M&A Buyer Loses Products Liability Indemnification Claim Against Seller

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In the complex landscape of mergers and acquisitions, understanding the legal implications of product liability is crucial for asset buyers. This blog post explores a recent South Carolina case where a buyer faced unexpected legal challenges due to a defect in equipment manufactured by the seller before the acquisition. The discussion highlights the importance of indemnification agreements and the need for buyers to proactively manage risks associated with products liability claims that may arise long after a deal closes. By emphasizing strategies such as obtaining tailored insurance coverage, this post equips M&A professionals with practical insights to safeguard their investments.

M&A Stories

October 6, 2024

M&A asset buyers must carefully manage the risk of facing lawsuits for defective products produced by the seller.

In a recent case, the seller manufactured slitter rewinders, industrial machines that process large rolls of materials like paper and film, slicing them into narrower strips. This equipment plays a crucial role in industries such as packaging and printing, where precise dimensions are vital for production.

The buyer acquired the seller’s assets in 2014, with the seller promising to defend and indemnify the buyer against any product liability claims related to goods sold before the acquisition’s closing.

However, in late December 2021, an employee at one of the seller’s customers was seriously injured while handling the equipment. She subsequently sued both the seller and the buyer in a South Carolina federal district court.

In response, the buyer filed an indemnification claim against the seller, seeking defense against the employee’s claim and compensation for any losses incurred. The seller, having dissolved over five years prior to the lawsuit, moved to dismiss the claim, arguing it was filed too late. Given the five-year statute of limitations, the court ruled in favor of the seller and dismissed the buyer’s claim with prejudice.

This case highlights that products liability claims can emerge long after the acquisition has closed. To mitigate such risks, buyers should consult with insurance advisors to assess the merits of obtaining tail coverage through representations and warranties insurance or product liability insurance policies with extended reporting periods. Ensuring adequate coverage is crucial for managing potential liabilities.

Case Reference: Byers v. Pinnacle Converting Equipment and Services, LLC, Case No. 0:23-cv-04775-JDA , United States District Court, D. South Carolina, Rock Hill Division, (September 26, 2024).

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners, management, as well as professionals who share an interest in the complexities of M&A law.

By John McCauley: I write about recenegal 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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Earnouts: The Importance of Clear Buyer Obligations

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This blog explores the complexities of earnout structures in M&A deals, emphasizing the need for sellers to negotiate clear post-closing obligations. Using a real-life Delaware court case, the post highlights how vague earnout terms can lead to disputes and legal challenges, reminding readers of the importance of commercially reasonable efforts and detailed contract provisions.

M&A Stories

October 3, 2024

Offering a seller an additional purchase price based on post-closing business performance can bridge gaps when parties are far apart on a fixed price. But when the earnout structure lacks clear terms, disputes often arise.

In 2020, a global buyer group acquired a ready-to-drink beverage company for $12 million, with an added earnout tied to 2022 net sales exceeding $25 million. When sales fell short, no earnout was paid. The seller sued the buyer and its parent company in Delaware, alleging breach of contract and violation of the implied covenant of good faith and fair dealing.

The court dismissed the case, siding with the buyer. It found no breach of the purchase agreement and dismissed claims against the parent, which wasn’t a party to the contract. The seller’s argument that the buyer failed to use “commercially reasonable efforts” post-closing also fell flat, as the purchase agreement contained no such obligation.

The court emphasized that the implied covenant of good faith and fair dealing cannot be used to rewrite a contract. It only applies when a contract is silent on an issue and one party acts against the deal’s core purpose. In this case, the seller hadn’t negotiated for specific protections or obligations around the earnout. The buyer was therefore not required to act in any particular way to hit the sales targets.

The lesson is clear: sellers must negotiate detailed earnout obligations, including commercially reasonable efforts, to protect themselves after closing. Without clear terms, buyers are only bound to pay if specific milestones are reached, not to take steps to ensure they are.

