Hashish M&A: Defending In opposition to Undisclosed Liabilities

June 6, 2024by Naomi Cramer

When somebody buys a hashish enterprise, and never simply that enterprise’s property, they primarily inherit all of its liabilities. And there are often so much.

If the enterprise is within the midst of a lawsuit, owes again taxes, is behind on hire, and many others., the customer might want to take care of these issues by itself–except the acquisition settlement requires some type of help from the vendor.

Sensible hashish enterprise patrons spend a whole lot of time doing “diligence” on the goal enterprise both earlier than signing a purchase order settlement or earlier than closing, largely to flag potential liabilities. However in some circumstances, patrons fail to ask the best questions or sellers (whether or not deliberately or not) fail to reveal materials details about the enterprise.

We name these “undisclosed liabilities,” and if they aren’t correctly addressed within the buy settlement, they’ll result in critical issues for the customer. Under, I’ll establish a couple of widespread ways in which patrons shield themselves from undisclosed liabilities.

Conducting thorough due diligence

You in all probability wouldn’t purchase a automobile with out take a look at driving it, ensuring title was clear, and perhaps even having a mechanic test it out. So would you purchase a enterprise with out ensuring you weren’t strolling right into a minefield first? You’d in all probability be shocked on the quantity of oldsters who would.

The primary and finest technique to keep away from undisclosed liabilities is to completely diligence the goal enterprise. The diligence course of often entails lawyers sending written questionnaires to the vendor’s counsel, in search of a bunch of details about the enterprise.

A superb diligence questionnaire will embrace details about its funds, debt, actual property, employment issues, litigation, company structuring and governance, mental property, owned and leased property, licensing and regulatory issues, and so forth. More and more they may embrace issues like privateness regulation compliance and different “newer” authorized issues.

That is actually solely the beginning — the customer’s counsel and tax/monetary advisors will evaluation lots of the paperwork and flag issues for the customer. Consumers may do issues like bodily inspections of the enterprise premises or property.

Issues raised within the diligence course of will drive negotiations with the vendor and in some circumstances necessitate adjustments to the deal construction. In additional excessive circumstances, a purchaser could stroll altogether.

Within the subsequent few elements of this put up, I’ll tackle instruments refined patrons use to proactively mitigate liabilities that weren’t disclosed within the due diligence course of.


Probably the most widespread risk-mitigation methods in enterprise purchases is requiring the vendor to indemnify the customer within the occasion that the customer suffers hurt because of sure recognized acts or omissions of the vendor. These often embrace inaccuracies in representations by the vendor or breach of the acquisition settlement by the vendor.

For instance, a purchase order settlement could state that the vendor should indemnify the customer and firm (in addition to their associates) in opposition to hurt they could endure as the results of vendor’s breach of a illustration. Say there was a illustration by the vendor that the corporate owed no again taxes, when in actual fact it did and the tax collector got here knocking, the customer might require the vendor to pay the again taxes and defend it in any tax continuing.

Indemnification provisions might be extremely difficult and closely negotiated. For instance, sellers will typically push for a cap on their indemnification obligation, since in any case, a vendor wouldn’t wish to find yourself accountable for paying greater than they had been paid within the deal to cowl the customer’s bills. Consumers however could push for carveouts to vendor caps in circumstances of fraud or concealment of fabric undisclosed liabilities.

Moreover, indemnification provisions solely actually work to the extent that the vendor has cash to truly indemnify the customer. A superb rule is to imagine that when the vendor is paid, it (and its cash) will vanish from the face of the earth, leaving the customer left holding the bag no matter how properly it negotiated an indemnification provision. Nonetheless, patrons have a couple of choices to guard in opposition to this.

Offsets and holdbacks

One simple approach (in concept no less than) to guard in opposition to a disappearing vendor is to make sure that cash shall be tied up post-closing. There are two foremost methods this usually occurs.

First, patrons could set up a holdback of a part of the acquisition value to be held in a impartial escrow account for some interval following the closing. For instance, if the acquisition value is $5mm, the customer could insist that $750,000 is held for a 12 months in an escrow account post-closing, and that any legal responsibility that arises throughout this time could also be happy out of the escrow fund.

Second, the place any a part of the acquisition value or consideration shall be paid or granted post-closing, the customer could embrace an offset provision just like the escrow holdback. Relatively than having a pot of cash held in escrow, the customer might merely deduct future cost. The place a part of the acquisition value is paid through a vendor be aware or post-closing installments, offset provisions are widespread. However they can be used in opposition to issues like post-closing choices, warrants, or earnout provisions.


Undisclosed liabilities are the bane of any refined purchaser’s existence. Considering proactively about mitigation methods early on can save patrons headache and monetary distress down the highway. Hashish M&A is not any simple activity and patrons who tackle undisclosed liabilities head on shall be in so much higher place down the highway.

For extra on hashish M&A, try a few of our different posts beneath:

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by Naomi Cramer

Auckland Lawyer for FIRST TIME Offenders Seeking to Avoid a Conviction. Family Law Expert in Child Care Custody Disputes. If you are facing Court Naomi will make you feel comfortable every step of the way.  As a consummate professional your goals become hers, with customer service as our top priority. It has always been Naomi’s philosophy to approach whatever you do in life with bold enthusiasm and pure dedication. Complement this with her genuine passion for equal justice and rights for all and you have the formula for success. Naomi is a highly skilled Court lawyer having practised for more than 20 years. She serves the greater Auckland region and can travel to represent clients throughout NZ With extensive experience, an analytical eye for detail, and continuing legal education Naomi’s skill set will maximise your legal rights whilst offering a holistic approach that best fits your individual needs. This is further enhanced with her high level of support and understanding. Naomi will redefine what you expect from your legal professional, facilitating a seamless experience from start to finish.   Her approachable and adaptive demeanor serves her well when working with the diverse cultures that make up the Auckland region. Blend her open and honest approach to her transparent process and you can see why she routinely delivers the satisfying results her clients deserve. If you want to maximise your legal rights, we recommend you book an appointment with Naomi today so she can detail the steps for you to achieve your goals. 

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