Hospital Buyer and Seller Fight Over Medicare-Medicaid $2.4 Million Payment

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Court interpreted APA as giving the hospital buyer the right to a $2.4 million interim lump sum adjustment determined by audit of seller services.

M&A Stories

Try to make you’re M&A documents user friendly: “Please, speak as you might to a young child, or a golden retriever” — From the film “Margin Call”

January 22, 2021

Introduction

A common issue in an acquisition is how to handle post-closing settlements with customers for pre-closing sales and services. The solution depends upon the target business.

The deal

This deal involved the acquisition of the assets of two hospitals. These hospitals received a significant amount of their revenue from Medicare and Medicaid. The hospital received Medicare and Medicaid payments every two weeks. The payments were calculated by Medicare and Medicaid based upon the overall projected claims for payment for the full year. These payments were an estimate based upon the seller hospitals’ budget and projections and was susceptible to upward or downward adjustments during the course of a year.

The payments were reconciled on an interim and final basis to ensure that the payments accurately reflect the actual value of the claims processed by the seller hospitals. In the event that the interim and final review of payments reflects that the seller hospitals had been underpaid, Medicare/Medicaid can modify the amount of every two-week payment and/or issue a lump sum adjustment to bring payments received in line with reality and updated projections. If the review indicates that the hospitals has been overpaid, the seller hospitals must remit funds back to Medicare directly or via offsets to future payments.

About two months before the closing, the Medicare auditor sent its report to the seller which contained an analysis of the payments made to the seller in the first six months of 2019, along with a projection of services the seller was expected to provide for the balance of the calendar year. Based upon that analysis, the auditor determined that the two hospitals were entitled to a lump sum adjustment payment in the amount of $2.4 million.

Payment of the amount to the seller was delayed due to the seller’s bankruptcy filing. The deal closed September 30, 2019.

The lawsuit

The seller received the $2.4 million lump sum adjustment 2 days after the closing. Subsequently, in April 2020, the seller prepared their final cost report which reflected amounts due to Medicare/Medicaid in the amount of $2.3 million. The overpayment liability was owed by the buyer to Medicare/Medicaid under the asset purchase agreement.

The buyer claimed that it was entitled to the $2.4 million lump sum adjustment that the seller received from Medicare 2 days after the closing.

The dispute ended up in a Delaware bankruptcy court. The court said that the $2.4 million lump sum adjustment received by the seller was not a receivable (which is an excluded asset under the APA and not acquired by the buyer). Instead, was a “settlement” asset purchased by the buyer.

The court supported its decision by the words of the asset purchase agreement: a receipt “(i) relating to supplemental, disproportionate share or waiver payments, or Medicaid GME funding with respect to time periods prior to the Closing Time; (ii) relating to the Seller Cost Reports or Agency Settlements (whether resulting from an appeal by Sellers or otherwise) and other risk settlements with respect to time periods prior to the Closing Time …” 

This case is referred to as In Re Hospital Acquisition LLC, Case No. 19-10998 (BLS), United States Bankruptcy Court, D. Delaware, (December 21, 2020). 

Comment

Certainly, it is fair result since the buyer had to pay back the overpayment. Don’t know if the APA language quoted by the court gets you there, but maybe. That language was hard to follow.

By John McCauley: I help people manage M&A legal risks.

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 post-closing adjustments for pre-closing sales and services, receivables Tagged with: ,

SEC Sues Target Officers for Fraud, Seeking Millions of Dollars in Damages

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SEC accuses Target’s CEO and CTO of lying to the buyer about owning a game changing product and overstating the target backlog and pipeline.

M&A Stories

Taking the high road in M&A negotiations is good business: “It’s a rough road that leads to the heights of greatness.” — Lucius Amnaeus Senaca

January 19, 2021

Introduction

The purchase price in an acquisition is usually based upon the target’s future earning potential. It is important that target management be honest in the representations of material facts that it makes in support of the forecasts it provides to a buyer. Because, there may be serious consequences for target management if the material representations of fact are not true.

The deal

The target was an Israeli privately held company that sold cell phone and satellite interception products. The buyer is a public company, a Florida based blank-check, or special-purpose acquisition company. The target was acquired by the buyer in 2015 in a merger transaction resulting in target becoming a public company.

