What if due diligence shows the seller is being sued by former customers?

A lawsuit by former customers is a finding to understand, not automatically a reason to walk away. BDC lists ongoing, pending or threatened litigation and past lawsuits among the legal items to review, and lists pending litigation among the red flags that legal and commercial due diligence lets you account for. The first job is finding out what the claim is, how large it is and who would pay.

Ask for the facts

Ask for the pleadings, any settlement offers, correspondence from the customers’ lawyers, and the seller’s own counsel’s view of the claim. Ask whether insurance responds, and whether the cover continues after the business changes hands. BDC also advises checking for pending lawsuits in the province where the company operates. Search each court level and ask the seller whether any customer has complained without suing.

Check how the structure affects the claim

BDC says purchasing shares comes with a very different set of responsibilities compared to purchasing assets. If you buy shares and the corporation is the one being sued, you acquire the corporation that faces the claim. If you buy assets, ask your lawyer which liabilities you are taking on and whether the agreement can leave this one with the seller. Either way, ask your lawyer about a specific indemnity from the seller; BDC suggests an indemnity agreement covering unforeseen liability for a period after the sale.

Why unfiled claims still matter

A search finds only claims already filed. Ontario’s Limitations Act, 2002 generally bars a proceeding more than two years after the claim was discovered, with an outer limit of 15 years from the act or omission, subject to exceptions. British Columbia’s Limitation Act sets the same two-year and 15-year periods, subject to its own exceptions. Alberta’s Limitations Act uses two years from when the claimant first knew or ought to have known and ten years from when the claim arose, whichever expires first, subject to its own exceptions. Other provinces differ, so past customers of the business may still be able to sue.