A security clearance deadline threatened to unwind a $40M sale

The situation

The letter arrived nineteen days before the closing date fixed in the purchase agreement. It was from the government department that administered the largest contract held by a specialty components manufacturer based in Picton, and it said, in essence, that the department could not confirm the incoming foreign ownership had cleared its security review in time for the transfer to proceed as scheduled. If the review was not complete, the contract could not simply carry over to new ownership on closing day. It would have to be addressed separately, on its own timeline, with no guarantee of what that timeline was.

The company had three shareholders. Fiona, a police sergeant who had put early savings into the business and stayed on the board without working there day to day, wanted out entirely and had already committed the proceeds to another purchase. Kenneth, an accountant who had built much of the company's financial and government-contracting discipline over fifteen years, was prepared to stay on for a transition period the buyer wanted. Cherise, who had run operations, was somewhere in between, willing to stay a year if the price was right and gone sooner if it was not. The agreement of purchase and sale, negotiated over four months, priced the whole business as one asset, government contracts included, at a figure in the $30 million to $50 million range. It had a hard closing date built around the buyer's own financing commitments, and that date was now nineteen days away.

What made the letter more than an administrative delay was that the business itself could not pause. Production lines were running against delivery schedules on multiple contracts, both government and commercial, and the workforce needed certainty about who was signing their paycheques. Shutting down operations to wait out a clearance process that had no fixed end date was not something the shareholders or the buyer could absorb. Something had to give within the nineteen days, and none of the three shareholders had the same tolerance for what that something should be.

We were retained six days after the letter landed, once the shareholders' original counsel had confirmed the closing date could not simply be pushed back without the buyer's financing lapsing. The instruction was blunt: find a way to close on schedule, or close on something close enough to schedule that Fiona's other purchase and the buyer's financing both survived it.

What the law actually said

Ontario corporate law governs how shares in the target company change hands, but it has nothing to say about who is allowed to hold a government contract involving sensitive work. That question sits with the department that awarded the contract, under the terms of the contract itself and the federal security screening regime that applies to suppliers on that kind of work. A share sale changes who owns the company; it does not automatically change who is entitled to perform an existing government contract, and most government contracts of this kind include a clause requiring the department's consent before ownership changes hands, precisely so the department can run its own review of the new owner.

The buyer in this deal was a foreign-controlled entity, which meant the review was not a formality. Security clearance for a company performing sensitive government work typically examines the ownership structure, the individuals who will control decision-making, and in some cases the nationality and background of those individuals, before the department will consent to a transfer. There is no fixed, guaranteed processing time for this kind of review; it runs on the department's own schedule, and departments do not commit to a date to accommodate a private transaction's closing calendar. A department that has not finished its review is not being obstructive by refusing to confirm consent on someone else's schedule; it is simply not finished, and pressing for an earlier answer does not generally produce one.

The purchase agreement, as drafted, treated the government contracts as part of a single bundle of assets transferring on one date. That structure assumed the clearance would land in time. It had not, and there was no contractual mechanism in the agreement for separating the contracts that needed clearance from the rest of the business, which did not. The agreement's closing conditions were written as all-or-nothing: either every asset transferred on the closing date, or the deal did not close at all on that date.

The practical consequence was that the shareholders and the buyer were not actually facing a legal bar to closing the sale of the company generally. They were facing a bar to transferring specific contracts, embedded inside a deal structure that had not anticipated needing to separate the two. That distinction, once it was clear, changed what the next nineteen days needed to accomplish. The task was not to somehow accelerate a federal security review; it was to restructure the transaction so the review's timeline stopped controlling the whole deal.

There was also a question of what happened to the contracts if clearance was ultimately refused rather than merely delayed. The department retained the discretion to decline consent outright, and owed no explanation on any particular schedule. Any restructuring had to work whether the review ended in four months with an approval or ended, eventually, with a decision that the contracts could not transfer to this buyer at all.

