When the Software Wasn't Fully Owned: A Kitchener Diligence Save

The situation

Keisha, an investment advisor, and Andre, a commercial landlord, had spent three years building a holding company that acquired profitable, founder-run businesses in Southwestern Ontario and kept their management teams in place. Their latest target was a Kitchener software company that built scheduling and dispatch tools for the trades — plumbers, electricians, HVAC contractors. The founder, Tuan, had built the core product himself over roughly a decade, growing it from a side project into a business with steady recurring revenue and a loyal customer base.

The parties had agreed on an enterprise value of about $68 million, structured as a share purchase with a portion of the price held back in escrow to cover the usual post-closing surprises. Keisha and Andre's holding company retained Treadstone Law to run the legal due diligence review — the process of confirming that the company they were about to buy actually owned what it claimed to own, and that no hidden liabilities would follow the shares into their hands. For a software business, the single most important asset is rarely a building or a piece of equipment. It is the code itself, and the intellectual property rights attached to it.

What the review found

Under Canadian copyright law, the person who actually writes software code is presumed to own the copyright in it, unless that person was an employee creating the work within the scope of their employment, or unless they signed a written agreement assigning their rights to someone else. A company does not automatically own code just because it paid for it, and it does not automatically own code just because a contractor was working under its direction. Without a signed assignment, an independent contractor can walk away from a project still holding the copyright to what they built.

Treadstone's review of the target's employment and contractor records turned up exactly this gap. In the company's early years, Tuan had worked with a rotating group of freelance developers, hired informally through referrals, to build the scheduling engine that was now the product's core feature. Several of these early contributors had never signed a written intellectual property assignment agreement. Two could not be located at all — one had moved out of the country, and the company had no current contact information for the other. A third early contributor was locatable but had left on poor terms years earlier after a dispute over unpaid invoices.

This meant the chain of title — the unbroken sequence of ownership transfers that establishes who currently holds the rights to an asset — had real gaps in it. On paper, the target company could not prove it owned all of the code its flagship product depended on. For a $68 million deal built on the assumption that the buyer would own the software outright, this was not a minor administrative gap. It was a defect in the core asset being purchased.

What we did

1. Mapped the code against the contributor history. Working with a technical advisor retained by the buyers, we identified which modules of the scheduling engine traced back to the unassigned contractor work, and which had been rewritten or substantially replaced by later, properly documented employees. Roughly a third of the core engine's original codebase was attributable to the unresolved contractors, though much of it had since been modified.
2. Located and re-engaged two of the three contributors. The contributor who had left on poor terms was found through a former colleague, and the one who had moved abroad was reached by email. Both were willing to sign retroactive assignment agreements — legal documents confirming, after the fact, that all rights in the work they had done for the company belonged to it — but each expected to be paid for doing so, and the one with the unpaid-invoice dispute wanted that old grievance resolved as part of the deal.
3. Advised that the third contributor was not curable before closing. The developer who could not be located at all represented a genuine, unresolved risk. There was no shortcut that let the buyers simply declare the missing developer's rights extinguished, and no amount of paperwork on the buyers' side could substitute for a signature the missing developer had never given. We were honest with Keisha and Andre that this piece of the problem would still exist on closing day, however the deal was structured.
4. Negotiated a price adjustment and an indemnity with the sellers. Rather than delay or walk away from a deal both sides still wanted, we worked with the sellers' counsel to restructure the escrow. The purchase price was reduced by roughly $1.8 million to reflect the cost and risk of the unresolved chain of title, and a separate, longer-duration escrow of about $1.2 million was carved out specifically to cover any future claim from the missing contributor or a dispute over the code itself. Tuan, as the founder and largest individual seller, personally indemnified the buyers for this specific risk beyond the general escrow period, since he had the most direct knowledge of how the early code was built.
5. Closed with a defined obligation to keep searching. The purchase agreement obligated the company, post-closing, to make continued reasonable efforts to locate the missing developer and obtain a retroactive assignment, with Tuan bearing the cost of that search up to an agreed amount.

The outcome

The deal closed roughly ten weeks after diligence began, later than the parties had originally hoped but well within a normal timeline for a transaction of this size once a material issue surfaces mid-process. Keisha and Andre's holding company completed the acquisition, but not on the terms first agreed. The price reduction and the dedicated escrow meant the sellers absorbed a real cost for the gap in their own records, while the buyers accepted that a small, contained risk would travel with the business rather than being eliminated outright.

Neither side got everything they wanted, which is the honest description of most negotiated compromises. The buyers would have preferred a fully clean chain of title with no lingering exposure. The sellers, and Tuan in particular, would have preferred to close at the original price without personally standing behind a problem that predated the sale process by years. What both sides got was a deal that reflected the actual risk on the table, priced fairly, with a clear mechanism for who bore what if the missing developer ever resurfaced with a claim.

Eighteen months after closing, the missing contributor had still not been located, and the dedicated escrow remained in place, untouched, as the parties had agreed it would for its full term.

For Keisha and Andre, the episode also changed how their holding company approached diligence on future acquisitions. Rather than treating intellectual property review as a checklist item late in the process, they began asking for contractor and employment records earlier, before a purchase price was even proposed, so that any chain-of-title issues could be priced into the initial offer instead of forcing a renegotiation after both sides had already shaken hands on a number.

What you can learn from this