Prior to closing, the target officers claimed $148 million in backlog and pipeline revenue and forecast fiscal year 2016 revenue of $108 million. Furthermore, the officers said that the target owned a game changing product.

The lawsuit

Unfortunately, after the closing, the target recognized only $16.5 million of 2016 revenue and posted a 2016 net loss of $8.1 million.

As it turned out the target did not own the game changing product. Instead, it had a reseller arrangement with the owner where it was would earn 50% of product revenues. And the claimed backlog in the words of the SEC complaint “was, in fact, not supported by actual, signed purchase orders. In addition, and also unbeknownst to the shareholders, a large part of the order backlog was with … (the target’s) … largest and most significant customer – a Latin American police agency – that were based only on oral agreements with management who had been terminated as a result of the then-recent prison escape of a notorious international narcotics trafficker.” 

The SEC wants to recover the officers’ profits from the deal, plus, interest and penalties. The SEC also wants the target CEO permanently barred from serving on as an officer or director of a public company.

The federal district court in Manhattan denied the officers’ motion to dismiss the SEC action and the litigation continues.

This case is referred to as Securities and Exchange Commission v. Hurgin, No. 19-cv-5705 (MKV), United States District Court, S.D. New York, (September 4, 2020) 

Comment

There are questions for both buyers and sellers from this deal. Could the buyer have discovered, in due diligence, that the game changing product was not owned by the target and that the product revenues would have to be shared equally with the product owner under a reseller agreement? Could the buyer have compared the claimed backlog and pipeline with target’s signed purchase contracts?

If the SEC claims are true, was it worth it to the CEO and CTO to lie about the target company if they have to give up their profits, and for the CEO, if he has to give up permanently, the right to serve as an officer and director of a public company?

By John McCauley: I help people manage M&A legal risks.

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 fraud in business sale Tagged with: ,

Judgment Against Buyer CEO for Lying to Target Is Nondischargeable in Bankruptcy

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Target principals’ judgement against Buyer CEO for fraudulently promising them buyer stock and royalties generated from post-merger sale of target products not dischargeable in Buyer CEO’s personal bankruptcy.

M&A Stories

Taking the high road in M&A negotiations is good business: “It’s a rough road that leads to the heights of greatness.” — Lucius Amnaeus Senaca

January 14, 2021

Introduction

Lying to make an acquisition happen can come back to bite you. And even personal bankruptcy might not save you.

The deal

The target in this deal developed and marketed computer software. It was acquired by a publicly traded technology company. As part of the deal the buyer CEO promised the target principals that they would receive buyer stock and royalties generated from post-merger sale of target products.

They did not receive stock or royalty payments.

The lawsuit

The two target principals obtained a judgment against the buyer CEO for intentional misrepresentation and a claim for violation of the Connecticut Unfair Trade Practices Act. They obtained judgments against the buyer CEO for judgment for over $1.3 million, which included punitive damages and attorneys’ fees, and interest, accruing on the judgment at the rate of 4% per annum from February 17, 2011.

The buyer CEO filed for personal bankruptcy. The target principals objected to the discharge of the judgment in personal bankruptcy and the bankruptcy court determined that the target principals’ judgment against the buyer CEO was nondischargeable. Meaning that the buyer CEO still owes the target principals (including interest) about $1.8 million. 

This case is referred to as In Re Parrella, Case No. 18-51613 (JAM), Adv. Pro. No. 19-5008 (JAM), United States Bankruptcy Court, D. Connecticut, (October 28, 2020). 

Comment

There is a simple lesson here. When buying a company, don’t lie. Keeping your promises is hard enough. But, if things go bad, you can probably file for bankruptcy.

By John McCauley: I help people manage M&A legal risks.

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 judgement for intentional misrepresentation, nondischargeable debt in bankruptcy Tagged with: ,

Shareholder Can’t Challenge Board Merger Approval Because No Change of Control

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A shareholder could not sue his directors for accepting a merger proposal for a claimed lower price than offered by another suitor because each target shareholder was to exchange each target share of stock for 1/3rd cash and the other 2/3rd of consideration in shares from a company “in a large, fluid, public market.”

