Lessons in Due Diligence for Directors and Officers: Avoiding Pitfalls in M&A

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Explore a case study involving a furniture company’s M&A journey and learn valuable lessons in due diligence for directors and officers. Discover the importance of thorough research and risk mitigation in the world of mergers and acquisitions.

M&A Stories 

September 21, 2023

Introduction:

In the world of mergers and acquisitions (M&A), making informed decisions is paramount. Directors and officers of Delaware limited liability companies, much like their counterparts in corporations, are obligated to exercise due care when considering an acquisition. While they are not guaranteeing the success of the deal, they must act with prudence to minimize risks. Failure to do so can result in personal liability, in cases of gross negligence.

The Background:

Let’s dive into a case from 2016 involving a furniture company established in 1984. This company, primarily operating furniture factory outlet stores in the South and Midwest, was known for its high-quality furniture brands. In 2016, a private equity firm acquired this company at an enterprise value of $34 million.

In 2018, the company made a strategic move by purchasing a bedding and home furniture retailer in Kentucky for over $7 million, aiming to expand its presence in that region. Unfortunately, this acquisition did not yield the desired results, and the subsequent pandemic pushed the company into bankruptcy. It was eventually sold out of bankruptcy for approximately $14 million, with certain liabilities assumed.

At its peak, the company boasted annual revenues of around $143 million, ran 68 locations, and employed about 675 people. However, by the time of the 2020 bankruptcy filing, it had downsized to 31 retail locations, a bedding manufacturing facility, a distribution facility, and roughly 270 employees.

Legal Proceedings:

In the aftermath of the bankruptcy, the company’s trustee filed a lawsuit against the officers and directors, alleging breach of their duty of care because of gross negligence in the Kentucky acquisition. The trustee argued that the due diligence process had failed to explore significant cultural and operational differences between the acquiring company and the Kentucky target.

According to the trustee, the decision-makers focused too narrowly on historical data from the Kentucky target and made flawed assumptions about future performance. They neglected key market trends, such as the shift to e-commerce and declining in-store foot traffic. Moreover, they failed to consider the economic challenges in the industry, including a softening mattress market that led to aggressive pricing strategies and bankruptcies among major mattress firms. Lastly, the trustee emphasized the failure to address substantial cultural differences, which hindered the integration of the acquired business.

In response, the directors and officers attempted to have the trustee’s complaint dismissed.

Outcome:

The bankruptcy judge determined that if the allegations were true, they could constitute gross negligence. Consequently, the motion to dismiss was denied.

Comment:

It’s worth noting that courts are generally hesitant to find breaches of the duty of. Additionally, Delaware corporations and LLCs have mechanisms, such as exculpatory clauses in their governing documents, that can shield directors, officers, and LLC managers from personal liability for breaches of their duty of care.

Case Reference:

See In Re Furniture Factory Ultimate Holding, LP, Case No. 20-12816 (JKS), Adv. Pro. No. 22-50390 (JKS), United States Bankruptcy Court, D. Delaware (August 31, 2023).

By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.

Email:             jmccauley@mk-law.com

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

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 

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 director and officer duty of care Tagged with: , , , , , , , , , , , , , , ,

Asset Buyer Dilemma: Are You Missing Valuable Assets in M&A?

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Explore the complexities of asset acquisitions in the world of mergers and acquisitions (M&A). Learn from a real-life case in the Kansas City area and understand how the legal nuances of third party beneficiaries can impact your M&A deals.

September 14, 2023

M&A Insights 

Introduction:

In the world of mergers and acquisitions, asset deals come with their unique set of challenges. Unlike equity deals, where buyers inherit a company along with its known and unknown liabilities, asset buyers face a different conundrum: potentially missing out on valuable assets they weren’t aware of.

The Kansas City Dealership Deal

Our story unfolds in the context of a car dealership acquisition located in the greater Kansas City area. The intricacies of Kansas law and dealer contracts with the car manufacturer dictate where and how dealerships can establish and relocate their businesses. Each dealer is assigned a specific geographic sales area, granting them exclusive rights to sell vehicles and provide warranty services within that territory.

