- Before you can decide anything, you need real information, not just the fact that a claim exists.
- The purchase price is reduced to reflect the estimated exposure.
Finding out that the business you're about to buy is currently being sued isn't automatically a reason to walk away — but it is a reason to slow down and ask better questions. Ontario buyers deal with pending lawsuits on target businesses more often than you might expect, and most of the time the right response is to assess and manage the exposure, not abandon the deal.
This article picks up where a litigation search leaves off: once you know a lawsuit exists, how do you actually figure out what it means for your purchase, and what should the purchase agreement do about it?
First: Get the Full Picture of the Claim
Before you can decide anything, you need real information, not just the fact that a claim exists. Ask for:
- The pleadings themselves — what is actually being alleged, and against whom (the corporation, an individual owner, or both)?
- The current status — is it newly filed, actively being litigated, headed to trial, or in settlement talks?
- The dollar exposure claimed, and whether it's realistic or inflated
- Insurance coverage — is the claim, or a meaningful part of it, covered by an existing policy?
- Legal costs incurred so far, and who's been paying them
A one-page summary from the seller is not enough on its own — your lawyer should generally review the actual court documents.
How the Analysis Changes by Deal Structure
| Structure | Effect of a Pending Lawsuit |
|---|---|
| Share purchase | The lawsuit is a liability of the corporation you're acquiring, whatever happens with disclosure and negotiation |
| Asset purchase | The lawsuit generally stays with the selling corporation unless it specifically involves an asset you're buying |
This is one of the clearest illustrations of why share and asset structures carry materially different risk — the same pending lawsuit can be a central issue in one structure and largely irrelevant in the other.
Common Ways Deals Respond to a Known Lawsuit
- Price adjustment. The purchase price is reduced to reflect the estimated exposure.
- Indemnity. The seller agrees, in the purchase agreement, to be responsible for the outcome of the specific claim, regardless of when it resolves.
- Holdback or escrow. A portion of the purchase price is set aside until the lawsuit is resolved or a defined period passes.
- Insurance confirmation. If the claim is covered, the deal proceeds with confirmation that coverage will remain in place and respond to the claim.
- Excluding the exposure entirely. In an asset deal, structuring the transaction so the specific liability and any related asset stays with the seller.
- Walking away. Sometimes the size, nature, or uncertainty of the claim genuinely isn't something a buyer should take on, whatever the price adjustment.
Most deals land on some combination of the first four rather than the last one.
Questions to Work Through With Your Lawyer
- [ ] Does this claim relate to the ongoing operations I actually want, or to something I could exclude?
- [ ] Is the claimed amount within a range my insurance, holdback, or price adjustment can realistically absorb?
- [ ] Could this lawsuit affect key relationships — a major customer, supplier, or landlord — beyond just the dollar amount?
- [ ] Is there a pattern here, or is this an isolated dispute in an otherwise clean history?
- [ ] What does my lawyer's honest read of the seller's litigation position look like, beyond what the seller is telling me?
Frequently asked questions
Does a pending lawsuit always reduce the purchase price?
Not always — sometimes the response is an indemnity or holdback instead of an upfront price cut, especially where the claim's outcome is genuinely uncertain and a fixed discount would be guesswork on both sides.
What if the lawsuit is against an individual owner, not the corporation?
This matters a lot for structuring. In a share deal it may still be relevant if the owner has obligations to indemnify the corporation, but in many cases a personal claim against an owner stays exactly that — personal — and outside the transaction.
Can I require the seller to settle the lawsuit before closing?
You can ask, and some purchase agreements make this a closing condition, but a seller may not control the timeline of litigation, and forcing an unfavourable settlement isn't always realistic. A holdback or indemnity is often more practical than a hard settlement requirement.
How do I know if the claimed exposure is realistic?
This is exactly the kind of judgment call that benefits from a lawyer reviewing the actual pleadings and, where the amount is significant, potentially involving litigation counsel to assess the claim's merits before you finalize deal terms.
This is a business purchase or sale question
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