In M&A transactions, discovering that the target company is facing a lawsuit is the moment many investors pause: buying a company that is being sued — is it like buying a legal "ticking time bomb"? The answer is not a simple yes or no. It lies in three smaller questions: does the lawsuit follow the company after the change of ownership, how large is the risk relative to the purchase price, and can the purchase agreement lock that risk in. This article analyzes a typical hypothetical scenario under the legal framework in force as of late September 2026.
Table of Contents
- 1. The Scenario (Hypothetical)
- 2. The Legal Questions
- 3. Analysis
- 4. Conclusion and Recommendation
- 5. Extended Variations
1. The Scenario (Hypothetical)
The scenario below is hypothetical and for illustration only. Company M is a Vietnamese enterprise operating in the manufacturing sector. After months of searching, M decides to acquire Company T — a logistics joint stock company established in 2019 in Hai Phong — to close its supply chain loop. Halfway through due diligence, M's team uncovers information the seller never mentioned: Company T is currently the defendant in a civil lawsuit.
The given facts of the scenario:
- F1. Company T is a joint stock company with charter capital of VND 80 billion and independent legal personality; M intends to acquire 100% of T's shares for VND 120 billion.
- F2. T is the defendant in a warehouse-construction contract dispute; the plaintiff claims VND 18 billion in damages from T. The case is at first-instance trial; no judgment has been issued.
- F3. T's current shareholders (the seller) insist the lawsuit is "insignificant, certain to win," but provide only the statement of claim; they refuse to disclose the full case file and will not allow M's lawyers access, citing "litigation confidentiality."
- F4. The parties have signed a memorandum of understanding (MOU) with a 60-day exclusivity clause; M has placed a VND 6 billion deposit.
- F5. T's charter does not restrict share transfers; T was established more than three years ago, so the transfer restrictions on founding shareholders' shares no longer apply.
2. The Legal Questions
The scenario raises three core legal questions:
- Q1. After M acquires 100% of the shares, does the lawsuit "follow" the company? As the new owner, must M bear the consequences of the lawsuit?
- Q2. Should the buyer proceed with the purchase? If so, what contractual mechanisms should it use to protect itself?
- Q3. If the lawsuit is lost after closing, who pays the VND 18 billion (plus court fees and enforcement costs)?
3. Analysis
3.1. The Applicable Legal Framework
Before weighing the options, five legal principles must be fixed — because every buy-or-walk decision has to stand on this foundation.
Principle 1: The defendant is the company, not the shareholder — a change of owner does not change the defendant. A joint stock company has legal personality from the date it is granted its Enterprise Registration Certificate (Article 111(2) of the Enterprise Law 2020 (Luật Doanh nghiệp 2020)). In a civil case, the defendant is "the person sued by the plaintiff" (Article 68(3) of the Civil Procedure Code 2015 (Bộ luật Tố tụng dân sự 2015), hereinafter "CPC 2015") — here, that is Company T itself as an independent legal person. M's purchase of 100% of the shares only changes T's ownership; T continues to exist, remains the defendant, and the case continues without any need to re-file. This is where many investors go wrong: they assume that after the purchase, "new owner, new matter" — the law does not recognize that.
Principle 2: The new owner succeeds to the procedural rights and obligations. Article 74(3) CPC 2015 provides: "Where there is a change of ownership of an organization and the rights and obligations are transferred to the new owner, the new owner shall succeed to the procedural rights and obligations." In a 100% share acquisition, M is the new owner succeeding to the company's entire procedural position: the right to defend, the right to appeal, the duty to produce evidence, and the duty to enforce the judgment. Put bluntly: buying a company that is being sued means buying the lawsuit as well.
Principle 3: A shareholder's liability is limited to its capital contribution — but the risk sits inside the value of the company acquired. Article 111(1)(c) Enterprise Law 2020 limits a shareholder's liability to the amount of capital contributed. M will not have to use its own assets to pay T's debts. That, however, is only a legal ceiling — the economic loss is very real: if T loses VND 18 billion plus court fees and enforcement costs, the real value of the company M just bought for VND 120 billion drops accordingly. The lawsuit does not reach into M's own pocket, but it "eats" into the value of the investment.