While dealers have the freedom to open, relocate, or consolidate dealerships within their sales area, these moves are subject to Kansas law. To move a dealership, a dealer must file a formal petition with the state, giving notice of the intended move. Importantly, any dealer within ten miles of the proposed new location can file a protest to block the move.

In 2007, our seller protested against a competitor’s move under Kansas law, leading to a settlement agreement. In this agreement, the seller allowed the competitor’s move in exchange for a promise not to protest any future relocations by the seller, a promise documented in the settlement agreement.

Several years later, the seller sold its dealership assets to our buyer. Surprisingly, the settlement agreement was never mentioned in the purchase documents, and it seems the buyer was entirely unaware of its existence.

The buyer’s plan was to relocate the dealership after the current lease expired. They located a suitable property within the ten-mile radius of the competitor’s dealership and petitioned the state for the move. Predictably, the competitor filed a protest. Oblivious to the settlement agreement, the buyer engaged in an expensive legal battle until July 2019. It was then that the former owner of the seller brought the settlement agreement to the buyer’s attention and assigned it to them. The buyer promptly informed the competitor of this assignment, leading to the withdrawal of the protest.

Legal Proceedings:

With the settlement agreement now in their possession, the buyer took legal action against the competitor in a Kansas City federal district court. Among other claims, the buyer argued that the competitor had breached the settlement agreement by protesting the relocation. Their argument rested on the assertion that, as a third party beneficiary to the settlement agreement, the competitor owed them a duty not to protest.

Outcome:

However, the competitor sought the dismissal of the lawsuit through a motion for summary judgment, contending that Michigan law, which governed the settlement agreement, did not explicitly designate a buyer of the seller’s dealership as a third-party beneficiary. The district court sided with the competitor, and the buyer’s subsequent appeal to the Court of Appeals for the 10th circuit ended in defeat.

Closing Remarks:

It’s worth noting that there was a dissenting opinion during the appeal process, suggesting that the trial judge should have allowed a jury to decide whether the buyer was indeed an intended third-party beneficiary of the settlement agreement.

Case Reference:

See Reed Auto Of Overland Park, LLC v. LANDERS Mclarty OLATHE KS, LLC, Nos. 21-3225, 22-3043, United States Court of Appeals, Tenth Circuit (Filed August 24, 2023).

By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.

Email:             jmccauley@mk-law.com

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

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 

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 third party beneficiary clause Tagged with: , , , , , , , , ,

Casino and Hotel Sale During Pandemic: Legal Clarification

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Explore the legal intricacies of a deferred closing in the world of business acquisitions, as we analyze a case involving a Las Vegas casino and hotel sale during the COVID-19 pandemic. Discover how legal proceedings unfolded and the outcome in this M&A story.

M&A Stories 

September 10, 2023

Introduction:

In the world of business acquisitions, delays can be inevitable. This story highlights a case where a seller, amid a global pandemic, found themselves in a deferred closing situation. Let’s delve into the details.

Background:

Our story revolves around a Las Vegas casino and hotel seller who had entered into an asset purchase agreement with a buyer back in April 2019. This agreement involved a deferred closing, contingent on the approval of the Nevada Gaming Commission. To seal the deal, the buyer had submitted a $350K earnest money deposit as security.

In March 2020, the COVID-19 pandemic prompted the Nevada Governor to issue a mandate for the temporary closure of nonessential businesses, including our seller’s casino and hotel. Responding to this, the buyer terminated the purchase agreement on April 14, 2020, demanding the return of the earnest money deposit. The seller, however, declined.

Legal Proceedings:

The dispute escalated to a state trial court. Here, a critical issue arose: had the seller’s pandemic-induced closure materially breached their promise to operate the business as usual, a condition of the purchase agreement?

Outcome:

The state trial court initially ruled in favor of the buyer, ordering the return of the $350K earnest money deposit. However, the seller appealed to the Nevada Supreme Court, which subsequently overturned the decision. The Supreme Court held that the seller’s compliance with state law was aimed at preserving the casino’s gaming license, and therefore, it did not constitute a material breach of the purchase agreement. Consequently, the seller retained the earnest money deposit.

Comment:

A noteworthy aspect of this case is that the earnest money deposit was intended as compensation for the seller’s commitment to keep the casino/hotel business off the market during the transaction with the buyer.

