Can a seller force me to take unwanted liabilities in a share deal?

No seller can compel a buyer to complete a share purchase. The deal exists only on the terms you agree to. The difficulty is structural: when you buy the shares of a company, you own the company, and the company keeps whatever it owed before you arrived. So the real question is what the agreement lets you do about liabilities you find, or fail to find, before closing.

Why shares carry the company’s history

BDC states that purchasing shares comes with a very different set of responsibilities compared to purchasing assets, and that the most dangerous unknown liabilities often arise from the seller’s pre-sale activities. It also notes that sellers will probably prefer a sale of shares for tax reasons. A seller may therefore propose a share deal for a good reason, and you may still negotiate how the liabilities are handled or ask whether an asset purchase suits you better.

Finding them before you sign

BDC says that due diligence is the most important thing a buyer can do for protection. It suggests searching the Personal Property Security Registry for liens, in Quebec the Register of Personal and Movable Real Rights, and checking for pending lawsuits, human rights complaints and bankruptcy filings. BDC also lists contracts among the documents to examine.

Disclosures and the indemnity

BDC’s guide to purchase agreements says the vendor formally describes the business and discloses known problems, and that the parties negotiate who bears the risk for each disclosed issue. It describes the indemnity section as setting the compensation the vendor pays if disclosures prove inaccurate or covenants are not kept, and says the seller is not liable for misrepresentations forever and that liability is typically capped. BDC also suggests an indemnity from the seller for unforeseen liability for a period after the sale.

Ask your lawyer how the draft handles a liability that appears after closing, who pays, up to what limit, for how long, and whether part of the price is held back to secure it.