Principle 4: The risk of interim urgent measures pressing on the company's assets. During the proceedings, the court may apply interim urgent measures such as seizure of the disputed assets, prohibition on the transfer of property rights, and freezing of bank accounts (Article 114 CPC 2015). Under F2, if the plaintiff requests and obtains them, T's accounts or warehouses could be frozen even before any judgment — meaning M could, right after closing, face a company with part of its assets "frozen," directly affecting post-merger operations.
Principle 5: The law does not prohibit buying a company that is being sued; the contract is where the risk is locked. Shares are freely transferable (Article 127(1) Enterprise Law 2020; under F5, the founding-shareholder restrictions no longer apply). No provision prohibits the transfer of shares of a company that is a defendant. Because the law "opens the door" to the transaction, the entire art of protecting the buyer lies in the share purchase agreement (SPA): representations and warranties, conditions precedent, holdback, escrow, indemnification. These mechanisms are contractual arrangements under the principle of freedom of contract; when the seller breaches them, the buyer is compensated for damages under Articles 418 and 419 of the Civil Code 2015 (Bộ luật Dân sự 2015), hereinafter "CC 2015" — covering actual material damage, reasonable costs, lost income, and benefits that should have been received.
3.2. Option A: Proceed with the purchase, but lock the risk with 9 contractual mechanisms
This is the professional investor's option: do not dodge the risk, price it and lock it in. The nine mechanisms below follow the sequence from pre- to post-closing.
1. Independent litigation DD — do not buy on hearsay. Require the seller to produce the entire case file: the statement of claim, any counterclaim, the evidence both sides have submitted, mediation records, and decisions applying interim urgent measures. Engage an independent litigation lawyer — not the seller's lawyer — to assess the likelihood of success and estimate the financial exposure in a worst-case scenario. Under F3, the seller's uncooperative attitude is itself a DD finding: the more the seller conceals, the higher the risk discount must be — or the more the deal should be stopped.
2. Representations and warranties (R&W) on the state of disputes. The seller must represent in writing in the SPA: the disclosed list of lawsuits is complete; no undisclosed lawsuits, potential disputes, administrative complaints, or penalty decisions exist that could create financial obligations for the company. The representation must carry a specific sanction (see mechanism 6), or it is merely hot air.
3. Conditions precedent before closing. Do not pay the full purchase price until: (a) litigation DD is completed with an acceptable result; or (b) the seller has made adequate provisions for the lawsuit in the financial statements; or (c) where the lawsuit is near resolution, wait for a favorable ruling before closing. Conditions precedent are the "circuit breaker" that lets M withdraw lawfully if the risk exceeds the threshold.
4. Holdback. Retain part of the purchase price — reference frame: the full disputed amount (VND 18 billion) plus estimated litigation costs, court fees, and a safety margin — releasing it to the seller only when the lawsuit concludes favorably for the company, or setting it off against liabilities arising if the case is lost. Under F4 (VND 120 billion price, VND 18 billion dispute equal to 15%), a holdback of VND 20–25 billion is a reasonable negotiating frame to put on the table.
5. Independent escrow. One level up from holdback: the retained funds sit in an escrow account at a bank or independent third party, in neither the seller's nor M's hands. The crux: once the seller has received the full VND 120 billion, it can perfectly well dissipate its assets and become an "empty shell" — at which point even the tightest indemnity clause is hard to enforce. Escrow addresses exactly this weak point.
6. Indemnification with clear parameters. The seller indemnifies M for all losses arising from the disclosed lawsuits (and concealed lawsuits with a basis for existing before closing), including damages under the judgment, court fees, lawyers' costs, and enforcement costs. Three parameters must be fixed: the liability cap — usually a percentage of the purchase price; the basket/deductible — losses below the threshold borne by the buyer; and the survival period — dispute representations are typically extended 2–3 years after closing because a lawsuit can run through multiple instances.
