The Two Words That Nearly Cost an Ottawa Founder Millions

The situation

Luc had spent eleven years building an Ottawa-based technology company that sold infrastructure software to mid-size enterprises. By the time a strategic acquirer came calling with a letter of intent, the company had a healthy customer base, steady recurring revenue, and clean books. The two sides settled on a purchase price in the neighbourhood of $65 million, split between cash at closing and a smaller deferred portion tied to the business hitting agreed revenue targets over the following two years.

Luc held most of the shares directly. A smaller block, roughly 12 percent, sat with a family trust he had set up years earlier with his spouse, Kofi, a specialist physician who had never worked in the business but was named as a beneficiary and, on paper, a co-seller for tax planning reasons. That detail would matter later, because whatever indemnification obligations Luc agreed to would flow through to Kofi's exposure as well, even though Kofi had no operational knowledge of the company at all.

The buyer's corporate development team, led on the ground by Femi, sent over a first draft share purchase agreement roughly six weeks into exclusive negotiations. Luc's instinct, like most founders in his position, was to read the price and the closing conditions and treat the rest as boilerplate for the lawyers to sort out. Treadstone Law was retained specifically to make sure that instinct did not cost him money he would only discover was missing after the deal had already closed.

What the review found

Share purchase agreements are built around representations and warranties: promises the seller makes about the state of the business, from clean financial statements to compliance with tax and employment law to the absence of undisclosed litigation. Most of those promises are qualified by materiality. A representation might state that the company is in compliance with applicable law "in all material respects," or that there has been no "material adverse change" since the last financial statements. Those qualifiers exist to stop a buyer from suing over a $4,000 invoicing error in a $65 million deal.

Buried in the indemnification section of the buyer's draft was a provision known in deal practice as a materiality scrape. It stated that for the purpose of calculating the seller's indemnification liability after closing, every materiality qualifier in the representations would be read out, disregarded, as though the word "material" had never appeared. The representations themselves, used to decide whether a breach existed at all, stayed intact. But once a breach was found, the dollar amount owed would be calculated as if there were no materiality threshold anywhere in the agreement.

That distinction sounds technical, and it is, but the dollar consequence is not. Under the buyer's draft, a $60,000 compliance gap that would never have counted as a material breach on its own could still generate a full $60,000 indemnification claim, with no materiality cushion softening the number. Layered on top of that, the buyer's draft set a general indemnification cap at 10 percent of the purchase price, roughly $6.5 million, but carved out an unusually long list of "fundamental" representations, covering title to shares, tax matters, and corporate authority, where liability was uncapped and survived indefinitely. Kofi, who held shares through the trust but had never touched the company's tax filings or contracts, would have carried that same uncapped exposure as a co-seller.

There was also a basket, the deductible amount of losses the buyer had to absorb before any claim could be made at all, but it was set as a "first-dollar" basket rather than a true deductible: once losses crossed the threshold, the seller owed the buyer for every dollar, including the dollars below the threshold, not just the amount above it. Combined with the materiality scrape, this meant a cluster of small, immaterial breaches could cross the basket and then trigger repayment of the entire amount, not just the excess.

What we did

1. Modelled the exposure in dollars, not clauses. Rather than debating drafting philosophy, we built out several scenarios showing what specific categories of breach, an employment misclassification here, an undisclosed contract amendment there, would actually cost Luc under the buyer's language versus a standard, unscraped calculation. Numbers move negotiations faster than principles.
2. Narrowed the scrape to damages only. We proposed the materiality scrape apply solely to the calculation of losses once a breach was already established using the materiality-qualified language of the representation itself. That preserved the buyer's core ask, a cleaner path to recovery, while restoring the threshold that determines whether a breach exists in the first place.
3. Converted the basket to a true deductible. We pushed to change the first-dollar basket to a tipping-then-deductible structure, later settling on a straightforward deductible: once losses crossed the threshold, only the amount above it was recoverable, not the whole balance.
4. Separated Kofi's exposure from Luc's operating risk. Because Kofi had no role in running the business, we negotiated a carve-out limiting Kofi's indemnification obligations, as a passive trust beneficiary, to matters of share title and tax residency rather than the full sweep of operational representations Luc alone was positioned to make.
5. Pushed back on the fundamental representations list. Several items the buyer had classified as "fundamental," including general regulatory compliance, belonged in the ordinary, capped category. We argued that status should be reserved for genuinely foundational matters like ownership and corporate authority, not everyday operational promises.
6. Tied the escrow to the actual risk window. Rather than negotiating the cap and the escrow holdback as separate line items, we linked the size and duration of the escrow to the survival period for each category of representation, so money sat in escrow only as long as a claim could realistically be brought.

The outcome

The negotiation with Femi's team ran over five weeks and did not end with a clean win on every point. The buyer agreed to narrow the materiality scrape to the damages calculation only, which was the change with the largest practical effect: it meant genuinely immaterial issues would no longer generate claims at all, only real, material breaches would, calculated without a materiality discount once found. The basket was converted to a true deductible and raised from the buyer's original figure to roughly $400,000, meaning losses had to clear that amount before anything was owed, and only the excess above it would be recoverable.

Kofi's exposure was narrowed as proposed, limited to share title and tax matters rather than the full representation set, which mattered less in dollar terms than in principle: a physician with no operational role in the company was no longer on the hook for warranties about software licensing or employment records he had never seen.

Where the compromise fell short of what Luc wanted was the general indemnification cap. The buyer held firm at roughly $6.5 million, resisting Treadstone's push to raise it, arguing that the narrowed scrape and the improved basket already represented meaningful concessions. Luc ultimately accepted that position rather than risk the deal stalling over a single number with closing pressure building on both sides. The escrow was reduced from the buyer's original ask of 15 percent of the purchase price to roughly 10 percent, held for eighteen months for general representations and longer for the fundamental category, consistent with the survival periods negotiated alongside it.

The deal closed on the agreed terms roughly ten weeks after the letter of intent was signed. Luc walked away with a materially better indemnification structure than the buyer's opening draft, and Kofi's personal exposure was meaningfully narrower than it would otherwise have been. But the cap stayed lower than Luc had hoped, and he closed the transaction carrying more residual risk on that front than he wanted. That is the honest shape of most purchase agreement negotiations: real ground gained on the mechanics that determine when and how much a seller pays, alongside a number or two the buyer simply would not move on.

What you can learn from this