Case Reference:

See Lucky Lucy D LLC v. LGS Casino LLC, Nos. 83833, 84257, Supreme Court of Nevada (Filed August 24, 2023).

By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.

Email:             jmccauley@mk-law.com

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

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 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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How Carnival Cruise Protected Its Digital Treasure: The DXP Software Saga

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Dive into the legal battle between Carnival Cruise and a bankrupt software developer over the OceanMedallion™ guest engagement system. Discover how Carnival fought to protect its proprietary innovation and the outcome of this high-stakes showdown.

M&A Stories 

September 8, 2023

Introduction:

Carnival, the cruise company known for unforgettable voyages, has a secret weapon called the OceanMedallion™ guest engagement system. It’s like the magic wand that makes your cruise experience extra special.

Carnival had hired a software developer to create some digital wizardry for this system. They shared their secrets, their ideas, and their know-how, making this software unique and exclusive to Carnival.

But the software developer hit some rough waters and ended up in a Delaware bankruptcy. And guess what they’re trying to do? They want to sell their DXP software, the one with Carnival’s secret sauce inside, to the highest bidder!

Carnival is not having it. So, what’s happening now is a legal showdown. Carnival is on a mission to protect its innovation, its secret ingredients, and its way of making your cruise experience truly magical.

It’s a battle of who gets to keep and control this unique software.

Background:

So, here’s the backstory: The software seller found themselves in financial hot water and filed for bankruptcy.

They made a deal with what we’ll call a “stalking horse bidder” for an auction sale. Think of them as the first person in a bidding race, kind of like the leader at the starting line in a race.

Now, what’s interesting is that this stalking horse bidder was connected to the lender who had given the seller money both before and after they hit these financial bumps.

The Delaware bankruptcy judge approved this plan, which included selling the seller’s DXP software assets free of any intellectual property infringement claims.

Legal Proceedings:

Carnival challenged the proposed sale. They asked the judge to rule that the seller’s DXP software contained Carnival’s proprietary information. Carnival also asked the court to order the seller to stop using, disclosing, or trying to sell its DXP software.

Outcome:

The court ruled that in Carnival’s favor.

Comment:

The seller’s lender and stalking horse bidder, before the Carnival litigation, probably had no idea about the infringement mess that was brewing.

Why’s that? Well, the seller had an impressive track record between 2009 and 2014. They were a seasoned pro in the cruise and hospitality world, working on more than 90 projects, including Disney Cruise Line, Walt Disney Parks & Resorts, Royal Caribbean Cruise Lines, and Bags, Inc.

And here’s the kicker: Since at least 2011, the seller had been diving deep into software architecture for cruise ships. They were like the behind-the-scenes maestro making sure everything ran smoothly on those luxury liners, thanks to their work with Disney and other big players.

Case Reference:

See IN RE DeCURTIS HOLDINGS LLC, Case No. 23-10548 (JKS) (Jointly Administered), Adv. Pro. No. 23-50413 (JKS), United States Bankruptcy Court, D. Delaware (August 9, 2023).

By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.

Email:             jmccauley@mk-law.com

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

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 

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 Problems with intellectual property, Uncategorized Tagged with: , , , , , , , , , , ,

Buyer’s Defamation Claim in Failed Bankruptcy M&A Deal

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M&A Stories 

Explore a recent M&A case where a buyer’s decision to back out of an asset purchase agreement led to a defamation claim by the seller. Learn about the legal proceedings and the court’s ruling in this bankruptcy-related merger case.

August 31, 2023 

Introduction:

In a recent bankruptcy-related merger and acquisition (M&A) case, a buyer’s decision to back out of an asset purchase agreement has led to a defamation claim by the seller.

Background:

This case revolves around the sale of assets from a pellet mill situated in a small town in South Carolina. The seller, a manufacturer of biomass wood pellets, had entered bankruptcy proceedings in a South Carolina court.

The buyer was the sole bidder for the business and entered into an agreement to purchase the assets, accompanied by a $250,000 deposit. However, during the due diligence process, the buyer was informed by the town administrator about significant issues with the business.

According to the town administrator, the pellet mill had not renewed its business license and had been non-operational for a considerable period, effectively shutting down. Consequently, the business would need to restart the permitting process, with no assurance of obtaining the necessary permits due to problems with the town’s noise ordinance.

