Seller Did Not Need Company Landlord’s Consent to Stock Deal

Introduction

Real estate can be a major asset in a company. It is very common for a company to lease their offices, stores, manufacturing facilities and distribution centers.

A buyer usually wants to use the company’s real estate. If buying a company’s assets, the buyer can expect to negotiate with the landlord to consent to the assignment of critical leases. That is because in an asset deal the company will have to assign the critical leases. And usually the lease will require the landlord’s consent to the assignment.

On the other hand, the buyer might not have to get the landlord to consent when buying the stock of a corporation or the membership interests of the LLC.  Why? Because the company remains the tenant of the real property both before and after the closing of the deal and so there is no lease assignment. Nevertheless, some leases may say that the lease terminates if there is a change of control of the company by stock purchase or merger, unless the landlord consents to the stock sale or merger.

The deal

This case involved a Massachusetts corporation that was sold by the seller to the buyer pursuant to a stock purchase agreement. The company landlord accused the company of breaching their lease by not asking the landlord to consent to the seller’s transfer of the company’s stock to the buyer.

The lawsuit

The company asked a Massachusetts state court to hold that the landlord’s consent to the transaction was not required. The trial court agreed with the company and its decision was upheld by a Massachusetts intermediate appellate court.

The courts said that the lease only prohibited an assignment of the lease to a nonrelated party. The court concluded that the company “did not assign the lease. Here, the lease always remained with” the company.

This case is referred to Altitude, Inc. v. Altitude Properties, LLC, No. 18-P-972, Appeals Court of Massachusetts, (March 8, 2019).

Comment

The court also noted that after the closing the buyer converted the company from a Massachusetts corporation to a Massachusetts LLC; both solely owned by the buyer. The court, the buyer and the seller all agreed that under Massachusetts law, the conversion did not require the landlord’s consent.

Email: jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

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Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

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Buyer Bought Target Employee’s Non-compete in Merger

Introduction

A company’s relationship with its employees may be the crown jewel of the business. Often these relationships are evidenced by employment agreements which contain some form of post-employment nonsolicitation and non-competition covenants.

Such provisions may not be enforceable in all states, such as California. However, if the covenant is enforceable, a buyer may want to retain the target company’s key employees and discourage them from walking out after the closing and competing against the business.

That may not be doable if the buyer is buying the assets of the company, that has non-competes with its key employees. In that case the employees may have the right to veto the assignment of the restrictive covenant.

It is much more doable if the target is to be acquired in a stock purchase or merger. That is because no assignment to the buyer is required. In such cases the only problem would be a provision in the agreement with the employee that says the covenant terminates upon the sale of a controlling interest in the target by stock purchase or merger. And that type of provision is not common in agreements with employees.

The deal

This case involved the nonsolicitation and non-compete covenant of an employee of the target company in the insurance services business that was acquired by stock merger. Essentially, the buyer merged the target into the buyer and the owners of the target received stock in the buyer

The key employee ultimately quit the target business to work for a competitor clearly soliciting target clients and handling insurance for the target’s former clients.

The lawsuit

The buyer sued the key employee for violation of its covenants in a Seattle federal district court. The employee argued that his restrictive covenants were with the target company and not the buyer. The court disagreed, saying that under applicable Washington law, when the target company merged into the buyer, the buyer by operation of law acquired all the rights to the key employee’s restrictive covenants.

This case is referred to USI Insurance Services National, Inc. v. Ogden, LLC, No. C17-1394RSL, United States District Court, W.D. Washington, Seattle, (March 6, 2019).

Comment

Buying assets can be problematic if a lot of the target company’s value are in contracts with suppliers, customers and landlords. You can bet that many of those contracts will require the consent of the supplier, customer or landlord to the target’s assignment of the contract to the buyer.

It can be much easier if you structure the deal as a stock purchase or merger. Often the contracts do not require the consent of the other party when the target company is acquired by stock purchase or merger. In those deals, if the contract does not require consent then the contracts transfer by operation of law; meaning no documents calling for contract or lease assignments.

Email: jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

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Buyer Sues Business Seller for Bad Accounts Receivable

Introduction

One of the problem assets in an acquisition can be the seller’s accounts receivable.

A buyer may want to manage the risk of bad receivables by providing for a post-closing adjustment to the purchase price.

The deal

This case involved the July 2015 purchase of the assets of a medical billing company, pursuant to an asset purchase agreement. One large seller receivable was with a customer that paid the seller a percentage of the customer collections from the medical billings handled by the seller.

After the closing, this customer refused to pay most of this receivable, claiming that the seller failed to perform its contractual responsibilities, causing the customer to lose the ability to collect on many of its medical claims. Furthermore, the customer claimed that the seller had agreed before the closing to write off the pre-2015 receivables. This was news to the buyer.

The lawsuit

This customer then sued both the seller and the buyer, and the litigation ended up in a Pennsylvania federal district court. The buyer turned around and sued the seller. The buyer asserted that the seller warranted that the customer receivables were valid obligations, and any alleged seller agreement to write off the pre-2015 accounts receivable would breach this warranty.

The seller denied that it had agreed to the write-off. The court said that seller would be responsible to the buyer for the write-off if the evidence at trial establishes that there was a write-off.

The buyer also wanted the seller to indemnify the buyer for any loss it suffers from defending the lawsuit brought against it by the customer. The court said no. There was nothing in the asset purchase agreement requiring the seller to indemnify the buyer for any loss the buyer suffers from the customer’s lawsuit against it.

This case is referred to Moore Eye Care, PC v. ChartCare Solutions Inc., Civil Action No. 15-cv-05290, United States District Court, E.D. Pennsylvania, (March 7, 2019).

Comment

Often the purchase price is adjusted after the closing for receivables that prove uncollectible. This provision is often secured by a hold back of a deferred portion of the purchase price or by an amount put in escrow.

The buyer could have also got the right to be indemnified for lawsuits filed against it arising out of seller’s operation of the business before the closing. This protection would often be found in the indemnification clause of the purchase agreement.

Email: jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

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Buyer Loses $21.6 Million Claim for Business Seller’s Exclusivity Breach

Introduction

One of the first documents that is often signed between a seller of a privately-owned business and a prospective buyer is a letter of intent. That document has a nonbinding description of the key terms of a business sale.

However, it also has a few binding terms often including a promise by the seller to exclusively negotiate with the buyer for a certain time period.

The deal

Our case involves two scrap metal dealers and has been the subject of two earlier blogs: Seller of scrap metal business waived Buyer’s breach of a nondisclosure provision and Court finds that seller of business may have violated an LOI exclusivity provision.

The prospective buyer was interested in purchasing the seller’s Nashville operations. The buyer and the seller signed a letter of intent outlining the main business terms currently in discussion, including a purchase price of $28 million.

The letter of intent made it crystal clear that these business points were nonbinding and that there would be no deal unless the buyer and the seller entered into a definitive acquisition agreement. Nevertheless, the seller promised in the letter of intent not to negotiate with any other suiters until May 20, 2017.

The lawsuit

The deal never happened. The buyer then accused the seller of negotiating with a competitor during the time frame the seller promised to negotiate exclusively with the buyer. The buyer sued the seller in a Tennessee federal district court.

The court held that the seller did in fact break the seller’s exclusivity promise. The buyer asked for $90K in damages that it incurred in negotiating the deal with the seller; called “reliance damages”. The court awarded the buyer the $90K in reliance damages.

The buyer also said that the lost deal cost it $21.6 in lost profits and sought to recover these “expectancy damages” from the seller. The court said that the buyer was not entitled to damages for lost profit, because the buyer and the seller could not reasonably have foreseen buyer’s lost profits that would result from the seller’s breach of the exclusivity provision; since the business terms of the deal had not yet been worked out.

This case is referred to PSC Metals, Inc. v. Southern Recycling, LLC, Case No. 3:17-ev-01088, United States District Court, M.D. Tennessee, Nashville Division, (March 4, 2019).

Comment

The buyer in this case could have managed the risk of the seller dealing with another suiter by having the seller agree to pay $2 million (for example) to the buyer in liquidated damages, if seller breached the exclusivity provision.

Email: jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

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Court Gives Pharmacy Seller Chance to Collect Earnout

Introduction

A prospective buyer and seller of a business often can’t agree upon a purchase price. One way to bridge the gap is to break down the purchase price into two pieces. A fixed amount and a contingent amount based upon the performance of the business after the closing.

The contingent amount is called an earnout in the trade. The earnout portion of the purchase price is often calculated as a share of the postclosing profits of the business.

The deal

In this case, the business provided pharmaceutical products, supplies, and consultation services to long-term care facilities in New Mexico. In 2013 the buyer and seller entered into an asset purchase agreement that contained an earnout.

The earnout was based upon the gross profits of the business during the period between the first and 2nd anniversary of the closing. The earnout would be $1.25 million if the gross profits from the customers of the business that stayed with the buyer through the 2nd anniversary of the closing was at least $2.2 million. The earnout would be reduced according to a formula if such gross profits were between $2.2 million and $1.87 million. No earnout would be earned if gross profits were less than $1.87 million.

The lawsuit

At the end of the 2nd anniversary of the closing the buyer told the seller that the business had missed the minimum gross profits target by $649K; meaning that there was no earnout. The seller sued the buyer and the lawsuit ended up in a New Mexico federal district court.

The seller accused the buyer of sabotaging the business’ customer accounts, causing customers to terminate their contracts with the buyer before the two-year anniversary; and thus, depriving the seller of his earnout. The seller said that the buyer violated an implied duty of good faith and fair dealing under applicable Delaware law by managing the accounts it purchased from the seller so poorly that clients terminated their accounts and reduced the seller’s chances of earning the deferred payment.

The buyer asked the court to throw the lawsuit out in its motion for summary judgment; claiming that it made no economic sense for the buyer to sabotage customer accounts just to avoid paying a portion of the gross profit to the seller. The buyer argued broadly that the seller had not presented any facts that create a genuine dispute over whether the buyer managed the accounts in good faith, and thus his claim must fail.

The court, however, said that the seller should have his day in court because the seller had made enough specific allegations of buyer behavior to create a genuine factual dispute about the buyer’s good faith; and that justifies permitting the seller to continue its lawsuit against the buyer.

Specifically, the seller produced evidence from an employee of one of the seller’s largest customers who terminated its relationship with the buyer before the 2nd anniversary of the closing. That employee talked about many problems that her company had with the buyer’s performance; and as a result, her company terminated its account with the buyer

Also, the court pointed to the evidence from a pharmacy consultant that worked both with seller and then the buyer. She said that in the time that she worked for the buyer, she observed problems relating to the buyer’s billing, delivery of medications, pricing for medications, and keeping of medical records.

This case is referred to Huntingford v. Pharmacy Corporation Of America, No: 1:17-cv-1210-RB-LF, United States District Court, D. New Mexico, (March 1, 2019).

Comment

The risk of agreeing to an earnout is that the seller is relying upon the buyer to make the earnout happen. And when it does not; a lawsuit is an uphill battle.

By John McCauley: I help businesses minimize risk when buying or selling a company.

Email: jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

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Court awards business seller $441K in preclosing tax refunds

Introduction

It is often common when selling your company to prorate any tax refunds that relate to the preclosing. Often the buyer of the company will agree to pay to the seller any such tax refunds that the target company receives after the closing.

The deal

That was the case here. The stock purchase agreement said that the seller gets any tax refunds of the company that relate to the preclosing. Unfortunately, there was a typo and the agreement went on to say that any tax refund relating to the preclosing that is received by the company after the closing is to be paid to the “buyer.”

The lawsuit

Bad blood developed between the buyer and the seller after the closing which boiled over into a Delaware federal district court lawsuit; both sides making claims against the other.

The seller demanded that the buyer turn over the federal and state preclosing tax refunds collected by the company after the closing to the tune of $441 thousand. The seller pointed to the language in the stock purchase agreement that said that all preclosing tax refunds collected by the company after the closing belong to the seller.

The buyer disagreed and pointed to the rest of the provision that said that such preclosing tax refunds collected after the closing must be paid by the company to the buyer.

The court dismissed the buyer’s argument saying that both parties had agreed to pay the preclosing tax refunds to the seller; that the phrase calling for payment to the buyer was a typo and should have called for payment to seller. Otherwise the provision made no sense because the buyer as owner of the company already possessed the preclosing tax refund.

In legalese, this typo was a mutual mistake of the buyer and the seller and the court exercised its power to reform the stock purchase agreement provision to change the word “buyer” to “seller.”

The court awarded the seller $441 thousand in damages plus interest.

This case is referred to Heritage Handoff Holdings, LLC v. Fontanella, Civil Action No. 1:16-cv-00691-RGA, United States District Court, D. Delaware, (March 6, 2019).

Comment

What really turned the court here was the fact that the provision made no sense as written because the buyer already possessed the money. The provision worked when “buyer” was changed to “seller”. Also, the change was consistent with the notes of seller’s attorney on a draft of the stock purchase agreement that said that the parties had agreed that preclosing tax refunds go to the seller.

By John McCauley: I help businesses minimize risk when buying or selling a company.

Email: jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

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Business Seller’s Nondisclosure of Customer Problems Cost $4.4 Million

Introduction

A buyer of a company often prices the target based upon some multiple of earnings. And a key assumption in its pricing model is often the stability of the target’s relationship with its key customers.

So, a buyer will want to know if there are any problems with the target’s key customers. In this case, the buyer found out about very serious problems with the target’s key customers, including a customer providing 80% of the target’s revenue.

Unfortunately, the buyer did not discover this problem until after the closing.

The deal

In this case, the target company made parts for the auto industry. It had several large customers including an elephant customer that provided it 80% of its revenue.

In 2015 the buyer (a private equity owned company) purchased the target for $12 million. It priced the deal based upon a 3.3 multiple of the target’s twelve-month trailing EBITDA earning.

The seller of the target had represented and warranted that there were no problems with its key customers.

The lawsuit

After the closing, the buyer discovered that two of target’s key customers, including its elephant customer were very unhappy with the target, and in fact had cutback purchases amounting to an annual $500K decline in revenues. The seller had never disclosed those problems to the buyer before the closing.

The buyer sued the seller in a Delaware federal district court for breach of seller’s stock purchase agreement’s representation and warranty that there were no customer problems; and also, for federal securities fraud for failure to disclose the major customer problems.

After trial, the court found for the buyer. It held that the damages were essentially the difference between the $12 million the buyer paid seller for the company and the actual value of the company after factoring in the undisclosed loss of customer revenue and the unstable relationship the company had with its key customers.

The court awarded the buyer $4.4 million in damages plus interest.

This case is referred to Heritage Handoff Holdings, LLC v. Fontanella, Civil Action No. 1:16-cv-00691-RGA, United States District Court, D. Delaware, (March 6, 2019).

Comment

Why did the buyer sue for securities fraud? Would not a claim for breach of the customer representation and warranty get it the $4.4 million? Maybe, but perhaps the stock purchase agreement capped buyer’s breach of stock purchase agreement claims to a much smaller number such as 10% of the $12 million purchase price.

The seller had argued to the court that it was not liable for federal securities fraud because it was not reasonable for the buyer to rely on what seller said about the target’s relationships with key customers. The seller argued that the buyer should have dug deeper and talked directly with the key customers.

The court disagreed; noting that the buyer and seller were focused on discretion so as not to alarm the target’s employees and customers. The court concluded that it was reasonable, and necessary, for the buyer to rely on what the seller was communicating rather than reaching out to customers itself.

By John McCauley: I help businesses minimize risk when buying or selling a company.

Email: jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

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Buying a Distressed Business in Bankruptcy Free of Union Costs

Introduction

Buying a distressed business is risky. Even an asset buyer can get stuck with a distressed company’s liabilities under certain federal and state laws, such as the bankruptcy laws.

The coal industry is a current poster child for distressed businesses. Five coal companies filed for bankruptcy protection in the past 3 years.

Coal companies often have very significant union liabilities, including pension and health care liabilities owed to current and retired employees. For some coal companies selling its assets to a new buyer is only viable if the deal does not come with the seller’s union liabilities.

The deal

Seller was a very distressed operator of three coal mines. Rail and port disruptions and adverse mining and geological conditions, as well as the enormous capital infusions required to update and operate its coal mines led to a liquidity crisis rendering Seller incapable of meeting its obligations.

Seller was unable to work its way out of its liquidity problems without the help of chapter 11 bankruptcy protection.

The lawsuit

So, Seller filed for chapter 11 bankruptcy protection in an Alabama bankruptcy court with $55,000 in cash and $175 million in debt.

At the time of the bankruptcy filling Seller had a collective bargaining agreement with the union covering retirement and health benefits for current and retired employees.

Seller shopped the business, but no potential buyer would take the company with the union liabilities. Going forward Seller would pay, on average, approximately $10.3 million per year on account of its union obligations. In addition, Seller’s pension plan was massively underfunded and in critical status, to the tune of approximately $1.2 billion.

Therefore, Seller asked the court to permit it to sell the business free of the union liabilities. The court agreed to do so; specifically noting that without the sale, the mines would be closed, and the union employees would be unemployed.

This case is referred to In Re Mission Coal Company, Case No. 18-04177-TOM11 (Jointly Administered), United States Bankruptcy Court, N.D. Alabama, Southern Division, (March 1, 2019).

Comment

Buying a distressed business out of bankruptcy free and clear of union liabilities is not a slam dunk.

Bankruptcy law only permits it if the court is convinced that it is the only possible way of selling the business as a going concern, and saving jobs of Seller’s union employees.

The judge described in 141 numbered paragraphs and in as many footnotes the exhausting process Seller and the union went through to try to save the union employee and retiree pension and health benefits.

By John McCauley: I help businesses minimize risk when buying or selling a company.

Email: jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

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Employment Contract Forces Business Seller into Arbitration with Buyer

Introduction

A buyer of a business often wants the seller’s owner to stay on after the closing. So, buyer and seller’s owner sign a separate employment agreement at the closing. This is in addition to the deal’s purchase agreement signed by buyer and seller.

Employment agreements often have arbitration clauses. Many purchase agreements don’t. However, it is common to refer to the employment agreement in the purchase agreement, which says that the entire agreement between buyer and seller, includes the employment agreement.

The deal

In this case seller was a construction company that specialized in the design and installation of patented technology that mitigated liquefaction, which occurs when sand loses strength during earthquakes and often results in damage to structures that sit on the sand. It did not own the technology. Instead, it licensed the technology under an exclusive license covering its market in the southeastern United States.

In 2015 seller sold its business to buyer, which was the owner and licensor of the technology. As part of the deal, seller’s owner agreed to work for buyer and signed an employment agreement that contained an arbitration provision. The purchase agreement also said that the entire agreement between the parties included the employment agreement. The asset purchase agreement did not have an arbitration provision.

The deal went sour. Under the deal buyer paid nothing for seller’s goodwill. Instead buyer and seller agreed to capture goodwill in a form of earnout for seller’s owner in the employment agreement, based upon profits from the purchased business.

The earnout did not materialize and seller’s owner left buyer’s employment in August of 2017.

The lawsuit

A year later seller’s owner sued buyer in a South Carolina court. Seller accused buyer of undermining seller owner’s rights to an earnout through buyer’s accounting practices and management decisions. Buyer asked the court to compel seller to resolve the dispute in arbitration as required by the employment agreement.

Seller said that this dispute goes to the sale of his company and that there is no arbitration clause in the asset purchase agreement.  The court said it did not matter; pointing to the purchase agreement’s language that said that the deal between the parties includes the employment agreement; which had an arbitration agreement.

This case is referred to Ellington v. Hayward Baker, Inc, No. 2:18-cv-3436-DCN, United States District Court, D. South Carolina, Charleston Division, (February 28, 2019).

Comment

Are there any lessons? At least two.  When selling your company, remember that a bird in the hand is worth two in the bush. In other words, it’s best to get your money in cash at closing, as opposed to relying upon the buyer to cooperate with you in making your earnout materialize.

Also, in 20/20 hindsight for seller’s owner, it would be difficult to reverse this result short of eliminating the arbitration clause from the employment agreement.

By John McCauley: I help businesses minimize risk when buying or selling a company.

Email: jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

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Court finds wealth manager did not solicit his sold company’s clients

Introduction

Buying certain personal service businesses presents challenges unlike buying a manufacturer of widgets.  The value in a personal service business may depend upon the relationship the owner has with his sold company’s customers.

Thus, the buyer risks buying a business where the customers walk out the door after the closing to follow the seller’s owner.  So, a buyer will often hire the seller’s owner to keep the customers and obtain the owner’s promise not to solicit the seller’s customers after the owner leaves the buyer.

The deal

In this case a wealth management company purchased the wealth management business of another company. The buyer bought a business that depended upon the relationship that seller’s owner had with seller’s clients.

To secure the benefit of the deal, seller’s owner agreed to work for the buyer and not to solicit his sold company’s clients.

The lawsuit

A couple of years later buyer announced that it was up for sale. A week later seller’s owner left buyer and worked for a competing wealth management company. The following week buyer was sold. The sale announcement sent out to buyer’s clients said that seller’s owner was no longer working for the buyer.

This resulted in a mass exodus of seller’s clients who ended back with seller’s owner. Buyer sued seller’s owner in a Nevada federal district court accusing seller’s owner of breaking his nonsolicitation promise.

Seller’s owner asked the court to throw the lawsuit out arguing that buyer’s allegations did not accuse the seller’s owner of soliciting his old clients. The buyer replied by saying that solicitation must have occurred because the buyer lost most of seller’s clients and they all ended up with seller’s owner.

The court said that the fact that seller’s clients ended up as seller’s owner’s clients was not enough to make a claim against seller’s owner for breaching his nonsolicitation promise.

This case is referred to Sentinel Rock Wealth Management, LLC v. Hartley, Case No. 2:16-cv-01643-MMD-VCF, United States District Court, D. Nevada, (February 28, 2019).

Comment

This case illustrates the risk of buying a business dependent upon a rainmaker.  The risk may be high that the rainmaker may attract the seller’s customers after the closing without lifting a finger. In such a case, a nonsolicitation clause would not help.

However, the buyer in some states, like California, could get the seller’s owner to promise not to compete against the buyer for a reasonable period in the seller’s former market. California permits this to protect the goodwill that buyer purchased from seller.

Also, Seller’s owner was rewarded for not trying to contact his old company’s clients. He apparently let the customers come to him; and thus, avoided liability under his nonsolicitation promise.

 

By John McCauley: I help businesses minimize risk when buying or selling a company.

Email: jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

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