SHARE PURCHASE RISKS
Pre-Acquisition - Letter of Intent - Due Diligence - Share Purchase / Sale - Asset Purchase / Sale - Merger - Equipment
Contact Neufeld Legal for business mergers and acquisitions at 403-400-4092 or Chris@NeufeldLegal.com
A share purchase transaction (where the buyer acquires the share equity of the target company) presents significantly greater risk for the purchaser given that the purchaser is assuming all the liabilities of the target company. Unlike an asset purchase transaction, where the buyer can selectively cherry-pick specific assets and explicitly exclude unwanted liabilities, the purchase of shares results in the acquisition of the target company in its entirety, including its complete historical record and all outstanding obligations. This structure immediately exposes the buyer to the critical risk of inheriting the proverbial "skeletons in the closet," which are unknown, undisclosed, or contingent liabilities that may not be apparent during standard financial review and due diligence. These hidden burdens could severely undermine the anticipated value of the acquisition, turning a promising investment into a financial liability shortly after closing.
The most significant and often financially devastating risks relate to undisclosed or contingent corporate liabilities. These may include historical tax non-compliance, which can result in severe penalties and back taxes for prior periods; environmental liabilities tied to past operations or properties; or significant ongoing litigation, including product liability claims or complex intellectual property disputes. Furthermore, the acquired company retains all its existing contracts, meaning the buyer inherits unfavorable supplier agreements, restrictive covenants, or, critically, "change of control" clauses. If a key contract contains a change of control clause that was not properly waived or consented to, the counterparty may terminate the agreement upon the sale of shares, immediately disrupting crucial operations and supply chains.
Operational and integration risks also pose a substantial threat to the deal's success. The buyer relies heavily on the seller’s warranties and representations regarding the target company's financial health, asset ownership, and operational status. If these warranties prove to be untrue, due to either intentional misrepresentation or unintentional oversight, the buyer’s only recourse is often a difficult, protracted, and capped indemnification claim against the seller, which may not fully cover the resultant losses. Moreover, the transaction may inadvertently trigger the departure of key employees or the loss of critical customer and supplier relationships, eroding the intangible goodwill and human capital that often forms a core part of the valuation.
Ultimately, the entire risk profile of a share purchase highlights the critical importance of comprehensive due diligence and robust contractual protection. The buyer must dedicate considerable resources to a multi-faceted investigation (financial, legal, operational, and commercial) to uncover potential issues and ensure the valuation is accurate. The Share Purchase Agreement must then be meticulously negotiated to include appropriate indemnities, limitations, and specific price adjustments (such as working capital true-ups or earn-outs) that effectively mitigate the identified risks and allocate potential future losses back to the seller. Without these protective layers, the buyer risks substantial post-closing losses and a failure to achieve the intended strategic and financial goals of the acquisition.
When it comes to the legal component of corporate mergers & acquisitions, that is when our law firm comes into play. Such that when your business is seeking knowledgeable and experienced legal representation in orchestrating and completing business mergers, acquisitions and divestitures, we are capable of providing such strategic legal advice and direction. Contact our law firm at Chris@NeufeldLegal.com or 403-400-4092 to schedule a confidential initial consultation for advancing your business' transactional objectives.