What we did

1. Read the contract's consent clause against the purchase agreement's closing conditions. We needed to know whether the deal, as drafted, actually required every contract to transfer on day one, or whether that was simply the assumption everyone had been working from. It turned out the purchase agreement could be amended without breaching the buyer's financing terms, which only required the core business and its revenue base to transfer on schedule, giving us room to redesign the mechanics without renegotiating the financing itself.
2. Identified which contracts genuinely required clearance and which did not. Not every government contract the company held involved sensitive work; several were straightforward supply arrangements with no clearance requirement attached. We went through each contract's own consent language individually rather than relying on the department's general letter, and confirmed that only a portion of the company's government revenue, not all of it, was actually blocked by the pending review.
3. Proposed splitting the transaction into two closings. The bulk of the business, including the unaffected contracts, would transfer on the original date, giving the buyer the revenue base its financing depended on. The contracts requiring clearance would be carved into a holdback arrangement, with a delayed, conditional transfer once the department confirmed its review, and an adjustment to price if that transfer never happened at all.
4. Negotiated the holdback mechanics with the buyer's counsel. The buyer wanted certainty on price; the shareholders wanted certainty on getting paid for the full business they had built, including the contracts that could not yet transfer. We proposed an escrow holding back a portion of the purchase price tied specifically to the value of the delayed contracts, released on clearance or forfeited on a defined timeline if clearance did not come, so both sides carried a defined, bounded version of the risk instead of an open-ended one.
5. Addressed the shareholders' differing exit needs inside the same structure. Fiona's timeline could not accommodate a delayed second closing, since her own purchase depended on receiving her proceeds on schedule, so her portion of the price was structured to be paid in full at the first closing, with the holdback allocated proportionately against Kenneth and Cherise's shares, since they were staying on with the company regardless of when the second closing landed.
6. Coordinated with the department on an interim operating arrangement. While clearance was pending, the sensitive contracts needed to keep being performed by someone the department recognized as the responsible party. We arranged for the outgoing ownership group to retain formal responsibility for those specific contracts on an interim basis, with the buyer managing day-to-day operations under a services arrangement underneath that formal responsibility, so production schedules did not slip while the review continued.
7. Rebuilt the closing documents on the compressed timeline. Splitting one closing into two, with an escrow and an interim operating arrangement layered on top, meant redrafting a substantial part of the transaction documents inside thirteen remaining days, working alongside the buyer's counsel late into several evenings to keep both sides' financing conditions and internal board approvals intact through the redesign.
8. Prepared a fallback price adjustment in case clearance was ultimately refused. Because the department could still say no rather than simply take longer, we built a formula into the escrow terms for what happened to the holdback if clearance never came, giving Kenneth and Cherise a defined floor on what they would receive even in the worst case rather than leaving that outcome to be negotiated later under worse pressure.

The outcome

The sale closed on the original date for the core business and the unaffected contracts, which represented most of the company's value. Fiona was paid in full and completed her other purchase on schedule, with no visible sign in her closing documents that anything about the transaction had been unusual at all. The sensitive contracts moved into the escrow and interim operating structure, with the department's clearance decision arriving roughly four months later. When it came, it approved the transfer, and the escrowed portion of the price released to Kenneth and Cherise not long after.

The outcome was not the clean, single-date closing anyone had originally negotiated for, and it is worth being plain about what that cost. The shareholders gave up certainty on when the last portion of the price would arrive, and the buyer accepted operational risk during the interim period, when a contract it did not yet fully control was still being performed under someone else's formal responsibility. Kenneth and Cherise carried the financial exposure of the holdback for four months longer than planned, with the money legally theirs under the agreement but not yet in hand, and the legal work of running two closings and an interim arrangement added meaningfully to the transaction's cost on both sides.

What the restructuring avoided was worse: a collapsed deal, a buyer whose financing lapsed while waiting on a federal review with no committed timeline, and a business that could not simply pause production to wait it out without damaging its own delivery record. The split closing let the parts of the transaction that were ready to close proceed on schedule, and confined the uncertainty to the specific portion of the business actually affected by the department's review rather than letting it hold the whole deal hostage. Kenneth stayed on through the transition as planned, working alongside the buyer's new management team; Cherise's final departure was delayed by the four months but happened on the terms she had originally wanted, once the escrow released and her role wound down.

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