This article is the sixth and final part of our private M&A deal study series where we highlight guidance provided by the American Bar Association’s 2025 private M&A deal point study and dig into some key aspects of a private M&A deal in Canada.
In this article, we dig into indemnities and limitations on liability in the context of a private M&A deal in Canada.
American Bar Association’s 2025 study
The American Bar Association has recently released its 2025 study which analyzes 83 acquisition agreements signed in 2020, 2021 and 2022 (being years associated with the Covid-19 pandemic) for the sale and purchase of private Canadian entities. The study (the latest since 2018) is widely recognized as a leading resource in shedding light on the question ‘what is market?’ with respect to deal terms in private M&A transactions governed by Canadian law.
Indemnities
At a high level, an ‘indemnity’ is a promise made by one party to compensate the other party for loss suffered due to the occurrence or non-occurrence of some event. Generally, an indemnity provides the basis for a larger dollar claim than ordinary damages claims made for breach of contract. However, as contractual indemnities are a creature of contract, liability associated with indemnity claims can be significantly limited with the use of certain contractual language.
Disclosure of information
Sellers who disclose information to a buyer about the target entity and its business as part of due diligence will likely require that the disclosed information, together with information on public registers, is carved out from the standard representations and warranties included in the sale and purchase agreement.
Disclosed information is treated differently on the basis that the buyer has had the opportunity to understand it but nevertheless wishes to proceed with the transaction. In some transactions, the buyer will only proceed with the transaction if the seller accepts specific and narrow indemnities not subject to all or most limitations on liability as a way of avoiding the general ‘carve out for disclosed information’. This allocates risk back toward the seller on specific matters such as potential damage to the environment and associated liability.
Given the fast paced nature of private M&A transactions and the ongoing operations of the target entity and its business, relevant information may be disclosed to the buyer only after due diligence and signing of the definitive sale and purchase agreement but before completion of the transaction.
Interim period disclosures
In 43 percent (no comparison data from the 2018 study) of the sample transactions in the 2025 study, interim period disclosures did not trigger a right for the buyer to cancel the transaction on the basis of the new information disclosed. However, buyers can negotiate indemnification in relation to these matters. Of the sample transactions that expressly contemplate updating the seller’s disclosure schedules during the interim period (to include disclosure of information coming to light in the interim period), 43 percent (no comparison data from the 2018 study) gave the buyer the right to complete the transaction and be indemnified for the new items disclosed during the interim period.
Limitations on liability
Knowledge qualifiers
It is common for sellers to limit their potential liability for representation and warranty/indemnity claims by including wording that qualifies the core contractual statements with the seller’s knowledge of relevant information. One way buyers counter this approach is to define seller’s knowledge to include not only actual knowledge of the seller (usually defined with reference to the directors and officers of the seller and target entity), but also the seller’s constructive knowledge. The seller is therefore on the hook for what they ought to have known as the business owner and operator as well as what they actually know about the business. Constructive knowledge qualifiers as a means to temper knowledge qualifiers were present in 80 percent (up from 56 percent in the 2018 study) of the sample transactions in the 2025 study.
Limitation period and dollar cap
The general limitation period for bringing claims is usually between 12 and 24 months following completion of the transaction. The highest percentage of the sample transactions (26 percent) in the 2025 study included a general limitation period of 24 months in which claims for breach of the transaction terms must be brought by a party. In terms of dollar amount cap on liability, 49 percent (up from 24 percent in the 2018 study) of the sample transactions in the 2025 study included a general cap on claims equal to 100 percent of the transaction value. However, exceptions to the limitation period and general dollar amount cap commonly apply for claims related to, for example, tax matters (which is often pegged to the applicable statutory limitation period), and fraud or wilful misconduct on behalf of the seller and/or target entity.
Dollar thresholds for bringing claims
It is common for the parties to agree to not bring claims against each other in relation to claims of little value. This position is informed by the reality that bringing legal proceedings in court or embarking on arbitration to resolve disputes is costly for the parties involved. 82 percent (down from 86 percent in the 2018 study) of the sample transactions in the 2025 study included a basket in relation to claims i.e., in order to bring a claim, either multiple qualifying individual claims in aggregate or an individual claim must exceed a specified dollar amount. The starting point for negotiations on the applicable dollar amount in respect of the basket is often set at 1 percent of the aggregate purchase price. Depending on negotiating strength, some sellers may successfully negotiate terms pursuant to which the seller is only liable for that dollar amount exceeding the threshold basket amount. Whether the buyer can claim the full dollar amount will depend on its relative negotiating strength as against the seller.
Only 15 percent (down from 38 percent in the 2018 study) of the sample transactions in the 2025 study included a de minimis in relation to single claims i.e., in order to bring a claim, an individual claim must exceed a specified dollar amount to be included in the basket. The starting point for negotiations on the applicable dollar amount in respect of de minimis claims is often set at 0.1 percent of the aggregate purchase price.
Seller disclaimers
In conjunction with an ‘entire agreement’ provision, as a way of further limiting its potential exposure to liability, a seller may require an express statement by which the seller disclaims all representations and warranties other than those expressly stated in the transaction documents. 87 percent (no comparison data from the 2018 study) of the sample transactions in the 2025 study included this express disclaimer provision.
For assistance with your M&A deal, please contact any member of our M&A group for legal assistance.
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Liam Phipps Legal Consultant | Business Law Vancouver |
This article is intended to be an overview of the law and is for informational purposes only. Readers are cautioned that this article does not constitute legal or professional advice and should not be relied on as such. Rather, readers should obtain specific legal advice in relation to the issues they are facing.