In negotiated acquisition agreements, representations and
warranties provided by the seller are sometimes qualified by the
knowledge of the seller. In such agreements, it is critical to
clearly set out the standards as to what constitutes knowledge of
the seller. According to the 2014 Canadian Private Target M&A Deal Points
Study by the American Bar Association (ABA
Study), 90% of the publicly available acquisition
agreements in 2014 involving Canadian targets and acquirers contain
a defined knowledge standard.
Knowledge qualifiers are sought by sellers to minimize their
exposure to liability, especially in relation to representations
and warranties regarding circumstances outside of their control or
which cannot easily be determined. For example, a commonly accepted
practice is to qualify the representation and warranty that there
is no threatened litigation against the seller. The use of the
qualifier in other areas is usually subject to negotiation in an
attempt to allocate the risks of an acquisition. Buyers may seek to
avoid knowledge qualifiers by arguing that the seller is more
familiar with the company and in a better position to investigate,
and therefore it is more efficient for the seller to assume such
Defined knowledge standards
The main area of contention is often not the existence of the
qualifier in an agreement, but the way in which it is defined. The
ABA Study shows that 18% of the acquisition agreements define
knowledge as actual knowledge. This definition is more favourable
to the seller because of its narrow scope; sellers would only be
liable for misrepresentation of facts in their actual knowledge,
without any obligation to investigate.
On the other hand, 72% define knowledge as including
constructive knowledge. This definition is less favourable to the
seller because it imputes knowledge in certain circumstances. Out
of those agreements that include the concept of constructive
knowledge, 89% impute knowledge when facts should have been known
after reasonable investigation or due inquiry, while 7% impute
knowledge that should have been known by particular persons in the
course of performing their duties.
For clarity, the parties should identify the person(s) whose
knowledge is imputed to the seller, whether generally
(i.e., all officers and directors) or with reference to
specific individuals. The ABA Study shows that 82% of the
agreements with defined knowledge standards identify the person(s)
whose knowledge is imputed.
From 2010-2014, the prevalence of defined knowledge standards
has been increasing from 82% to 90% of the acquisition agreements,
with a growing proportion being defined to include constructive
knowledge rather than solely actual knowledge (72% in 2014 as
compared to 51% in 2010). Whether or not this suggests that buyers
are gaining ground by imposing greater obligations on the seller to
conduct investigations or inquiries, it remains clear that the
various knowledge standards should be carefully considered in
negotiations and properly defined in the agreement.
The author would like to thank Matthew Lau, articling
student, for his assistance preparing this legal update.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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