7. Guarantee from the seller's parent company or the individuals behind it. If the seller is an intermediary entity (SPV) that can be "hollowed out" after the transaction, require the seller's parent company — or the individuals standing behind it — to guarantee the indemnity obligations. Without a guarantee, every indemnity promise is only as strong as the assets the seller has left after pocketing the money.
8. Control of the lawsuit after closing. The SPA should provide: after M takes over, M has the right to appoint defense counsel for the lawsuit; the seller must cooperate — producing evidence, providing witnesses, and not settling unilaterally with the plaintiff without M's consent. This avoids the old seller "abandoning ship" and leaving M to face a lawsuit alone without understanding the file's roots.
9. Material adverse change (MAC) clause and a walk-away right. During the 60-day exclusivity period (F4), if a new material lawsuit arises, or the existing lawsuit turns seriously worse (e.g., a bank account is frozen by an interim urgent measure), M may terminate the MOU and recover the VND 6 billion deposit. The MAC clause is the "emergency exit" for the period from MOU signing to closing — the phase of highest information risk.
3.3. Option B: Defer or walk away — wait until the lawsuit is resolved
Content: no closing until the case has a legally effective judgment or decision; during the wait, extend the MOU or terminate it and recover the deposit under the MAC clause. Advantages: it completely eliminates the risk of mispricing the lawsuit — the final figure is known, no escrow or cap gymnastics needed. Drawbacks: a civil case through two instances can take 2–4 years; during that time the business opportunity (the supply chain M needs) may fall to competitors; the seller may refuse to wait and sell to someone else; the VND 6 billion deposit may be lost or have to be fought over depending on the MOU terms. This option fits when the lawsuit is too large relative to the purchase price (e.g., over 30–40%) or when the seller refuses every protective mechanism in Option A — that refusal is itself the answer.
3.4. Option C: Change the deal structure — buy assets instead of shares
Instead of buying 100% of the shares (share deal), M selectively buys T's assets: warehouses, vehicles, logistics contracts, trademarks — an asset deal. Because M does not acquire the T legal entity, M does not "inherit" the defendant position; the lawsuit stays with the old legal entity and the old shareholders. Advantages: a clean cut of the litigation risk. Drawbacks: far more complex — each customer contract, each employment contract, each license must be transferred separately; the tax cost of an asset purchase is usually higher; and particular care must be taken that the transaction is executed transparently at market value, without any sign of asset dissipation aimed at evading enforcement obligations — otherwise the transaction may be challenged on its legality. A lighter variant of Option C: keep the share deal but require the seller to settle the lawsuit definitively (settlement, payment) before closing, with court confirmation — combining the advantages of all three options.
3.5. Comparing the options
| Criterion | Option A: Proceed + lock the risk | Option B: Defer/walk away | Option C: Switch to asset deal |
|---|---|---|---|
| Legal basis | Freedom of contract; indemnity under Articles 418, 419 CC 2015 | Termination rights under the MOU + MAC clause | No succession to the defendant entity; note tax and employment obligations when transferring assets |
| Timeline | Closing on schedule within 60 days | May take 2–4 years awaiting judgment | Longer than a share deal due to transferring each asset and contract |
| Transaction cost | Litigation DD legal fees + escrow fees | Low up front, but high opportunity cost | Higher tax, contract-transfer and licensing costs |
| Residual litigation risk | Low if all 9 mechanisms are in place, especially escrow + guarantee | Zero (lawsuit resolved) | Zero for the current lawsuit |
| Post-purchase control | High — full control over the defense | Not applicable | High, but contractual and staffing relationships must be rebuilt |
| Biggest risk | Seller loses the ability to pay indemnity (cured by escrow + guarantee) | Lost opportunity, lost deposit, seller sells to someone else | Transaction challenged if signs of asset dissipation; operational disruption during transfers |
4. Conclusion and Recommendation
On exactly the given facts, the recommendation is as follows. F1, F2, F5 show the transaction is in principle lawful and the lawsuit is firmly attached to the T legal entity — M cannot buy the company and "leave behind" the lawsuit in a share deal (Article 74(3) CPC 2015). F4 shows the VND 18 billion lawsuit equals 15% of the purchase price — beyond the threshold that can be ignored, requiring commensurate protection mechanisms. F3 is the decisive point: the seller's opacity about the file is a red flag on information risk.