M&A Stories

January 13, 2021

Introduction

No event is more important to a company than when considering a sale or merger. And the responsibility to manage this process falls directly on the board of directors. Not surprisingly, some shareholders may not like the board’s course of action

The deal

The target in this deal was a publicly traded Maryland corporation that operated a Michigan community bank. The directors of the target accepted the offer by a much larger publicly traded community bank to merge the target into the buyer where each target share currently trading at about $42 would be exchanged for $14 cash and buyer stock.

The lawsuit

A target shareholder filed a lawsuit in a Michigan state court against the board after the board had approved the merger and submitted a proxy to the shareholder for approval. The shareholder sued to stop the deal on that grounds that the board had breached its duty to the shareholders to maximize shareholder value. The shareholder alleged that the board had turned down a higher offer from another suiter.

The trial court dismissed the lawsuit and the shareholder appealed to a Michigan intermediate court of appeal. The court of appeal affirmed the dismissal. The court said that under applicable Maryland law, the shareholder could only sue the directors directly for breach of their duty to maximize shareholder value if the proposed merger was a change of control transaction.

In this case, the target shareholders were receiving 2/3rd of their consideration from a widely held public company. This, the court held was not a change of control transaction. 

This case is referred to as Finke v. Vanderkelen, No. 345621, Court of Appeals of Michigan, (May 21, 2020)  unpublished, per curiam. 

Comment

A director duty to maximize a shareholder transaction was first recognized in 1986 by the Delaware Supreme Court in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986). The “Revlon Doctrine” is currently recognized by at least 9 states (California, Delaware, Illinois, Kansas, Maryland, Michigan, Minnesota, Missouri, and New Hampshire).

But when does it apply? Clearly in any all-cash transaction. Also, any stock transaction where, or—in the case of a stock-for-stock acquisition—an acquisition in which a widely held public stock is exchanged for shares of a company in which there is a controlling shareholder. The principal transaction type that does not trigger Revlon is the stock-for-stock deal in which the post-closing entity remains widely held by stockholders.

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 Change of Control, Revlon doctrine Tagged with: ,

Target Shareholders Can’t Compel Target Law Firm to Disclose Merger File

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Court says that the target law firm represented the target not the target shareholders in the merger, and the buyer acquired the target law firm files in the merger.

M&A Stories

January 8, 2021

Introduction

The shareholders of an acquired company often receive rights to post-closing contingent payments. Common post-closing payments are earnouts and contingent value rights. Not surprisingly, there can be significant disputes between the buyer and selling shareholders over the calculation of such payments.

The deal

The target in this case was a privately held insurance group that provided workers’ compensation insurance and related services, mainly to small businesses, in 31 states. The buyer acquired the target by merger for $138 million in cash and contingent value rights.

The lawsuit

A dispute broke out between the selling shareholders and the buyer over the value of the rights. This resulted in the sellers filing a $80 million lawsuit against the buyer. The sellers accused the buyer of manipulating reserves, falsely stating its liabilities and misrepresenting the rights and payments due to the contingent value rights holders to deprive them of the purchase price to which they were entitled. 

In the course of the litigation the sellers requested that the target’s M&A law firm disclose certain files about the contingent value rights. The law firm refused stating that it had represented the target, not the selling shareholders, and that the law firm’s target files were now owned by the buyer.

The Nebraska Supreme Court agreed: “Additionally, … (Target Law Firm) … has no obligations to Target shareholders extending from … (Target Law Firm’s) … agreement to represent …(Target) … in the merger process. … (Target Law Firm’s) … representation was limited to … (Target) … as the corporate entity and explicitly did not extend to … (Target’s) … shareholders. This representation is detailed in the engagement letter, signed by (a representative of the Target shareholders designated by the shareholders in the acquisition documents) …, stating that … (Target Law Firm’s) … client would be … (Target) … and stipulating that “this engagement does not create an attorney-client relationship with any related persons or entities, such as. . . shareholders. . . .” 

This case is referred to as Yeransian v. Farr, No. S-19-320, Supreme Court of Nebraska, (Filed May 1, 2020). 

Comment

There is always a risk to the sellers of a business when agreeing to receive post-closing payments; especially if the amount of the payment is contingent.

