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Legal due diligence exists to answer three questions: does the seller own what it is selling, what is attached to it, and what will it cost to keep it running after closing. Everything else is detail.
Book My 15-Minute Assessment →Diligence is not paperwork. Every finding either changes the price, adds a closing condition, moves into a specific indemnity, or ends the deal, and a finding that does none of those was not worth searching for.
It verifies that the vendor owns what it is selling and identifies what is attached to it. That means corporate records and share ownership, material contracts and their change of control clauses, leases and real property, employment terms and liabilities, litigation, tax and regulatory compliance, intellectual property ownership, and public searches including Personal Property Security Act registrations, executions, bankruptcy and litigation.
Tell us briefly what is going on. A lawyer reviews every enquiry and replies within 24 hours on business days.
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Legal due diligence in a private acquisition serves the deal, not the file. Every issue that emerges should be routed to one of four destinations: a price reduction, a condition that must be satisfied before closing, a specific indemnity backed by a holdback or escrow, or a decision not to proceed. Diligence that produces a long descriptive memorandum with no recommendations has cost the buyer money without changing anything, which is the most common failure in mid-market transactions.
Scope must also be proportionate. A buyer acquiring a professional services firm with twelve employees and no real property needs a very different review from one acquiring a manufacturer with a leased plant, secured equipment financing, unionised staff and environmental history. We set the scope, and the budget, against the deal value and the specific risk profile before opening the data room, and we agree materiality thresholds with the client so that immaterial contracts are not reviewed at the same depth as the customer agreement that represents forty per cent of revenue.
Lexaltico LLP conducts buy-side legal due diligence on Ontario private company acquisitions, and prepares sell-side vendor diligence for owners who want problems found and fixed before a buyer finds them. This page sets out how the process runs and what it typically covers.
Signed before information moves. It should cover permitted purpose, non-solicitation of employees, return or destruction of materials, and a term long enough to matter.
Sets structure, price mechanics, working capital treatment, exclusivity and timetable. Exclusivity, confidentiality, costs and governing law are binding even though the commercial terms are not.
A tailored request list, not a generic precedent. Gaps and delays in the data room are themselves diligence findings.
Corporate profile reports, Personal Property Security Act searches, execution searches, bankruptcy and insolvency searches, litigation searches, Bank Act security, title and, where relevant, intellectual property registers.
Issues ranked by materiality, each with a recommended treatment: price, condition, indemnity or walk away.
Representations and warranties drafted around what diligence found, qualified by the vendor disclosure schedules, with indemnity architecture to match.
Third-party consents, regulatory clearances, discharges of security, clearance certificates, closing deliveries and post-closing filings.
Corporate diligence establishes that the target exists, is in good standing, and that the shares being sold are validly issued and owned by the people purporting to sell them. That means the articles and all amendments, the by-laws, the minute book, the securities register traced from incorporation forward, the register of individuals with significant control, any shareholder agreements, options, warrants or convertible instruments, and confirmation that the corporation has filed its Initial Return and annual returns. A defective share issuance discovered at closing can stop a deal outright.
Contract diligence covers customer and supplier agreements, leases, equipment finance, licences, distribution and franchise arrangements, and any agreement outside the ordinary course. The two things being looked for are change of control and assignment provisions, which determine whether consents are needed, and terms that will bind the buyer after closing: exclusivity, most favoured nation pricing, unlimited liability, automatic renewal, and termination rights exercisable on short notice by a major customer.
Employment diligence reviews written agreements and their termination provisions, contractor classifications, bonus and commission plans, benefit and pension arrangements, any union certification or collective agreement, outstanding Employment Standards Act claims, human rights applications and workplace investigations, and accrued vacation. Ontario adds specific traps: a termination clause that breaches the Employment Standards Act, 2000 in any respect can be unenforceable in its entirety, exposing the buyer to common law reasonable notice for the whole workforce, and non-competition clauses in employment agreements have been prohibited since October 25, 2021 outside narrow exceptions.
Searches are cheap relative to their value. A Personal Property Security Act search against the corporation and its predecessor and business names discloses registered security interests in its personal property; registrations run for the period selected, commonly five years, and each one has to be reconciled to a known lender and either discharged at closing or expressly assumed. Bank Act security registrations sit in a separate federal register and are missed surprisingly often.
Beyond the PPSA, standard searches include a corporate profile report and certificate of status, execution searches against the corporation and, in an asset deal, against real property, bankruptcy and insolvency searches, Superior Court and Small Claims Court litigation searches, and Workplace Safety and Insurance Board clearance certificates confirming premiums are current. Where the business owns registered intellectual property, Canadian Intellectual Property Office searches confirm ownership and status of trademarks and patents, and licences in and out should be reviewed for assignability.
