li>\n
- Pending or threatened litigation<\/span><\/li>\n
- Environmental liabilities<\/span><\/li>\n
- Incomplete tax records<\/span><\/li>\n
- Contract transfer restrictions<\/span><\/li>\n
- Intellectual property ownership issues<\/span><\/li>\n<\/ul>\n
Each missed issue may affect value, timing, or liability.<\/span><\/p>\nFor example, if one client represents 40 percent of the company\u2019s revenue, that concentration changes the risk profile of the business. If that client\u2019s contract also includes a termination right on change of control, the risk becomes more serious.<\/span><\/p>\nDue diligence does not remove uncertainty. It replaces assumptions with documents, facts, and negotiated protections.<\/span><\/p>\nEmployment and Labour Risks<\/span><\/h2>\nEmployment issues can create serious M&A transaction risks.<\/span><\/p>\nIn an asset transaction, employees may be terminated by the seller and rehired by the buyer, depending on how the deal is structured. This can raise questions about notice, severance, continuity of service, vacation, and benefits.<\/span><\/p>\nIn a share transaction, employment usually continues, but the buyer may inherit existing employment liabilities, including claims or obligations that arose before closing.<\/span><\/p>\nThe buyer should pay close attention to:<\/span><\/p>\n\n- Unpaid overtime<\/span><\/li>\n
- Vacation accruals<\/span><\/li>\n
- Misclassified independent contractors<\/span><\/li>\n
- Pending labour disputes<\/span><\/li>\n
- Non-compliant employment contracts<\/span><\/li>\n
- Weak restrictive covenants<\/span><\/li>\n
- Termination liabilities<\/span><\/li>\n
- Pension or benefit plan obligations<\/span><\/li>\n
- Workplace health and safety issues<\/span><\/li>\n<\/ul>\n
If the buyer acquires a company with past employment violations, those issues may become post-closing claims.<\/span><\/p>\nLegal due diligence should include employment agreements, contractor agreements, compensation arrangements, workplace policies, termination history, benefits, and any disputes with current or former employees.<\/span><\/p>\nIn some cases, employment exposure can be managed through specific indemnities, escrow holdbacks, purchase price adjustments, or pre-closing remediation.<\/span><\/p>\nEmployment issues can become part of the purchase price, the transition plan, or a post-closing claim.<\/span><\/p>\nIntellectual Property Risks<\/span><\/h2>\nFor many businesses, intellectual property accounts for a large part of the company\u2019s value, making intellectual property (IP) ownership a key risk in M&A.\u00a0<\/span><\/p>\nThis is especially true for companies with software, product designs, brand assets, trade secrets, customer data, proprietary processes, or technical documentation. IP issues are often discovered late in the transaction, sometimes after the purchase price has already been negotiated.<\/span><\/p>\nThe IP review should look for issues such as:<\/span><\/p>\n\n- Unregistered trademarks<\/span><\/li>\n
- Unassigned contractor inventions<\/span><\/li>\n
- Expired or poorly maintained registrations<\/span><\/li>\n
- Inadequate confidentiality agreements<\/span><\/li>\n
- Software licensing violations<\/span><\/li>\n
- Unclear ownership of code, designs, or documentation<\/span><\/li>\n
- Prior infringement claims<\/span><\/li>\n
- Use of third-party materials without proper rights<\/span><\/li>\n<\/ul>\n
If ownership is unclear, the buyer may not receive the assets it expected to acquire.<\/span><\/p>\nFor example, if outside contractors built a software platform but never signed assignment agreements, the company may not fully own the code. If a brand name has been used for years but was never registered as a trademark, there may be uncertainty around exclusivity and enforcement.<\/span><\/p>\nAn M&A risk assessment should confirm whether:<\/span><\/p>\n\n- IP is registered where registration is needed<\/span><\/li>\n
- Employees and contractors have signed assignment agreements<\/span><\/li>\n
- Confidential information is protected<\/span><\/li>\n
- Licensing terms permit transfer or continued use<\/span><\/li>\n
- No infringement claims are pending or threatened<\/span><\/li>\n
- Digital assets, domains, software, and accounts are controlled by the company<\/span><\/li>\n<\/ul>\n
Failure to address IP risk may reduce valuation, delay closing, or weaken the commercial purpose of the transaction.<\/span><\/p>\nTaxation and Financial Risks<\/span><\/h2>\nTax exposure is one of the M&A risks most likely to change the outcome of a transaction.<\/span><\/p>\nThe structure of the deal affects the tax outcomes of both buyer and seller. Asset purchases and share purchases can produce very different results under Canadian tax law. The parties should understand those consequences before agreeing on price and structure.<\/span><\/p>\n