Anonymised, illustrative composite. The confidential information memorandum listed 40 active customer contracts as the core of the target's value. Ninety days after closing, a fund found out how many of them had actually changed hands.
At a glance
A fund structured its acquisition of an industrial services business as an asset purchase, buying the equipment, the brand, the employees and — on paper — the customer book, while leaving behind the target corporation's legacy liabilities. The confidential information memorandum presented roughly 40 active service contracts as the deal’s core value, most running two to five years with automatic renewal.
The asset purchase agreement listed those contracts on a schedule and included a general assignment clause purporting to transfer “all right, title and interest” in each one to the buyer as of closing.
A contract is a bundle of rights and obligations between specific parties, and an assignment clause in a purchase agreement between buyer and seller does not, by itself, bind a third-party customer who never signed it. Treadstonelaw’s own guidance on this exact gap is direct. Without the consent the contract requires, “a buyer can leave the closing table believing it has bought a customer base that, legally, hasn’t come with the deal at all”, and “the buyer may not actually be entitled to enforce — or benefit from — that agreement going forward.”
Roughly ten of the forty contracts, when finally read line by line after a billing dispute three months post-close, contained exactly that requirement — either an express assignment-consent clause or a change-of-control clause the seller’s side of the deal had not triggered on a share sale, but a genuine asset transfer plainly did. Nobody had asked those customers for consent before closing, because nobody had systematically sorted the contracts by clause type before the schedule was built.
The exposure was not abstract. One customer, on discovering the change of vendor had happened without its written sign-off, treated the switch as a breach of its own contract and used the leverage to renegotiate pricing downward before agreeing to consent retroactively. Another two smaller accounts simply walked, on the view that an unconsented assignment released them. As the same guidance puts it, servicing a customer without formal consent creates risk on both sides of the deal: “The customer could treat the change as a breach, the seller could remain contractually exposed, and the buyer may not actually have enforceable rights under the agreement.”
None of this touched the deal’s GST/HST treatment, which is a separate question entirely — and worth pinning precisely, because the going-concern election is habitually cited to the wrong subsection. ETA s.167(1)(a) deems the supplier to have made “a separate supply of each property and service that is supplied under the agreement”; s.167(1)(b) then permits a joint election in prescribed form, “except where the supplier is a registrant and the recipient is not a registrant.” It is s.167(1.1)(a), not s.167(1), that produces the result the parties wanted: where the election is made and, if the recipient is a registrant, filed with the Minister by the filing deadline for the recipient’s first reporting period in which tax would otherwise have become payable, “no tax is payable in respect of a supply of any property or service made under the agreement” — subject to three carve-outs that survive the election: a taxable supply of a service still to be rendered by the supplier, a taxable supply of property by way of lease, licence or similar arrangement, and, where the recipient is not a registrant, a taxable sale of real property. The parties here met those conditions. But the election governs the tax treatment of the asset sale and nothing else. It has no bearing on whether an individual customer contract was validly assigned, and closing it cleanly gave the fund no comfort at all on the contract-consent problem sitting underneath it.
The same guidance flags a wrinkle the fund had not fully appreciated going in: change-of-control clauses in a customer contract can bite even where a future deal is structured as a share purchase rather than an asset purchase — a structure many buyers assume avoids assignment problems entirely because the contracting corporate party never technically changes. A change-of-control clause is triggered by the change in ownership itself, not by which legal entity is named on the contract, so a buyer cannot structure its way around a genuine change-of-control right just by buying shares instead of assets. Every material contract, on either structure, needs its assignment language and its change-of-control language checked separately — they are not the same clause, and they do not fail the same way.
The fund's counsel went back through every remaining contract and built a consent-tracking schedule from scratch: assignment language, change-of-control language, any “consent not unreasonably withheld” qualifier, and an absolute-prohibition flag where one existed. Consent letters went out to the remaining flagged customers, most of whom signed without incident once asked directly rather than presented with a fait accompli.
For the fund's next asset deal, the diligence checklist changed permanently: every contract scheduled for transfer is now sorted by assignment-clause type before signing, consent requests go out during the exclusivity period rather than after closing, and unconsented-but-material contracts become an express closing condition rather than an assumed formality.
A 30-minute call is enough to tell you whether a structuring or diligence gap like this one is sitting in your pipeline.