Based on this newly acquired information, the buyer chose to terminate the purchase agreement as part of the bankruptcy proceedings.

Legal Proceedings:

In response, the buyer initiated legal action in the bankruptcy court, seeking damages. The allegations included breach of the purchase agreement, fraud, and unfair trade practices. In return, the seller filed a counterclaim, asserting defamation. The buyer then sought the court’s dismissal of the defamation claim, requesting a final decision (dismissal with prejudice).

Outcome:

The court ultimately dismissed the seller’s defamation counterclaim with prejudice. The court’s reasoning was grounded in the concept that the buyer had a legal safeguard against defamation claims for any statements made within the context of the bankruptcy proceedings. Moreover, the seller was unable to establish any instances of defamatory statements made outside the realm of the bankruptcy proceedings, despite two attempts.

Comment:

It is uncommon for a buyer to face a defamation lawsuit due to withdrawing from a deal following thorough due diligence. However, this case underscores the importance of buyer discretion when discussing the seller or its business with individuals unrelated to the transaction.

Case Reference:

See In Re Jasper Pellets, LLC, C/A No. 22-01409-EG, Adv. Pro. No. 22-80045-EG, Consolidated with Adv. Pro. No. 23-80033-eg, United States Bankruptcy Court, D. South Carolina (July 6, 2023).

By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.

Email:             jmccauley@mk-law.com

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

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 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 termination of M&A agreement Tagged with: , , , , , , , , , , ,

Surgeon Group’s Lawsuit for Pre-Closing Surgery Reimbursement in M&A Case

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Explore a recent M&A case where a surgeon group filed a lawsuit over reimbursement for surgeries performed before a business acquisition. Learn about the legal proceedings, magistrate’s recommendation, and the importance of clear liability allocations. Case reference: AA Medical, PC v. Centene Corporation.

M&A Stories

August 30, 2023

Introduction:

In a recent M&A case, a surgeon group has taken legal action against a buyer regarding reimbursement for surgeries performed prior to the business acquisition’s completion.

Background:

In this situation, a health insurance company purchased the assets of another health insurer, which included a contract with a surgeon group in New York. The surgeon group had conducted surgeries for various patients before the official acquisition took place. Subsequently, the surgeons sought reimbursement from the purchasing health insurer as per their provider contract. However, the buyer declined to honor this request.

Legal Proceedings:

The surgeon group filed a lawsuit against the buyer in a federal district court in Brooklyn. The buyer, seeking a swift resolution, asked the court to dismiss the claim that they had assumed responsibility under the provider contract for covering surgeries performed prior to the acquisition. The judge decided to involve a federal magistrate to obtain a recommendation on the case.

Magistrate’s Recommendation and Outcome:

Following a thorough review, the federal magistrate suggested that the judge rule in favor of the buyer. This recommendation was because the asset purchase agreement clearly indicated that the seller bore the responsibility for covering surgeries conducted before the official acquisition.

Importance of Clear Allocations:

In asset-based transactions like these, it’s crucial to precisely outline the allocation of liabilities that the seller retains prior to the closing. Well-defined allocations play a significant role in minimizing the potential for legal disputes after the deal has been finalized.

Case Reference:

See AA Medical, PC v. Centene Corporation, No. 21-CV-5363 (JS) (ST), United States District Court, E.D. New York (June 30, 2023).

By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.

Email:             jmccauley@mk-law.com

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

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 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 problem with seller contract Tagged with: , , , , , , , , , , ,

BUYER’S SUCCESSOR LIABILITY IN NEW JERSEY FOR HISTORICAL CONTAMINATION

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Learn about buyer’s successor liability for historical contamination in New Jersey when acquiring manufacturing businesses.

M&A Stories

August 1, 2023

Introduction:

When a buyer acquires a manufacturing business, they may unknowingly inherit certain liabilities from the seller. This blog discusses a real case where a buyer of a scissor factory in Newark, New Jersey, faced successor liability for the seller’s historical petroleum contamination on the site.

Background:

In 1976, the buyer purchased the assets, including the property, of a scissor factory in Newark for $10.5 million in cash, with no buyer shares involved. The buyer operated the factory for nine years before selling it in 1988.

