- The corporation itself doesn't change hands in a technical sense — you take control of the same legal entity that manufactured or sold the product.
- The concern behind this kind of exception is straightforward: a business could otherwise sell off its risky product line to a "clean" buyer, walk away from claims by injured customers,…
- While there's no fixed checklist, situations more likely to raise this kind of exposure tend to share features like: - Continuing to sell the same product line, largely unchanged - Using…
If the business you're buying manufactures, sells, or distributes physical products, someone could bring a claim over something sold before you ever owned the business. Understanding product liability exposure when buying a business in Ontario — and how it differs between an asset purchase and a share purchase — is essential before you sign anything.
The instinct many buyers have is that an asset purchase creates a clean break: buy the equipment and inventory, leave the seller's old problems behind. For product liability, that instinct can be wrong. Courts have, in some circumstances, allowed claims to reach a buyer who continues a seller's product line, even where the deal was structured as an asset purchase specifically to avoid inheriting liabilities.
The General Rule for Each Structure
Share purchase. The corporation itself doesn't change hands in a technical sense — you take control of the same legal entity that manufactured or sold the product. Product liability claims tied to pre-closing conduct are generally claims against that corporation, which you now own.
Asset purchase. The general rule is that liabilities not expressly assumed stay with the seller. For product liability specifically, though, this general rule has recognized limits. Where a buyer continues the seller's product line — sometimes under the same name, using the same processes, serving the same customers — a court may, in some circumstances, treat the buyer as having taken on liability for products sold before closing, as an exception to the ordinary asset-sale rule.
Why the Exception Exists
The concern behind this kind of exception is straightforward: a business could otherwise sell off its risky product line to a "clean" buyer, walk away from claims by injured customers, and leave nothing behind to satisfy a judgment. Courts have been willing, in appropriate cases, to look past the legal form of the transaction where the buyer is effectively a continuation of the same product business. This is not a bright-line rule with a fixed test, and it does not apply automatically to every asset purchase — whether it applies depends heavily on the specific facts.
Factors That Tend to Matter
While there's no fixed checklist, situations more likely to raise this kind of exposure tend to share features like:
- Continuing to sell the same product line, largely unchanged
- Using the same or a very similar business or brand name
- Serving substantially the same customer base
- Retaining the same key employees, including those involved in the product's design or manufacture
- Presenting the business to the public as a continuation, rather than a genuinely new operation
None of these factors is decisive on its own, and the presence of one or two does not automatically create liability — this is squarely the kind of question that needs a lawyer's assessment of your specific transaction.
How Buyers Manage This Risk
| Tool | What it does |
|---|---|
| Due diligence on product history | Surfaces known claims, complaints, and recalls before you're committed |
| Representations and warranties | Seller confirms known product issues and claims history |
| Indemnities | Shifts the financial consequence of a pre-closing product claim back to the seller |
| Holdback or escrow | Reserves part of the purchase price against known or suspected claims |
| Insurance review | Confirms what product liability coverage exists, and whether it covers pre-closing conduct |
| Deal structure choices | Adjusting branding, naming, and operational continuity where the deal allows it |
Reviewing the seller's insurance is part of standard due diligence on any business purchase, and it takes on particular importance where product liability is a live risk — confirming whether existing coverage responds to claims about products sold before closing.
Frequently asked questions
Does an asset purchase always protect me from the seller's old product claims?
Not always. The general rule favours the buyer, but recognized exceptions exist, particularly where the buyer continues the seller's product line in a way that looks like a continuation of the same business. Whether that applies to your deal depends on the specific facts.
Is a share purchase automatically riskier for product liability?
It carries the exposure more directly, since you're taking over the same corporate entity. But that exposure is often easier to price and insure against than the asset-purchase exception, precisely because it's the default rule rather than a fact-specific exception.
Can I get insurance to cover pre-closing product claims?
Insurance solutions exist in some transactions, and reviewing the seller's existing coverage is a standard part of due diligence. Whether a specific insurance product fits your deal is a question for your insurance broker and lawyer working together.
What if the seller doesn't disclose a known product problem?
This is exactly what representations, warranties, and indemnities in the purchase agreement are designed to address. If a seller misrepresents the product history, the buyer generally has contractual remedies, separate from whatever exposure exists to the original injured party.
This is a business purchase or sale question
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