- - Litigation by the business — the business itself is pursuing a claim against someone else, which can actually be a valuable asset in the deal.
- Because a share purchase transfers ownership of the same legal entity, existing litigation against that corporation — whether already filed or just threatened — generally continues…
- In an asset purchase, a lawsuit against the seller generally stays with the seller, since the buyer is only acquiring specific identified assets rather than the seller's entire legal…
Finding out mid-negotiation that the business you're buying is facing a lawsuit doesn't have to kill the deal — but it does change how the deal needs to be built. Whether a pending lawsuit in an Ontario business purchase follows you as the buyer depends heavily on deal structure, what's disclosed, and how the purchase agreement is written.
This article walks through how share and asset purchases generally treat existing litigation differently, and the tools parties use to allocate that risk once a claim is already on the table.
Start With What Kind of Litigation It Is
Not all litigation behaves the same way in a business sale. It helps to separate:
- Litigation against the business — a customer, employee, competitor, or regulator has a claim against the corporation or its operations.
- Litigation by the business — the business itself is pursuing a claim against someone else, which can actually be a valuable asset in the deal.
- Threatened but unfiled claims — a demand letter or a known dispute that hasn't yet turned into a lawsuit, but reasonably might.
Each of these needs to be identified during due diligence and addressed specifically in the purchase agreement, rather than left to the general representations to cover.
Share Purchase: Litigation Generally Comes With the Corporation
Because a share purchase transfers ownership of the same legal entity, existing litigation against that corporation — whether already filed or just threatened — generally continues against it after closing. The buyer, as the new owner, is effectively now standing behind a defendant it didn't choose to be sued.
This is one reason litigation history is a standard line item in due diligence for any share purchase, alongside financial statements, contracts, and tax filings.
Asset Purchase: More Room to Leave Litigation Behind, With Limits
In an asset purchase, a lawsuit against the seller generally stays with the seller, since the buyer is only acquiring specific identified assets rather than the seller's entire legal identity. This is one reason buyers facing known litigation risk often prefer an asset structure.
That said, this isn't an absolute shield. Depending on the nature of the claim and how the deal is structured, a buyer that continues the seller's business in a way that looks like an uninterrupted continuation can, in limited and fact-specific circumstances, still face exposure. This overlaps with the kind of successor-liability question that arises in product liability claims specifically, but the underlying idea — courts sometimes looking past the deal's legal form — can extend to other types of claims too.
How Purchase Agreements Handle Known Litigation
| Tool | How it's used |
|---|---|
| Disclosure schedule | Seller lists known and threatened litigation specifically, rather than relying on a general representation |
| Specific indemnity | Seller agrees to cover losses from a named, known claim, separate from the general indemnity |
| Holdback tied to the claim | Portion of price held back specifically pending the outcome of known litigation |
| Purchase price adjustment | Known exposure quantified and reflected directly in price instead of handled after closing |
| Excluding the claim (asset deals) | Buyer structures the deal to avoid acquiring the asset or entity associated with the dispute |
Due Diligence: What to Ask For
- [ ] A complete list of active litigation, arbitration, and regulatory proceedings
- [ ] Any demand letters or threatened claims that haven't yet been filed
- [ ] Insurance coverage that may respond to a given claim
- [ ] Litigation the business itself is pursuing against others, and whether it will transfer to the buyer as an asset
- [ ] Past litigation history, even if resolved, to understand patterns in the business's risk exposure
Frequently asked questions
If I know about a lawsuit before closing, can I still walk away from the deal?
Depending on how the purchase agreement is drafted, discovering a material undisclosed issue during due diligence can be grounds to renegotiate or, in some cases, walk away before closing — this depends entirely on the specific conditions and termination rights written into your agreement, not on general principle alone.
Does an asset purchase always let me avoid a seller's pending lawsuit?
Generally it keeps the seller's existing litigation with the seller, but there are fact-specific exceptions where continuing the same business in substance can expose a buyer despite the asset structure. This needs a lawyer's review of the specific claim and deal.
What if the seller doesn't disclose a pending lawsuit?
This is precisely what representations, warranties, and indemnities in the purchase agreement are meant to address — an undisclosed material claim discovered after closing generally gives the buyer contractual remedies against the seller, separate from the underlying lawsuit itself.
Can a business's own pending lawsuit against someone else be part of the deal?
Yes — a claim the business is pursuing can be treated as an asset and, depending on the agreement, either included in or excluded from what the buyer acquires. This should be addressed explicitly rather than assumed either way.
This is a business purchase or sale question
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