Lawsuit:

In 2021, the current owner of the site sued the buyer in a federal New Jersey district court to recover damages for the historical petroleum contamination caused by the seller.

Successor Liability Doctrine:

The buyer had not explicitly assumed the liability for contamination during the 1976 acquisition. However, the current owner argued that the buyer was still responsible for the cleanup costs under New Jersey’s successor liability doctrine.

The doctrine applies if the buyer’s acquisition is considered a de facto merger or mere continuation, where the buyer continues the seller’s business. In this case, it was evident that the buyer continued the scissor factory’s operations with the same employees and property for nine years.

De facto merger and mere continuation also require the seller to dissolve after the transaction. Though it was not clear whether the seller dissolved, it had ceased operations, and its corporate charter was suspended after the closing.

Crucially, New Jersey’s successor liability doctrine differs from most states as it does not exclude all-cash deals from being considered de facto mergers or mere continuations.

Outcome:

The court ruled in favor of the current site owner, affirming that all-cash business asset acquisitions in New Jersey carry the risk of successor liability, unlike in most other states.

Case Reference:

See Public Service Electric and Gas Company v. Cooper Industries, LLC, Civ. No. 21-13644 (KM) (JBC), United States District Court, D. New Jersey (June 26, 2023).

Conclusion:

Buyers acquiring manufacturing businesses in New Jersey should be aware of the potential successor liability for historical contamination, even if they did not explicitly assume such liabilities during the purchase. Understanding the state’s unique successor liability doctrine is essential to avoid unexpected legal consequences in the future.

By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.

Email:             jmccauley@mk-law.com

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

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 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 environmental problems Tagged with: , , , , , , , , , , ,

HOW A SIMPLE CLAUSE COULD HAVE SAVED A CALIFORNIA M&A BUYER FROM LITIGATION IN FLORIDA

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A forum section clause in a share purchase agreement might have deterred Florida sellers of stock in a Tennessee company from suing a California-based buyer that is a Delaware corporation in a Florida court.

July 27, 2023

Introduction:

In the world of mergers and acquisitions, lawyers often engage in battles over seemingly standard language in acquisition agreements. This blog post highlights the importance of a “boilerplate” forum selection clause and how it could have protected a California-based buyer, operating as a Delaware corporation, from facing a lawsuit in a Florida court filed by sellers from Florida.

The Deal:

The buyer, a provider of cloud banking technology, acquired a Tennessee-based company offering software services and products to credit unions through a share purchase agreement.

Lawsuit:

Following the completion of the acquisition, the Florida sellers sued the buyer in a Florida federal district court, alleging that the buyer had defaulted under the share purchase agreement. However, the buyer managed to have the case dismissed by arguing that the Florida court lacked personal jurisdiction over them. The court agreed and dismissed the lawsuit, leaving the sellers to pursue justice in a different state.

The Key Issue:

The main point of contention was the buyer’s connections to Florida, which were minimal. The buyer, a California-based Delaware corporation, had no physical presence or employees in Florida and claimed not to conduct any business there. Their only ties to Florida were occasional meetings with the sellers and payment transactions to them.

Court Decision:

Despite these limited interactions, the court ruled that proceeding with the lawsuit in Florida would violate the buyer’s due process rights due to the lack of substantial connections with the state. Consequently, the court dismissed the Florida lawsuit.

Case Reference:

See Lopatine v. Finlink, Inc., Civil Action No. 21-20987-Civ-Scola, United States District Court, S.D. Florida (July 23, 2021).

Lesson Learned:

This case exemplifies the importance of including a forum selection clause in acquisition agreements. By stipulating a predetermined location to resolve any post-closing disputes, buyers can avoid unnecessary time and expenses associated with debating the appropriate jurisdiction.

In conclusion, having a well-defined forum selection clause can serve as a valuable safeguard for buyers, ensuring that disputes are handled efficiently and effectively without the burden of navigating different court systems.

By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.

Email:             jmccauley@mk-law.com

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

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 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 problems with post-closing litigation in inconvenient form Tagged with: , , , , , , , , , ,

BUYER NOT IN BREACH FOR DEMANDING REFUND AFTER UNVEILING SELLER’S FRAUD IN NIGHTCLUB PURCHASE

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A Georgia intermediate appellate court held that the buyer had not breached the purchase agreement after the closing for wanting to unwind the deal.