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 Ownership of Target Law Firm File Tagged with: ,

Buyer Waived Privileged Communications Shared with Target During Due Diligence

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Court holds that buyer waived its lawyers’ privileged communication when shared during due diligence with the target. The buyer was trying to determine whether the proposed merger would trigger the target’s distribution agreement change of ownership provision and whether the supplier (a buyer competitor) could terminate the agreement without paying a significant termination fee. The court concluded that the buyer and target primarily shared a common commercial interest in these issues and not primarily a common legal interest.

M&A Stories

January 7, 2021

Introduction

Lawyers for a buyer conducting due diligence in an acquisition must be careful about sharing privileged communication with the target. This may amount to waiving the attorney client privilege of communications between a lawyer and its buyer client.

The deal

This deal involved the acquisition by a beverage maker of a sports drink distributor by merger for $13.8 billion cash and a 13% stake in the combined entity.

The lawsuit

The supplier, a major competitor of the buyer, terminated the distribution agreement that the target had with the supplier, after the closing. The supplier argued that the significant termination fee was not payable, because there had been a change of control under the distribution agreement. The target sued the supplier in the Superior Court of Delaware to recover the termination fee.

The supplier demanded to see certain buyer attorney/buyer client communication that had been shared by the buyer lawyers with the target during due diligence that related to the change of ownership and termination fee provisions of the target distribution agreement with the supplier. The target resisted arguing that the buyer did not waive its attorney client privilege when the buyer’s lawyers shared it privileged communication with the target because the buyer and target shared a common legal interest in understanding and protecting the target’s rights under the distribution agreement.

The court said that the question is whether sharing the buyer’s privileged communications with the target breached the confidential nature of the information and thereby waived the privilege.

“Although sharing privileged communications with … (the target) … generally destroys the communication’s confidentiality, the ‘common interest doctrine’ recognizes that privilege is not waived in communications by … (the buyer) … with … (the target) … ‘in a matter of common interest.’… To maintain the privilege, however, the common interest must ‘involve primarily legal issues, rather than relate to a common interest in a commercial venture.’”

The court in this case held that the privilege was waived: “(The target’s) argument that … (the buyer and the target) … shared a common interest in evaluating and protecting their rights under … (the distribution agreement) … does not satisfy … (the target’s) burden of demonstrating that the shared interest primarily was legal, rather than commercial. The parties may well have shared an interest in positioning the post-merger entity so as to capitalize on Target’s distribution … (agreement) … (The) … focus of the communications … (however) … was the parties’ commercial interest, even though in-house and outside counsel provided input on the drafts. 

This case is referred to as American Bottling Company v. Repole, C.A. No. N19C-03-048 AML CCLD, Superior Court of Delaware, (Submitted: May 1, 2020. Decided: May 12, 2020) 

Comment

This was a close call. The lesson is to recognize that due diligence communications between a buyer and seller/target lawyers may not be protected by attorney client privilege.

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 attorney client privilege, common interest doctrine Tagged with: ,

Seller’s CEO Can be Sued for Not Disclosing Buyer’s Unaudited Financials in Proxy

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M&A Stories

December 24, 2020

Introduction

An officer owes a duty of care to his or her shareholders. This fiduciary duty of an officer is especially important when the directors have asked the shareholders to approve a proposed merger. The chief executive officer in particular must make sure that the shareholders are fully informed about the proposed deal; meaning that they have sufficient relevant information in order to evaluate the proposed merger.

The deal

This deal involved the $23 billion merger of a public oil and field service company (seller) with the oil and gas unit of a public conglomerate (buyer). The buyer proposed a merger to the seller’s directors, where the seller shareholders would exchange their stock for $7.4 billion cash and stock in a new company that would contain the buyer’s oil and gas unit and the seller oil and field service business. After the closing, the new combined entity would be owned by buyer shareholders (62.5%) and seller shareholders (37.5%).

There were no audited financial statements for the buyer’s oil and gas unit. Instead, the seller board reviewed unaudited financial statements for the buyer’s oil and gas unit, management forecasts and a fairness opinion from its investment banker. The parties signed a merger agreement which required the buyer to deliver audited financial statements for its oil and gas unit.