Under Canadian copyright law, the first owner of copyright in a work made in the course of employment is generally the employer, but the default rule for an independent contractor is the opposite: the contractor owns the copyright unless there is a written assignment. Software companies acquiring targets that built their product with freelancers frequently discover that the chain of title to their core asset is incomplete. Fixing it before closing is a condition; fixing it after is a negotiation.
Representations and warranties are the vendor's statements of fact about the business as at signing and closing. They serve two functions: they force disclosure, because an inaccurate representation must be qualified by the disclosure schedules, and they allocate risk, because a breach gives the buyer an indemnity claim. Diligence and drafting are therefore the same exercise viewed from two ends: what diligence could not verify becomes a representation, and what diligence found becomes a disclosure, a specific indemnity or a price adjustment.
Indemnity architecture is where the real negotiation happens. Survival periods typically run one to two years for general representations, with longer or unlimited periods for fundamental representations such as title to the shares, corporate authority and tax. A basket or deductible prevents small claims; a cap limits total exposure, often a percentage of the purchase price, with fundamental representations and fraud carved out. A holdback or escrow of part of the price is what makes the indemnity collectible. Representation and warranty insurance is increasingly available in the mid-market and can replace or supplement escrow where the vendor wants a clean exit.
Closing conditions handle problems that must be fixed rather than priced: obtaining a landlord's consent, discharging a security interest, terminating a related-party contract, delivering a clearance certificate, obtaining regulatory approval, or securing employment agreements from key people. A material adverse effect condition addresses deterioration between signing and closing, and its definition, particularly the carve-outs for general economic and industry conditions, is worth negotiating carefully rather than accepting from a precedent.
Part IX of the Competition Act requires pre-merger notification to the Commissioner of Competition where both statutory thresholds are exceeded: a party-size threshold measured by the combined Canadian assets or Canadian revenues from those assets of the parties and their affiliates, currently $400 million, and a transaction-size threshold that is adjusted annually and is published by the Competition Bureau each year. Where notification is required, the parties may not close until the statutory waiting period, which runs 30 days from a complete filing, has expired or been terminated early, and a supplementary information request extends it.
Notification thresholds are not a safe harbour on the merits. The Commissioner may apply to the Competition Tribunal in respect of a merger that has been completed for up to three years after closing, whether or not it was notifiable. Buyers and sellers in concentrated markets should have a competition assessment done even on a small transaction. Separately, since June 2023 the Competition Act has made it a criminal offence for unaffiliated employers to agree to fix wages or not to solicit each other's employees, which is directly relevant to how bidders and targets behave during a process and to the drafting of no-hire clauses.
Where the buyer is a non-Canadian, the Investment Canada Act requires either a notification or, above the applicable review thresholds, an application for review under the net benefit test, and any investment can be subject to a national security review regardless of size. Industry-specific approvals may also apply in regulated sectors such as financial services, transportation, health services and cannabis. Regulatory timing usually dictates the closing date, so it should be scoped in the first week, not the last. Contact our corporate group to discuss diligence on your transaction.
Diligence involves moving other people's personal information. The federal Personal Information Protection and Electronic Documents Act contains a business transaction exception permitting organisations to use and disclose personal information without consent for the purposes of a prospective transaction, subject to conditions: the parties must enter into an agreement limiting use of the information to purposes related to the transaction, requiring it to be protected with appropriate safeguards, and requiring it to be returned or destroyed if the transaction does not proceed. If the transaction completes, further conditions apply, including notifying affected individuals within a reasonable time that the transaction occurred and that their information has been transferred.
Practically, that means employee files, customer lists and health or financial records should be redacted or aggregated in the first phase of diligence and disclosed in identifiable form only where genuinely necessary. Where the target holds sensitive personal information at scale, the buyer should also diligence the privacy programme itself: consent practices, retention schedules, cross-border storage, breach response history and any outstanding complaints or investigations, because those liabilities travel with the business in a share purchase and can be significant.
Competitively sensitive information requires separate handling when the buyer and target are competitors. Sharing current pricing, customer-specific terms, margins or strategic plans before closing can create exposure under the Competition Act and, if the transaction does not complete, leaves the parties having exchanged information they should not hold. The standard solution is a clean team: a defined group of individuals, often external advisors, who review the sensitive material and report only conclusions to the deal team, governed by a written protocol.
Finally, the confidentiality agreement should be treated as a real document rather than a formality. It should define the permitted purpose narrowly, cover the fact of the discussions themselves, restrict solicitation of the target's employees for a defined period, address whether the recipient may share information with lenders and co-investors, and specify what happens to material at the end of the process, including the practical reality that backups cannot always be deleted. For a seller, it is the only protection in place during the period when the most sensitive information about the business leaves the building.
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Lexaltico LLP
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