July 26, 2023

Introduction:

In a recent case, an Atlanta nightclub buyer faced a lawsuit from the seller after seeking a refund due to the seller’s fraudulent actions.

Background:

The case involved the acquisition of an Atlanta nightclub’s assets. After some time, a patron claimed to have been sexually assaulted on the club’s dance floor before a sold-out show. The buyer then discovered that the seller had not disclosed the nightclub’s history of violent and criminal incidents. As a result, the buyer requested the seller to take back the nightclub and refund the purchase amount.

Lawsuit:

In response, the seller filed a lawsuit against the buyer for breach of the purchase agreement in an Atlanta state trial court.

Outcome:

The jury initially ruled in favor of the seller, granting damages and attorney fees. However, the appellate court later reversed this decision and ordered a new trial. The appeals court concluded that the buyer did not breach the purchase agreement by demanding a refund since they had already paid the purchase price.

Case Reference:

See Grae Hospitality, LLC v. LL Atlanta, LLC, A23A0460, Court of Appeals of Georgia, Fourth Division (Decided: June 22, 2023).

Comment: It is unfortunate that a new trial is necessary despite the appellate court’s finding that the buyer did not breach the purchase agreement. This situation could have been avoided if the buyer had requested a directed verdict after the seller presented their case in the initial trial.

By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.

Email:             jmccauley@mk-law.com

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

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 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: , , , , , , , , , , ,

STALKING HORSE BIDDER AWARDED $4.2 MILLION BREAKUP FEE AND REIMBURSEMENT AFTER SUCCESSFUL AUCTION

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The asset purchase agreement provided for a breakup fee and expense reimbursement. However, the bankruptcy court did not approve the deal protection terms before the auction. Nevertheless, the court approved the breakup fee and expense reimbursement because it resulted in a successful auction that brought an additional $500K to the bankruptcy estate.

M&A Stories

July 21, 2023

Introduction:

In distressed business situations, auctions are common for selling assets out of bankruptcy to maximize creditor recovery. This blog explores a recent case where a stalking horse bidder was awarded a substantial breakup fee and expense reimbursement despite not having prior approval from the bankruptcy court.

The Deal:

The seller, an operator of petroleum barges, faced financial difficulties due to customer losses following a 2017 explosion and the pandemic’s impact on demand. To prevent foreclosure sales, the seller filed for bankruptcy and planned to sell the business through an auction. However, before the auction, no significant interest in purchasing the assets was secured, leading the seller to approach a previous post-petition bankruptcy financing company to act as a stalking horse bidder.

The Stalking Horse Bid:

The stalking horse bidder agreed to bid $110 million for 17 tugs and 12 barges. To compensate them for their time and expenses, the asset purchase agreement stated that if another bidder successfully purchased the assets, the stalking horse bidder would receive a $3.3 million breakup fee and $900,000 expense reimbursement. The agreement also set a floor price of $115.3 million, requiring other bidders to bid at least $500,000 more than the stalking horse bidder’s proposed price.

The Auction:

On auction day, another company purchased the assets for the minimum bid of $115.3 million.

The Lawsuit:

The seller’s creditors contested the stalking horse bidder’s entitlement to the breakup fee and reimbursement, arguing the lack of bankruptcy court approval before the auction. However, both the bankruptcy court and the Houston federal district court disagreed with the creditors. They recognized that the stalking horse bid established a floor, attracting an additional $500,000 for the bankruptcy estate. Given the unforeseen drop in oil prices on auction day, the court understood why the bankruptcy court’s approval was not obtained for the deal protection terms.

This case is referred to as In Re Bouchard Transportation Co., Civil Action No. H-21-2844, United States District Court, S.D. Texas, Houston Division, (May 31, 2022).

Lesson Learned:

The case emphasizes the importance of obtaining the bankruptcy court’s prior approval for deal protection, including breakup fees and expense reimbursements. Waiting until after the auction can lead to creditor pushback and legal challenges.

By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.

Email:             jmccauley@mk-law.com

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

Telephone:      714 273-6291

Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles

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