Furthermore, the merger agreement gave the seller board a “fiduciary out” or right to terminate the merger if the audited financial statements differed from the unaudited financial statements in a manner that was materially adverse to the intrinsic value of the buyer’s oil and gas unit, excluding, among other items, changes in the amount of goodwill.

The buyer’s audited financial statements for its oil and gas unit reflected approximately $4 billion of goodwill impairments in 2014 and 2015 that were not reflected in the unaudited financial statements. The seller board determined that the differences between the unaudited and audited financials were not material and, that the seller board’s termination right in the merger agreement was not available.

The seller board asked the seller shareholders to approve the proposed merger. The proxy statement represented that, after receiving and reviewing the audited financial statements, the seller board decided that any differences between the audited and unaudited financial statements were not material and, therefore, the termination right in the merger agreement was not available.

The proxy contained the audited financials, which reflected the goodwill impairments, but did not contain the unaudited financials. The seller’s shareholders approved the deal which closed July 3, 2017.

The lawsuit

The deal did not go well and the combined entity’s stock performance deteriorated. Seller shareholders sued the buyer, the seller board and its CEO and CFO, in the Delaware Court of Chancery.

All defendants escaped at the motion to dismiss stage except for the seller’s CEO, who has to fight on in court.

The court said that the seller’s management had a duty to make sure that the information supplied in the proxy statement fully contained all data necessary to evaluate the proposed merger; and that the unaudited financials of buyer’s oil and gas unit was “material” information. “In sum, the Proxy contained a material omission because it did not include the … Unaudited Financials …”

Turning to the seller’s CEO the court said: “Under Delaware law, the standard of care applicable to the fiduciary duty of care of an officer is gross negligence.” And in reviewing the shareholder’s allegations, the court felt that there was enough in the complaint to survive a motion to dismiss: “(The) … Complaint contains numerous allegations concerning … (the seller’s CEO) … involvement in the negotiation of the Merger, which is unsurprising given his multiple roles as Chairman of the Board, CEO, and President at the time. Most relevantly, the Complaint alleges that “Buyer CEO signed both the Proxy, as the Chairman and CEO of Buyer, and the Form S-4, as a person about to become a director of New Buyer.”

Continuing on the court said: “Although not overwhelming, this allegation is sufficient to support a reasonably conceivable claim that … (the seller CEO) … breached his duty of care with respect to the preparation of the Proxy he signed as … (the seller’s CEO). This is so, in my view, given the importance of the Unaudited Financials—the only source of … (the buyer oil and gas unit’s) historical financial information available to … (the seller) … before it signed the Merger Agreement—and given the categorical obligation in Section 5.04(c) of the Merger Agreement to attach the Unaudited Financials to the Merger Agreement. Perhaps discovery will show that the failure to attach the Unaudited Financials to the Proxy was inadvertent or handled by advisors on which … (the seller CEO) reasonably relied, but those factual questions cannot be resolved on the pleadings.”

This case is referred to as In Re Baker Hughes Incorporated Merger Litigation., C.A. No. 2019-0638-AGB, Court of Chancery of Delaware, (Submitted: July 16, 2020. Decided: October 27, 2020) 

Comment

The CEO may still win the lawsuit.

An officer of a private company also has to be very careful when asking for shareholder approval of a transaction. The officers must fully disclose all material information.

The seller board was exculpated from personal liability for breaches of the duty of care under the seller’s certificate of incorporation, which is permitted by Section 102(b)(7) of the Delaware General Corporation Law. The court noted this provision can’t save an officer “for breaches of the duty of care under the Company’s 102(b)(7) provision.”

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 officer duty of care, shareholder approval of deal Tagged with: ,

Buyer Can Sue Seller of Business in Delaware for Fraud in “As Is” Deal

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M&A Stories

December 15, 2020

Introduction

A buyer of a business usually manages unknown M&A risks by requiring the seller to provide a comprehensive set of representatives and warranties about the business. But occasionally, the buyer agrees to an “as is deal” where the seller makes little or no representations and warranties about the business.

The deal

The seller in this deal was in the business of designing systems for the testing of food products and food processing environments, and had developed and provided testing systems for different pathogens, such as Listeria and Salmonella. The seller had a product line which included (1) test kits for identifying Listeria and Salmonella, (2) hardware systems used to analyze the test kits; and (3) software used to run the test kits on the hardware systems.

