A balance sheet is a snapshot of what has already happened. Several of the obligations a share buyer actually inherits never show up on it at all — they surface only when someone asks the right question first.
Key takeaways
Treadstone Law’s guide to hidden liabilities in an Ontario share purchase states the underlying mechanism directly: a share buyer acquires the entire corporation, meaning “the corporation’s history” comes with it, not merely its assets at the moment of closing. (treadstonelaw.ca) Outstanding or unassessed tax liabilities from before the purchase, including unremitted source deductions or HST, “generally remain the corporation’s problem — and now yours.” (treadstonelaw.ca) None of that requires the liability to have been booked, assessed, or even known to the seller at the time of the sale — the corporation’s continuity, not the balance sheet, is what carries it forward.
The clearest example is a registered security interest against a specific asset. Treadstone Law is explicit: “liens or security registrations against the corporation’s equipment, inventory, or receivables do not disappear just because ownership changed hands.” (treadstonelaw.ca) A registration like this may never appear as a liability line on a notice-to-reader statement at all — it lives in a public security registry, attached to the specific asset, not in the seller’s bookkeeping. deavo’s general due-diligence checklist reaches the same point from the buyer’s side, listing “outstanding loans, leases, or liens against business assets” as a required financial diligence item, precisely because the financial statements alone will not surface it. (deavo.ai)
A unanimous shareholder agreement is a second, less obvious example, and the mechanism is federal rather than provincial. The Canada Business Corporations Act provides that an agreement among all the shareholders restricting the directors’ powers “is valid,” and, critically, that “a purchaser or transferee of shares subject to a unanimous shareholder agreement is deemed to be a party” to it. (laws-lois.justice.gc.ca, CBCA s.146) Where notice of the agreement was not properly given, the purchaser has a narrow window — “no later than 30 days after they become aware” of its existence — to rescind the transaction; outside that window, the buyer is bound by governance restrictions that appear nowhere on the target’s financial statements at all, because a USA is a governance document, not an accounting entry.
Lease and key-contract terms behave the same way. A change-of-control clause requiring landlord or counterparty consent to an ownership change is a real, binding commitment on the buyer’s ability to complete the deal cleanly, and deavo’s general checklist lists exactly this — lease terms, “including remaining length, renewal options, and any change-of-control clauses,” — as something to review before closing, separately from the financial statements. (deavo.ai) None of it shows up as a number on the balance sheet; all of it can materially affect what the buyer actually owns the day after closing.
Treadstone Law’s guide also flags litigation, employment liability and environmental exposure as inherited automatically on a share purchase — lawsuits and regulatory complaints against the corporation transfer with ownership, unpaid wages and vacation pay obligations remain with the entity, and contamination or compliance issues tied to a property persist regardless of who owns the shares. (treadstonelaw.ca) A pending claim that has not yet been resolved, or has not yet even been filed, will often appear nowhere on a notice-to-reader statement — there is no requirement that a compilation engagement disclose it, because a compilation performs no testing for it in the first place.
The tools treadstonelaw recommends for managing this risk are contractual rather than accounting-based, because the risk itself sits outside the accounting: “representations, warranties, indemnities, holdbacks” and price adjustments, layered on top of the specific diligence checklists that surface these commitments in the first place. (treadstonelaw.ca) Because none of this shows up in the financial statements, none of it will be caught by a review of the financial statements, however thorough — it requires a separate search: a security-registry search against the specific assets, a review of the corporate minute book for any unanimous shareholder agreement, and a read of every material lease and contract for a change-of-control clause.
A buyer is acquiring 100% of the shares of a manufacturing business with clean-looking notice-to-reader statements showing no material liabilities. A security-registry search run alongside the financial diligence turns up a registered interest against the company’s primary production equipment, securing a five-year-old equipment loan the seller states was “paid off years ago.” The loan may in fact be paid off, but the registration was never discharged — a common, mundane administrative lapse, not evidence of anything sinister — and until it is formally discharged, the buyer would be acquiring equipment with an unreleased security interest still on the public record. Separately, the corporate minute book review turns up a unanimous shareholder agreement from an earlier round of financing that restricts the board’s ability to approve capital expenditures above $250,000 without a specific shareholder vote — a governance restriction the seller had simply forgotten to mention, because it had not been asked about, and that binds the buyer as the incoming shareholder under CBCA s.146 whether or not it was disclosed. Neither item appears anywhere in the financial statements. Both are resolved before closing: a payout letter and formal discharge for the registration, and either a termination of the USA or an acknowledgment of its terms for the second.
Related: the security-registration risk specific to pledged inventory, sorting inherited risk into price, holdback or indemnity, why the financial statements alone will not surface these commitments
Often, though not automatically or completely — an asset purchase can leave many of these liabilities with the seller’s corporation rather than passing to the buyer, which is exactly why treadstonelaw treats asset-versus-share structuring as a central diligence question in its own right. Registered security against a specific asset the buyer is acquiring, however, generally follows the asset regardless of deal structure until it is formally discharged. (treadstonelaw.ca)
Through the corporate minute book, reviewed as part of legal due diligence — it is not something that would appear in the financial statements, and the CBCA’s deeming provision means a buyer can be bound by one even without proper notice, subject to a narrow 30-day rescission window once its existence becomes known. (laws-lois.justice.gc.ca, CBCA s.146)
Not usually as a straight price cut. Most of them — litigation, contingent registrations, contract consents not yet obtained — are uncertain in amount or outcome at the time they are found, which is exactly the shape of risk an indemnity basket and cap, or a holdback tied to a specific resolution, is built to manage rather than a fixed deduction from the price.
A short call is enough to scope the registry, minute-book and contract review this needs.
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