Accordingly, Option A is recommended, but conditionally: proceed only if (1) the seller accepts full litigation DD by M's independent counsel; (2) at least VND 20–25 billion is retained in an independent escrow account until the lawsuit is resolved; (3) the seller (and the parent company/individuals behind it) sign a guarantee of the indemnity obligations; (4) the MOU is supplemented with a MAC clause permitting withdrawal and deposit recovery if adverse developments arise. If the seller refuses any of these four conditions — especially if it refuses file transparency — the recommendation switches to Option B: walk away and protect the VND 6 billion deposit. An honest seller with a "certain to win" lawsuit has no reason to refuse transparency.
Important note: this conclusion holds only for the given facts F1–F5. Changing one fact — e.g., the disputed amount being VND 1 billion instead of 18 billion, or the lawsuit already having an effective judgment — could lead to a different conclusion. Real cases require a lawyer's separate assessment of the complete file.
5. Extended Variations
Variation 1: The lawsuit already has a first-instance judgment against T, now under appeal — what then? The risk rises one level because there is already an adverse assessment from the first instance, but it is not the end — the judgment is not yet legally effective. Option A still works, but the holdback/escrow should be raised to near the full liability under the first-instance judgment plus appeal costs, since the probability of payment is now higher.
Variation 2: T's bank accounts have already been frozen by an interim urgent measure — what then? This is an operational emergency, not just a pricing risk. M must require the seller to immediately produce the decision applying the interim urgent measure, assess the scope and duration of the freeze, and make its lifting (or substitution with alternative security) a condition precedent to closing. If T's cash flow is frozen for an extended period, the enterprise value must be re-priced comprehensively.
Variation 3: After closing, the buyer discovers the seller concealed another lawsuit — what then? Activate the representations, warranties and indemnity provisions in the SPA: the seller has breached its representation on the completeness of the dispute list. Collect evidence proving the seller knew of the lawsuit at signing (court summons, internal emails) and sue for damages under the SPA and Article 419 CC 2015. This is precisely why the representations' survival period should run 2–3 years after closing.
Variation 4: The target is the plaintiff suing someone else (about to recover money) — what then? The problem inverts: the lawsuit is now a potential asset, not a risk. The buyer must assess the likelihood of winning and the enforceability against the losing party — a winning judgment that cannot be enforced is worth zero. The protections invert too: the seller may demand a share of future recoveries (an earn-out tied to the lawsuit's outcome), and the buyer must commit to pursuing the case in good faith after closing.
Does your situation differ from this scenario?
Every lawsuit has its own file and every M&A deal has its own structure — the disputed amount, the stage of proceedings, the seller's good faith, and the price structure all change the answer. If a business is facing the decision to buy a company entangled in a dispute, FLAT's M&A lawyers can independently assess the litigation file, quantify the risk, and design protection mechanisms (holdback, escrow, indemnity, MAC clause) suited to the specific transaction. Contact hotline 0988424851 for an assessment tailored to your situation.
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References
- Who succeeds to the civil procedural rights and obligations of a litigant (Article 74(1), (2) CPC 2015) — thuvienphapluat.vn
- Cases of enterprise termination — succession of rights and obligations on division, consolidation, merger (Articles 198, 200, 201 Enterprise Law 2020) — thuvienphapluat.vn
- The latest Civil Procedure Code 2026 — the current text — thuvienphapluat.vn
- Full text of Enterprise Law 2026 and guiding documents — thuvienphapluat.vn
- Share transfer in joint stock companies — Article 127(1) Enterprise Law 2020 — thuvienphapluat.vn