Canada: Ignorance Is Not Bliss: Beware Minimal Due Diligence

Last Updated: May 14 2013
Article by Martin Boodman and Shane C. D'Souza

Most Read Contributor in Canada, September 2018

The Quebec Court of Appeal's decision in Francoeur v. 4417186 Canada Inc., 2013 QCCA 191, provides a cautionary tale on the dangers of entering into a share purchase agreement and subsequently closing a share purchase transaction, without ample due diligence.

The one-sided apportionment of risk

The Francoeur share purchase agreement (the "SPA"), which was signed by parties the court characterized as "fierce competitors", contained the following key provisions.

  1. The purchaser acknowledged that (a) until closing, it did not have access to certain "key documents" held under seal, (b) it had not undertaken any due diligence, and (c) it accepted the risks in the circumstances.
  2. The material under seal included a list of golden parachute arrangements with key employees.
  3. The closing was conditional on various terms that could be waived by the purchaser.
  4. Prior to the closing, the target company's president had the power to make decisions in the ordinary course of business, but was precluded from signing contracts valued in excess of $100,000.
  5. The seller's representations and warranties were limited to those expressly stipulated in the SPA.
  6. The purchaser had limited indemnification rights in the case of misrepresentations by the seller.

The target company's pre-closing activity

On the same day that the SPA was signed (but before closing), the target company's president announced the departure of its vice-president. Soon thereafter, the target company negotiated a settlement (the "Disputed Agreement") with the vice-president specifying, inter alia, that the vice-president would transition to a new position at a reduced salary (albeit more than the $100,000 limitation imposed in the SPA) for 12 months. In exchange, the vice-president waived all recourse against the seller in relation to his termination.

Post-closing: The purchaser's remorse

The purchaser, after reviewing the documents under seal, took the position that the vice-president was not entitled to (a) a golden parachute because he was not an employee of the target company when the transaction closed, or (b) payments pursuant to the Disputed Agreement.

Predictably, the vice-president sued the target company (which at this point was owned by the purchaser). Also predictably, the purchaser sued the seller and the former president for indemnification, alleging that the seller fraudulently concealed the target company's golden parachutes from the purchaser and secretly concluded a sham transaction to convey an entitlement to which the vice-president had no right.

The Quebec Court of Appeal

The Quebec Court of Appeal reversed the trial judge's finding that the Disputed Transaction was invalid and the vice-president had no entitlement to the golden parachute. Among other things, the Quebec Court of Appeal held the following.

  1. The golden parachute was not fraudulently hidden from the purchaser. As the transaction's closing was not assured, it was reasonable for the target company to protect confidential information from its competitor. The purchaser assumed all risks associated with conducting no due diligence.
  2. In any event, the SPA could not alter the vice-president's entitlement to a golden parachute. The purchaser acquired the target company in a share transaction that left the company intact and therefore responsible for valid pre-closing agreements entered into by the company.
  3. The SPA permitted the former president to negotiate the Disputed Agreement even though its value was in excess of the $100,000 limitation imposed in the SPA. Until closing, the former president was charged with running the business. The SPA's limitations did not alter the target company's duty to provide the vice-president with a proper notice of termination or a financial equivalent due to his dismissal. Moreover, the Court found the former president's actions reasonable as the transaction's closing was not assured and it was in the target company's best interests to lock up a key employee for 12 months.
  4. The former president and seller were not liable to the purchaser even if they had misrepresented facts relating to the vice-president's dismissal. In the SPA, the purchaser waived any right it might have had to take legal action based on such a misrepresentation.

The Three Takeaways

In circumstances where due diligence is short-circuited for business reasons, a purchaser should:

  1. be reminded that in a share transaction, the purchaser acquires the good, the bad and the ugly from the target company, subject to protections negotiated in the share purchase agreement.
  2. consider negotiating:
    • for the disclosure of proprietary information subject to a confidentiality agreement;
    • a rigorous indemnification clause to specifically account for risks that the purchaser is unwilling to assume (that said, seeking indemnification from the seller may require costly litigation); and
    • a retention amount to be held in trust until an appropriate period post-closing.
  3. reconsider the risks and benefits of acquiring the target company without appropriate due-diligence – of course, targeted due-diligence from qualified and trusted legal advisers is always recommended, subject to business priorities.

To view original article, please click here

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions