Buyer of Treadmill Maker Did Not Assume Implied Merchantability Warranty

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M&A Stories

November 18, 2020

Introduction

A buyer of a manufacturer often prefers an acquisition of assets as opposed to equity of the seller in order to minimize the risk of post-closing product liability claims.

The deal

This deal involved the acquisition of the assets of a treadmill manufacturer. In the asset purchase agreement the buyer assumed only the seller’s written repair or replace warranty and expressly stated that the buyer was not assuming any other seller product liability.

The lawsuit

Before the closing the seller had sold a treadmill to a gym. One day while using the treadmill, a woman fell, striking her head. She later died due to her injuries from the fall.

The family sued the buyer in a Texas state court, claiming that the buyer had assumed the Texas version of the Uniform Commercial Code’s implied warranty of merchantability. The trial court ruled in favor the buyer and the family appealed to a Texas intermediate appellate court. The appellate court reversed finding that the buyer assumed seller’s implied warranty of merchantability under a rationale not clear to this writer.

The buyer appealed to the Texas Supreme Court which reversed, ruling in the buyer’s favor. The Texas high court held that the buyer, as an asset buyer, only had assumed seller’s duty to the deceased woman’s estate under an implied warranty of merchantability if the buyer expressly assumed the seller’s implied warranty of merchantability in the asset purchase agreement.

And the buyer did not, only promising to assume the written repair and replace warranty: “Based on the asset-purchase agreement’s plain and unambiguous language, the Buyer’s express assumption of the written warranty for repair or replacement of defective treadmill parts was not an assumption of a warranty of merchantability implied by law. Accordingly, the Buyer was entitled to summary judgment. We reverse the court of appeals’ judgment to the contrary and render judgment that the Koubas take nothing on their implied warranty of merchantability claim.”

This case is referred to as Northland Industries, Inc. v. Kouba, No. 19-0835, Supreme Court of Texas, (Argued October 7, 2020, Opinion Delivered: October 23, 2020) 

Comment

This was the right decision. The buyer had clearly only assumed the repair or replace warranty. The ruling for the deceased woman’s estate in the Texas intermediate appellate level included a strong dissent from the chief justice of this Court of Appeals of Texas, First District, Houston.

By John McCauley: I help people manage M&A risks involving privately held companies.

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.

Posted in assumption of a contract, implied warranty of merchantability, seller's warranty claims, successor liability Tagged with: ,

Stalking Horse Loses Acquisition Bid Over Value of Proposed PPP Loan Assumption

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M&A Stories

November 17, 2020

Introduction

A financially distressed company often ends up selling its business in bankruptcy. The sale is conducted in an auction based upon a negotiated asset purchase agreement with a stalking horse.

The deal

The bankrupt company in this deal operated a lamb processing plant facility in Wyoming. It was distressed and had filed for bankruptcy in Wyoming.

The company owed a bank $3.95 million that it took out under the Payroll Protection Program. An insider to the company had formed a company to serve as the stalking horse for a bankruptcy auction of the company. The company and the stalking horse negotiated a $10 million cash asset purchase agreement where the stalking horse would also assume certain liabilities, including the PPP loan.

The PPP loan had a forgiveness feature and the selling company valued the $3.95 million PPP loan at $1.25 million for purposes of evaluating auction bids. The winning bid at the auction for the company was for $14.25 million cash.

The lawsuit

The stalking horse bidder challenged the seller’s determination of the value of its proposed assumption of the PPP loan, arguing that its value should be its face value of $3.95 million. The court rejected the challenge finding that the seller’s valuation of the loan value was within the realm of good business judgment: “In determining whether to approve a proposed sale under section 363, courts generally apply standards that, although stated various ways, represent essentially a business judgment test. … Under the business judgment standard, the court examines the sale’s process and procedure and gives deference to Debtor’s choice of the winning bid.”

This case is referred to as In Re Mountain States Rosen, Case No. 20-20111, United States Bankruptcy Court, D. Wyoming, (July 21, 2020) 

Comment

PPP loans were a new feature in section 363 bankruptcy sales in the summer of 2020. Nevertheless, in 20/20 hindsight the stalking horse should have tied down the value of the PPP loan in the acquisition documents so as to given it a baseline to judge overbids.

By John McCauley: I help people manage M&A risks involving privately held companies.

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.

Posted in bankruptcy sale, distressed business acquisitions, PPP loan assumption, Section 363 sale Tagged with: ,

Franchise Asset Buyer Didn’t Inherit Seller’s Unemployment Tax Experience Rating

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M&A Stories

November 2, 2020

Introduction

A company’s unemployment insurance liability depends upon its experience rating; the employee turnover history of the business. A buyer of the assets of a business usually starts with a lower unemployment liability than the seller. However, there is a risk that the state may seek to impose a seller’s higher experience rating upon the buyer.

The deal

The deal involved the purchase of the assets of several Krispy Kreme stores in the Dallas area. The seller was a limited partnership and the general partner was the franchisor. The buyer entered into a franchise agreement with the franchisor as part of the deal.

Texas law states that the buyer of a business inherits the seller’s experience rating if the seller had substantial management or control over the three stores purchased by the buyer after they were sold.  After the closing Texas claimed that the franchisor as general partner of the seller had substantial management or control of buyer’s operations as a result of the franchise agreement. It transferred the unemployment compensation experience rating of the seller to the buyer.

The lawsuit 

The transfer resulted in additional unemployment taxes for the buyer. The buyer paid the taxes and made a refund claim in the approximate amount of $300K.

The Texas state trial court denied the refund claim and the buyer appealed to an intermediate appellate court.  That court held that the franchisor’s rights and obligations under the franchise agreement did not amount to the required substantial management or control of buyer’s store operations:

The court:The evidence submitted by … (the buyer) … established that after it purchased the three stores from … (the seller) …, it had no further relationship or dealings with … (the seller) … that would show “substantially common management or control” by … (the seller) … to justify transferring its unemployment compensation experience rating to … (the buyer) …. Even though … (the franchisor) … was listed as a “Seller” on the Assert Purchase Agreement, the summary judgment evidence showed that … (the franchisor) … was merely a franchisor and did not have “substantially common management or control” over … (the buyer’s) … day-to-day operations of the seller stores beyond those set forth in the franchise agreements.”

This case is referred to as Dulce Restaurants, LLC v. Texas Workforce Commission, No. 07-19-00213-CV, Court of Appeals of Texas, Seventh District, Amarillo, (September 25, 2020) 

Comment

This result is not surprising. The deal was no different than any deal involving the acquisition of the assets of a franchised business, other than the fact that the general partner of the limited partnership seller in this case happened to be the franchisor.

Laws giving a state the right to transfer the seller’s unemployment tax experience rating to the buyer are designed primarily to prevent fraud where a business with a high experience rating sells the assets to a buyer which the seller owns or controls.

By John McCauley: I help people manage M&A risks involving privately held companies.

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.

Posted in franchise sale, seller's unemployment experience rating Tagged with:

Buyer of Manufacturer’s Assets Has No Liability for Product Sold Before Closing

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M&A Stories

October 28, 2020

Introduction

Management of product liability risk when buying a company is always an issue, even in an asset acquisition. Especially, if there is a history of seller products liability claims.

The deal

This deal involved the November 2017 acquisition of the assets of a business which made and sold an intrauterine device. It was a copper-wound, T-shaped contraceptive that is placed in the uterus to prevent pregnancy.

The seller had a history of products liability claims. However, the buyer did not assume liability for injuries the seller’s device caused before the date of the asset purchase agreement.

The lawsuit 

A claimant had seller’s device implanted in 2010. She had it removed in 2016. During its removal, part of the device broke and became embedded in the lining of the claimant’s uterus. She later opted for surgery to remove the embedded part, but it was unsuccessful. Claimant’s doctor advised her to leave the broken part in her uterus.

The claimant sued multiple defendants for her injuries, including the buyer and the seller. The lawsuit ended up in a Houston federal district court. The buyer asked the court to dismiss the claim against it on the grounds that it did not make or sell the device.

The buyer argued that because it did not manufacture or sell the device, it cannot be liable for the claimant’s injuries under applicable Texas or Pennsylvania law. The claimant agreed that the buyer did not manufacture or sell the device; she argued that buyer is liable under a successor-liability theory because the buyer purchased the device assets from the seller in an alleged fraudulent transfer.

The court dismissed the claim, with prejudice, noting that the claimant did not plead any factual basis for finding, or any legal claim for, successor liability or fraudulent transfer in her complaint:Only one factor is present: that the … (buyer) … allegedly knew of pending litigation against … (the seller) … before the asset sale. Nothing indicates that … (the seller) … sold the … assets for inadequate consideration, … (or) … that the transfer was concealed …” 

This case is referred to as Barcelo v. Teva Pharmaceuticals Usa, Inc., Civil Action No. H-20-00017, United States District Court, S.D. Texas, Houston Division, (April 2, 2020) 

Comment

The court applied Texas law.  The result might have been different if California was the applicable law. California developed a product line exception which might have imposed successor liability upon the buyer in this deal.  Few states have followed California’s lead.

By John McCauley: I help people manage M&A risks involving privately held companies.

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.

Posted in sale of product line, successor liability Tagged with: ,

Expert Can Testify That GM Was Unreasonable in Disapproving Dealership Sale

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M&A Stories

October 20, 2020

Introduction

Selling your franchise business usually requires the consent of the franchisor, whether you own a Subway franchise or an auto dealership. However, state law generally requires the franchisor to be reasonable in this approval process.

The deal

The deal involved the sale of a Buick GMC dealership located about 50 miles outside of Pittsburgh. The asset purchase agreement provided for a purchase price of $750,000 for goodwill plus payment for various assets. In addition, the buyer planned to discontinue Buick Operations at the seller’s facility and relocate GMC operations to Buyer’s existing Chevrolet, Buick, and Cadillac dealership in a buyer facility 20 miles closer to Pittsburgh.

The seller’s Buick GMC dealer agreement with GM provided that the GM franchise could not be assigned to the buyer without the approval of GM. The seller asked GM for approval and GM refused.

GM’s stated reasons for refusal included the permanency of the investment of the five existing Buick GMC dealers in Pittsburgh, declining population in and around Pittsburgh, existing GMC dealerships providing adequate competition, and the likelihood of injury to existing network outweighing any perceived benefit from increased competition.

The lawsuit

The deal did not go through. The seller sued GM in a Pittsburgh federal district court for damages, based upon violation of sections of the Pennsylvania Board of Vehicles Act.

The seller retained an expert to conduct analysis and provide testimony regarding GM’s denial. In his report, seller’s expert stated that GM’s analysis of its factors was insufficient to justify its conclusions. The expert also stated that the conclusions GM reached in its denial contradicted the conclusions reached by GM in other cases involving network changes. Seller’s expert characterized GM’s analysis as an “outcome-driven approach” with an intent to deny the seller’ relocation request.

GM asked the court to prohibit the expert from testifying at trial, arguing in essence that the expert did not adequately disclose the facts underlying his opinion. The court disagreed, finding adequate disclosure of the facts underlying the expert’s opinion: “… (the expert’s) … report identifies each factor from the decision letter and outlines how the facts do not support the rationale or that it contradicts GM’s decisions from other cases.”

In addition, the court stressed how important experts are in this kind of dispute: “Without expertise in the automotive industry, as proffered by … (the seller) … through … (seller’s expert) …, a layman would not likely understand the methodologies utilized by GM or be able to assess whether those methodologies pass the scrutiny of another expert. In this case, … (seller’s expert) … is not charged with conducting an independent analysis to demonstrate that GM should have accepted the … (the deal) … Instead, the relevant inquiry into the … claim is the conduct of GM in reaching its conclusions and therefore whether it acted and decided reasonably. … Therefore, at issue are the cited GM rejection factors and the methods GM used to assess and determine those factors to reach its decision to deny … (the seller) … application for consent. Given the specialized knowledge needed to complete this analysis, the Court finds it appropriate to proffer an expert in the relevant field to offer a critique and opinion to assist the jury as it evaluates the reasonableness of GM’s actions and decision. Thus, … (seller’s expert’s) … opinions and testimony are relevant and admissible.”

This case is referred to as Brooks Automotive Group, Inc. v. General Motors LLC, No. 2:18-CV-00798-MJH, United States District Court, W.D. Pennsylvania, Pittsburgh, (May 8, 2020) https://scholar.google.com/scholar_case?case=15805139854672892254&q=%22asset+purchase+agreement%22&hl=en&as_sdt=2006&as_ylo=2020

 Comment

This case demonstrates the risk of selling a franchise. A franchisee can assume that a legal challenge of a deep pocket franchisor’s denial of consent to sell the franchise will be opposed by top flight lawyers. The fight will be expensive and time consuming.

By John McCauley: I help people manage M&A risks involving privately held companies.

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.

Posted in approval of franchisor, denial of consent must be reasonable, franchise sale Tagged with: ,

Business Buyer Fails To Make Timely Purchase Payment and Loses Deal

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M&A Stories

October 16, 2020

Introduction

Business people often agree upon the terms of an acquisition in an atmosphere of goodwill. The details of the documentation are left to their inside and outside professional advisers. This friendly relationship is helpful to move the deal forward. However, it can lull one into thinking that terms and deadlines in the acquisition agreement are “merely guidelines.”

The deal

In this asset deal the buyer’s parent COO and the seller CEO apparently had a good relationship. They negotiated a deal that lead to an asset purchase agreement with a July 26, 2017 effective date. Apparently, there was not a physical closing.

The asset purchase agreement required that the buyer make a purchase price payment on July 26.

The lawsuit

The buyer did not make the July 26 payment. The buyer parent COO told the seller CEO on July 30 that he needed to open a bank account in the United States to enable the buyer to make the $22,000 payment, which he intended to do on August 1. The seller CEO simply responded, “Great.”

When payment still had not been received by August 9, the seller notified the buyer that they were rescinding or cancelling the agreement.

The buyer resisted and the dispute ended up in a Michigan state court. The buyer lost at trial and appealed to an intermediate appellate court.

The appellate court affirmed the trial court’s decision: “Despite the clear and unambiguous language of § 3 of the Asset Purchase Agreement, … (the buyer) … argues that the timing of the specified payment was not crucial. However, it is also undisputed that … (the buyer) … had not established a bank account in this country to enable it to wire the money to … (the seller) … before … (the seller) … rescinded the agreement. Even if … (the buyer’s) … failure to pay the specified $22,000 amount on the stated effective date is not considered a substantial breach, … (the buyer) … substantially breached the agreement by failing to make any effort to make the specified payment for at least two weeks after the agreement’s stated effective date. While … (the buyer) … indicated that it would follow through with payment days after the agreement was signed, there was no progress toward making that payment. … (The seller) … waited more than two weeks for … (the buyer) … to make the necessary arrangements to make the required payment, but no payment was made.”

This case is referred to as Trillium Cyber, Inc. v. Canbushack, Inc., No. 345494, Court of Appeals of Michigan, (April 23, 2020) 

Comment

It seems that the buyer’s failure to make the timely payment was not a cash flow issue. Instead, the buyer parent’s COO was too cavalier about making a timely payment. Unfortunately, the seller’s CEO was not so understanding and he had the language of the asset purchase agreement to back him up.

By John McCauley: I help people manage M&A risks involving privately held companies.

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.

Posted in failure to make timely purchase price payment, rescission Tagged with: ,

Business Buyer’s Set-off Provision Did Not Apply to Unliquidated Indemnity Claims

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M&A Stories

October 14, 2020

Introduction

The buyer of a business is always concerned about the risk that the target business is not as advertised. One risk management tool is to defer payment of some of the payments to the seller until after the closing.

The deal

The buyer in this deal purchased the assets of an online business. The transaction was structured to provide for post-closing payments to the seller. The asset purchase agreement also gave the buyer the right to set-off amounts the buyer was “owed” by the seller under the asset purchase agreement.

The lawsuit

After the closing the seller disputed buyer claims for adjustments to the purchase price and indemnification. The buyer then withheld making a $500K payment to the seller under the APA’s set-off provision.

The dispute ended up in a Louisiana state trial court. The seller challenged the buyer’s right to set-off post-closing payments owed to the seller because buyer’s claims were disputed, therefor unliquidated, and therefore not “owed” as required under the set off provision of the asset purchase agreement.

The trial court agreed with the seller, and the buyer appealed to an intermediate court of appeals.  The appellate court framed the dispute: “The sole issue before this court is whether § 11.6(f) of the Asset Purchase Agreement requires that the Buyer’s indemnification claims be liquidated before they can be subject to the set-off provisions of the agreement. The Buyer argues that nothing in the contract is ambiguous, and the contract evidences no indication that liquidation was a prerequisite to the set-off rights set forth in § 11.6(f).”

The court then looked at the set off provisions: “Notwithstanding anything to the contrary in this Agreement, and without prejudice to any other right or remedy it has or may have, Buyer may set off or recoup any indemnification payments owed to it by Seller pursuant to this Article 11 against any Post-Closing Payments to the Company pursuant to Section 3.1.”

The court, in denying the buyer’s right to set-off said: “Although the trial court stated that the Buyer may be due set-off at some point in the future, it could not set off payments based on disputed amounts. We agree with the trial court. While the Buyer may be due indemnity at some point in the future based on the resolution of the claims it has asserted against the Seller, it cannot unilaterally withhold payments when the sums due, if any, are undetermined and speculative.”

This case is referred to as Admin-Media, LLC v. AC of Lafayette, LLC, No. 19-691, Court of Appeal of Louisiana, Third Circuit, (March 11, 2020) 

Comment

The post-closing payments could be withheld from the seller until the dispute was resolved if they had been escrowed pursuant to a well drafted escrow arrangement.

Another concern of a set-off is if the deferred payment is evidenced by a promissory note with an acceleration provision. Under that scenario the buyer in exercising its set-off right risks accelerating the balance of the note.

The model ABA Model Asset Purchase Agreement set-off provision protects the buyer in that circumstance: “The exercise of such right of set-off by Buyer in good faith, whether or not ultimately determined to be justified, will not constitute an event of default under the Promissory Note or any instrument securing the Promissory.”

By John McCauley: I help people manage M&A risks involving privately held companies.

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.

Posted in offset or setoff provision, unliquidated or disputed claim Tagged with: ,

EBITDA Purchase Price Adjustment Provision Center Stage of $4.4 Million Fight

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M&A Stories

October 9, 2020

Introduction

Many acquisitions are priced based upon EBITDA. Often the purchase price is adjusted after the closing based upon some agreed upon formula such as EBITDA.

The deal

This deal was a sale of the assets of the business for $11 million. However, the purchase price was to be adjusted after the closing, up or down, depending upon the FYE 2015 EBITDA.  The adjustment would be 4 times the amount that FYE 2015 EBITDA was higher or lower than $2,750,000.

After the closing the seller determined that the FYE 2015 EBITDA was $3,854,328 which would mean an upward purchase price adjustment of about $4.4 million.

The lawsuit

A purchase price adjustment dispute broke out between the buyer and seller in an Indianapolis federal district court. The crux of the lawsuit was the asset purchase agreement provision that was designed to deal with disputes over determination of the purchase price adjustment.

In essence the provision says that the seller determines the EBITDA for the FYE 2015 and that the seller’s determination is final unless the buyer objects within 30 days.

Preliminary to trial, the seller asked the court for an order to exclude any buyer evidence challenging the seller’s calculation of EBITDA. According to seller, the asset purchase agreement or APA required the buyer to submit in writing any objections the buyer had to the seller EBITDA calculation within 30 days. No objections were raised within the thirty days period following the submission by the seller. Thus, the seller argued that the buyer waived any right the buyer may otherwise have had to challenge the seller EBITDA calculation.

The buyer countered arguing that the APA required the seller to prepare and submit a “certificate” containing the final EBITDA calculation. Because such a certificate allegedly was not prepared and submitted by the seller, the 30-day objection window was never triggered.

The court looked at the APA provision which said: “Seller shall deliver to Purchaser the 2015 Financial Statements, together with a certificate setting forth the final EBITDA and any adjustments, based on the final EBITDA, to the Base Purchase Price. If Purchaser does not object … within thirty (30) days after receipt, or accepts such items in writing during such thirty (30) day period, the … Final EBITDA prepared by the Seller Accountant and the EBITDA Adjusted Purchase Price set forth in such certificate shall become final and binding upon the parties”.

The issue boiled down to whether or not the seller had provided a certificate within the meaning of the asset purchase agreement. The court decided that the buyer could produce evidence that no certificate was supplied by the seller to the buyer as provided for in the asset purchase agreement: “the agreement did not define `certificate,’ making it apparently an ‘ambiguous’ term. … Accordingly, “whether … (the buyer is) … prohibited from challenging the final EBITDA is an unresolved question of law requiring interpretation of the Agreement. … We are unable to resolve prior to trial whether … (the buyer) … waived … (the buyer’s) … contractual right to challenge the final EBITDA or whether, as a matter of contract interpretation, … (the buyer) … was relieved of that obligation because the specified “certificate” was never issued and the time to object was never triggered.”

This case is referred to as Henman Engineering And Machine, Inc. v. Norman, No. 1:17-cv-00701-SEB-TAB, United States District Court, S.D. Indiana, Indianapolis Division, (August 13, 2020)

 Comment

Clearly the seller put the buyer on notice of its EBITDA calculation. However, words in an agreement matter and the requirement for a certificate not defined is a recipe for litigation if the stakes are high enough.

With 20/20 hindsight the agreement could have stated that the certificate to be supplied is substantially in the form of an exhibit attached to the asset purchase agreement.

By John McCauley: I help people manage M&A risks involving privately held companies.

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.

Posted in determination of purchase price adjustment, EBITDA, purchase price adjustment Tagged with: , ,

Buyer Risk for Unpaid PPP Loan in M&A Transaction

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M&A Development

October 6, 2020

Introduction

Unpaid PPP loans add a new risk for the buyer and seller of a business. The Small Business Administration published guidance on this M&A risk on October 2, 2020. Following the SBA guidance is important if a target business has an unpaid PPP loan balance which the target business wants all in part forgiven free of federal and possible state income taxation.

The deal

The area of concern relates to acquisition of target businesses with PPP loans that have not been paid off. But only for a target business with an unpaid PPP loan balance where the target business has not properly applied for forgiveness of the loan which is secured by the deposit with the PPP lender of the unpaid PPP loan balance in a PPP lender escrow account.

In such cases, the target business borrower must notify the PPP lender of the pending transaction and the lender must seek prior approval from the SBA to close the transaction. This approval process can take up to 60 days, according to the SBA guidelines.

The SBA will not approve an asset deal unless the buyer assumes the PPP loan liability. Furthermore, in a stock, asset or merger transaction according to the SBA guidelines: “If deemed appropriate, the SBA may require additional risk mitigation measures as a condition of its approval of the transaction.” 

What are the consequences to the M&A parties if they don’t follow the guidelines? The guidelines are silent on consequences. But it could include a loss of the right to obtain forgiveness and acceleration of the unpaid balance.

In addition, for asset buyers there is the possible risk of having a court unwind the acquisition as a fraudulent transfer or the buyer being held responsible for an unpaid PPP loan that the buyer did not assume under a successor liability theory.

The SBA guidelines are found at https://home.treasury.gov/system/files/136/PPP–Procedural-Notice–PPP-Loans-and-Changes-of-Ownership.pdf

Comment

The buyer should also see if the PPP loan documents contain additional change of ownership terms which must be complied with.

By John McCauley: I help people manage M&A risks involving privately held companies.

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.

Posted in deferred closing, governmental approval, PPP loan, SBA approval re PPP loan Tagged with: ,

APA Arbitration Clause Doesn’t Apply to Buyer/Seller Affiliate Contract

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M&A Stories

September 29, 2020

Introduction

Buyers and sellers of businesses often select arbitration as their dispute resolution procedure. Arbitration is seen as faster and less costly than going through the courts.

However, a binding arbitration clause in an acquisition document is not a guaranty that there won’t be an attempt to force the dispute into a court.

The deal

This deal here involved the sale of a Vicksburg, Mississippi auto dealership. The transaction was structured as an asset acquisition. There was an asset purchase agreement between the buyer and seller for the dealership assets (other than the land and building). There was also a purchase contract for the real estate between a buyer affiliate and a seller affiliate.

The agreements were signed but the deal did not close.

The lawsuit

The buyer and buyer affiliate sued the seller and seller affiliate in a federal Mississippi court to force the seller and its affiliate to close the deal and for damages.

The seller and its affiliate asked the court to compel the buyer group to arbitrate pursuant to the arbitration clause in the asset purchase agreement. The buyer affiliate claimed that it could not be compelled to arbitrate the real estate contract dispute, because it was not a party to the asset purchase agreement (which contained an arbitration clause) and that there was no arbitration clause in the real estate purchase contract.

The court agreed with the buyer affiliate. It compelled the buyer and sell to arbitrate the asset purchase agreement dispute, but permitted the real estate purchase contract dispute to proceed.

This case is referred to as BLW Motors, LLC v. Vicksburg Ford Lincoln Mercury, Inc, Civil Action No. 3:19-CV-577-DPJ-FKB, United States District Court, S.D. Mississippi, Northern Division, (April 1, 2020) 

Comment

So now things get more complicated, expensive and time consuming. The buyer and seller battle out the non-real estate part of the deal in arbitration while the buyer affiliate and seller affiliate battle out the real estate part of the dead in a federal court.

Acquisitions of a business often involve multiple related agreements and multiple related parties. An arbitration clause in one agreement will probably not apply to disputes between related parties in a related agreement. Therefore, make sure that all parties to all agreements agree in writing to arbitration for all disputes arising from all of the acquisition documents.

By John McCauley: I help people manage M&A risks involving privately held companies.

Email:             jmccauley@mk-law.com

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

Telephone:      714 273-6291 

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