The buyer partners with food companies to implement proactive approaches to manage food safety risks and was interested in the seller’s product line. The seller made positive representations about performance and certification of the products during negotiations.

The seller sold the product line to the buyer for $12 million pursuant to an “as is” deal evidenced by an asset purchase agreement. The seller made no asset purchase agreement representations and warranties about the product line.

The lawsuit

The buyer discovered after the closing that the product line was not as represented by the seller in the negotiations. According to the buyer: “… the only commercial customer using the Listeria Test with the HT System cancelled its contract. … (1) the HT System was not capable of high-volume testing, such as running 96 tests at one time; (2) the Salmonella Test failed to detect numerous strains; and (3) the Salmonella Test had not been submitted for AOAC certification. … (and (4) … the HT System and Salmonella Test remain unprepared for market launch.”

The buyer sued the seller for fraud in a Delaware Superior Court. The buyer’s complaint described each seller misrepresentation along with the date and place of each misrepresentation, as well as the identity of the buyer and seller representatives present at each misrepresentation.

The seller filed a motion to dismiss the buyer’s fraud claim, arguing that the buyer had not alleged facts that if true could reasonably amount to fraud. The court disagreed, leaving it up to the jury to decide whether the seller in fact made the claimed misrepresentations about its product line, and whether if true, the misrepresentations amounted to fraud.

This case is referred to as Phage Diagnostics, Inc. v. Corvium, Inc., C.A. No. N19C-07-200 MMJ [CCLD], Superior Court of Delaware, (Submitted: January 7, 2020. Decided: March 9, 2020) 

Comment

Of course. buyer would be in a better legal position if seller had made those representations and warranties in the asset purchase agreement.

Also, the buyer might have lost its fraud claim because the buyer and seller were sophisticated parties if (1) the seller had expressly stated in the asset purchase agreement that it is making no representations and warranties about the product line other than those contained in the asset purchase agreement; and (2) the buyer expressly disclaimed in the asset purchase agreement reliance upon  any seller representations and warranties not contained in 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 "as is where is", fraud in business sale Tagged with: ,

Business Seller’s Post Closing Payments in Jeopardy by Covid and Buyer Owner’s Prison Sentence

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M&A Stories

December 10, 2020

Introduction

Sometimes a business owner gets an offer for his or her business that is higher than expected. The catch is that a significant part of the price is payable after the closing.  But the buyer principal is a well-known business person with a good national reputation. What could go wrong?

The deal

The business here was a very lucrative Illinois based eye center built up from scratch by an ophthalmologist. The founder received her medical degree in 1986. After completing her internship, she followed with a residency in ophthalmology. She joined a practice and took it over in the 1990’s. Since she has opened several branches.

The doctor entered into negotiations with a multinational corporation based to sell her practice in the summer and fall of 2017. The buyer was owned by a Yale University graduate and well-known businessman who invested in and/or purchased various businesses throughout the world.

This led to a series of acquisition agreements where the buyer would pay the doctor about $18 million at a closing (December of 2017), a $7.68 million promissory note payable in three equal annual installments in January of 2019, 2020 and 2021. The doctor would remain at the practice for 3 years and would be paid an additional amount when she retired in 3 years which would be a percentage of the value of the eye center practice at that time.

The lawsuit

The doctor received the closing payment of about $18 million and the first note payment of $2.6 million in January 2019. But that was it.

Then the Wall Street Journal reported on February 28, 2019, that buyer owner had diverted at least $2 billion from a group of life insurance firms “into his private empire.” The report provides that, soon after entering the insurance business, the buyer went on a spending spree by buying nearly 100 companies around the world, an estate in the Florida Keys, an Idaho lakeside retreat, a Gulfstream jet, the most expensive mansion ever sold in Raleigh, N.C., and a 214-foot yacht with room for a dozen overnight guests. Based on the Journal’s extensive investigation, Buyer Principal lent “at least $2 billion from those insurers to scores of entities he controlled, using much of it to expand his private holdings.”

On March 18, 2019, a federal grand jury indicted the buyer owner and others for financial crimes including wire fraud and bribery. The indictment alleged the buyer owner and his associates promised to donate millions of dollars to the North Carolina Republican Party in exchange for favorable treatment of the buyer owner’s insurance companies by North Carolina Commissioner of Insurance.

