Anonymised, illustrative composite. The buyer used the purchase agreement's own 'and/or nominee' clause to assign the deal to a ten-dollar subsidiary a week before closing — and the same clause released the buyer the seller thought it had.
At a glance
A share purchase agreement for a $3,800,000 acquisition named the buyer as “Buyer Inc., and/or its nominee” — boilerplate flexibility language, common in share purchase agreements and usually harmless, letting a buyer designate an affiliate to take title without renegotiating the deal. The seller’s post-closing protection ran to $1,050,000: a $600,000 vendor take-back note and a three-year earn-out worth up to $450,000, plus a working-capital true-up. The seller assessed the buyer’s parent company’s balance sheet — roughly $4,200,000 of net assets — as the credit behind those obligations.
One week before closing, the buyer exercised the nominee right and assigned the agreement to a newly incorporated subsidiary, capitalised with $10 of nominal share capital, which then became the actual purchasing entity and the counterparty on every post-closing obligation. On its own, an assignment clause like this is not the problem — a buyer nominating an acquisition vehicle to take title is routine. The problem was in the wording that came with it: the clause did not simply permit the buyer to assign the agreement, it stated that upon assignment the buyer “shall thereupon be released from all obligations hereunder.” That language had been carried over from a template built for institutional buyers assigning between affiliated funds of equal credit quality, where a release on assignment is unremarkable. It was never adapted for a deal where the assignor and the assignee were not remotely equal in substance.
$3,800,000 purchase price; $600,000 vendor take-back note and up to $450,000 of earn-out — $1,050,000 of post-closing seller exposure — running, on the assignment as executed, against a newco with $10 of paid-up capital rather than the buyer’s parent, whose own balance sheet carried roughly $4,200,000 of net assets.
No statute governs whether the assignment clause itself works a release — that is a question of what the clause says, answered by general contract law. (A separate statute can matter after a release, if the newco is later stripped of value to defeat the seller specifically — see below.) As a matter of general contract law, an assignment of a contract, without more, does not by itself release the assignor from its own obligations under it — the assignor remains liable to the counterparty unless the counterparty agrees to a novation, a tripartite substitution under which the original party is discharged and the new party takes its place. A bare assignment right, drafted only to let a buyer designate a nominee to take title, ordinarily says nothing about releasing anyone; the assignor and the assignee both remain answerable, jointly if need be.
The distinction that matters is between an assignment and a novation. The clause here did not stay in that ordinary lane. By providing that the buyer “shall thereupon be released” on assignment, it converted a routine flexibility right into a pre-agreed novation — a mechanism by which the seller had, months earlier and without focusing on it, already consented in advance to release whichever entity the buyer named later, regardless of that entity’s substance. That is not an ambiguous drafting point requiring a court to infer intent from surrounding circumstances; the clause said what it said, and on a plain reading it did exactly what the buyer used it to do.
Reviewing the closing set in the final days before signing, the seller’s counsel caught the release language and renegotiated before the agreement was executed: the newco would still take the shares, but its parent agreed to guarantee the vendor take-back note and the earn-out obligations directly, and the assignment clause was narrowed so that any future assignment required the seller’s consent and did not release the assignor absent a written release signed by the seller.
Had the release language gone unnoticed and the deal closed as drafted, and had the newco later been unable or unwilling to pay — a realistic outcome for a company with $10 of capital and no independent credit — the seller’s only recourse would have run against an entity with nothing to recover from. The parent, released by the clause’s own terms, would have owed nothing on the SPA. Up to $1,050,000 of the deal’s value to the seller would have been effectively unsecured against a shell.
The seller would not have been entirely without a statutory lever even then, but it is a weak one on these facts, and the weakness is itself instructive. Ontario’s Fraudulent Conveyances Act voids “every conveyance of real property or personal property…made with intent to defeat, hinder, delay or defraud creditors or others of their just and lawful actions, suits, debts, accounts, damages, penalties or forfeitures”. If, after the assignment, value had been stripped out of the newco specifically to leave the seller’s note and earn-out uncollectible, the seller, as a creditor of the newco, could in principle challenge that later transfer. But s. 2 turns on intent, and the newco’s thin capitalisation was disclosed — visible on the face of the assignment — and consistent on its face with ordinary acquisition structuring rather than a scheme aimed at this seller specifically. Proving the statutory intent on facts like that is a real fight with a real chance of losing it, not a substitute for the parent guarantee the seller actually negotiated.
The tell was a single phrase — “and thereupon shall be released” — riding along inside a clause that, read quickly, looks like nothing more than ordinary buyer flexibility. A reviewer checking only whether an assignment right exists, without separately checking whether a release travels with it, will miss exactly this. The two questions are different, and a template built for one buyer profile does not automatically fit another.
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