The Seller Group allege that in the summer of 2019, there were media reports that the FBI had seized $2 million in assets from political action committees controlled by the buyer owner. Moreover, North Carolina’s insurance department took over a group of troubled life insurers owned by the buyer owner and regulators obtained approval to place the insurers into a rehabilitation, which is a type of receivership akin to a bankruptcy reorganization.

This led to the buyer owner now serving a 7-year prison sentence in a federal prison.

And if that was not enough, the eye practice was hit with devastating losses by Covid starting in March of 2020.

The doctor is now in Illinois litigation trying to salvage the remainder of her deal, but it does not look promising.

This case is referred to as Yeh v. Prairie E&L Management, LLC, Case No. 20-3124, United States District Court, C.D. Illinois, Springfield Division, (May 22, 2020) 

Comment

I don’t think anyone would have foreseen this deal cratering as a result of a celebrity financial scandal or a world pandemic. But it is a reminder that deferred payment obligations are always risky. Maybe the risk is worth taking. But also think about trying to get more up front by remembering the phrase: “A Bird in the hand is worth two in the bush.”

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 risk of post closing payments Tagged with: ,

Buyer Can’t Sue Seller for Not Telling Buyer About Pending Loss of Major Customer

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M&A Stories

December 10, 2020

Introduction

It is very important for a prospective buyer of a business to do smart due diligence to validate the purchase price. However, there is always a risk that the seller won’t tell you the truth when asked. That’s when the dense, boring, legal boilerplate in a merger, asset purchase or stock purchase agreement comes into play.

The deal

This was a strategic deal between two companies that provided services to clients in the healthcare field. One of the services the seller provided its clients was a Nurse Advice Line. The seller’s rights and obligations under those Nurse Advice Line contracts was an important part of the deal. Humana was one of the seller’s top customers and the source of several of the contracts.

Approximately two weeks before the asset purchase agreement was signed, Humana and the seller participated in a phone call during which the seller learned that Humana intended to terminate the majority of its nurse advice line contracts. Humana advised Seller that written notice of the termination would follow. The seller did not tell the buyer of the conversation. To the contrary, the seller instructed its employees not to disclose Humana’s intent to anyone.

The deal closed with the buyer in the dark.

The lawsuit

After the transaction closed, the buyer discovered that Humana intended to terminate the contracts.

The seller had represented and warranted in the asset purchase agreement that it had not received any written contract termination notices. And that was true as of the closing. But the seller had received oral notification of Humana’s intent to terminate its contracts before the closing. Furthermore, the seller had told the buyer during negotiations that it had not received notice of any customer’s intent to terminate the service contracts.

Thus, the buyer sued the seller and its principal in a Delaware Superior Court for fraud accusing it of lying. The seller asked the court to dismiss with prejudice the claim because the buyer had agreed in the asset purchase agreement to sue only on breach of representations and warranties contained in the asset purchase agreement, and that the seller had only represented and warranted that it had not received any written notifications from customers of an intent to terminate service contracts, and that the only Humana notification of intent to terminate contracts was in fact given orally.

The court agreed and dismissed the buyer’s claim, saying that the buyer can’t “escape the contractual limitations to which it expressly agreed. Delaware law enforces sophisticated parties’ agreements to limit their reliance to contractual representations.”

This case is referred to as Infomedia Group, Inc. v. Orange Health Solutions, Inc., C.A. No. N19C-10-212 AML CCLD, Superior Court of Delaware, (Submitted: April 23, 2020.

Decided: July 31, 2020) 

Comment

So what boilerplate language was in this purchase agreement that allowed the seller to avoid a fraud claim for denying the fact that it knew that Humana intended to terminate its contracts?

There were two innocuous looking boilerplate provisions that the buyer agreed to: (1) that the only representations that seller was making on the deal were contained in the asset purchase agreement (2) that the buyer was only relying on the seller representations and warranties made in the asset purchase agreement, and specifically the buyer disclaimed relying upon anything said by the seller during negotiations.

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 contracts, due diligence, extra-contractual fraud, fraud in business sale, non-reliance clause Tagged with: ,

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