Case Reference: Limitless Coffee, LLC v. Mott’s, LLP, C.A. No. N23C-12-229 EMD CCLD , Superior Court of Delaware, (September 19, 2024).

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners, management, as well as professionals who share an interest in the complexities of M&A law.

By John McCauley: I write about recenegal 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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Texas Upholds Asset Acquisition Formality: Successor Liability Limited to Assumed Seller Liabilities

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Explore the intricacies of M&A legal topics with our latest blog post, “Texas Upholds Asset Acquisition Formality: Successor Liability Limited to Assumed Seller Liabilities.” This piece delves into the unique legal landscape of Texas, contrasting its strict adherence to the form of asset transactions with other states’ more flexible approaches. Discover how Texas law shapes the responsibilities of buyers in asset acquisitions, particularly in the context of successor liability and the implications for creditors. By understanding these nuances, M&A professionals can better navigate the complexities of asset acquisitions, especially when dealing with cross-state transactions and bankruptcy sales. Gain valuable insights into the importance of including robust choice of law provisions in acquisition agreements, ensuring that Texas’s favorable laws can provide essential protections for buyers.

M&A Stories

September 24, 2024

In asset acquisitions, many states impose successor liability on buyers based on the substance of the deal—often treating asset purchases as mergers or mere continuations of the seller. Texas, however, adheres strictly to the form of the transaction.

In this case, a creditor sued the buyer of a bankrupt company’s assets, claiming successor liability. The buyer, based outside of Texas, moved to dismiss the claims, arguing that Texas law applied. Under Texas law, a buyer is only responsible for liabilities it expressly assumes, without consideration of whether the acquisition resembles a merger or continuation of the seller.

The creditor argued for Indiana law, which applies a more creditor-friendly approach by examining the substance of the transaction. However, the court found that Texas law governed the case because of the strong connections between the creditor, the seller, and the state of Texas. Since the buyer had not assumed the seller’s liabilities, the court dismissed the creditor’s claims.

Texas is an outlier in this respect. Most states will examine the substance of a deal to determine whether a buyer should be held responsible for seller liabilities as a de facto merger or continuation. In contrast, Texas limits successor liability strictly to those liabilities the buyer explicitly assumes.

For buyers hoping to take advantage of Texas’ pro-buyer laws, it’s critical to include a broad choice of law provision in the acquisition agreement. This provision should ensure that Texas law governs all aspects of the transaction, including contractual issues, tort liabilities, and statutory obligations. Given the potential for significant claims related to torts—such as personal injury or death—addressing these explicitly can protect the buyer from substantial unforeseen liabilities. This strategy can be particularly useful for buyers outside Texas, especially when the seller or business has strong ties to the state.

Additionally, in this case, the buyer benefited from the fact that the assets were purchased out of bankruptcy. Assets acquired through bankruptcy are typically free of unassumed liabilities, further bolstering the court’s decision.

Case Reference: Case Reference: Buy Direct, LLC v. DirectBuy, INC.., Cause No. 2:15-CV-344-JVB-JEM , United States District Court, N.D. Indiana, Hammond Division, (September 6, 2024).

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners, management, as well as professionals who share an interest in the complexities of M&A law.

By John McCauley: I write about recenegal 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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Delaware Court Awards Over $1 Billion in Earnout Dispute Over Surgical Robot Milestones

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This blog covers a Delaware Court of Chancery case involving a $1 billion earnout dispute over FDA milestones in the acquisition of a surgical robotics startup. The post highlights key legal issues such as earnout provisions, commercially reasonable efforts obligations, breaches of good faith, and fraud in the context of mergers and acquisitions. It also explores the complex dynamics between regulatory approvals and competing products in high-stakes M&A deals within the medical device industry.

M&A Stories

September 23, 2024

Earnouts are a common feature in M&A, especially when the acquired business deals with innovative medical devices requiring regulatory approval. However, they often lead to post-closing litigation, as seen in a recent Delaware Court of Chancery case.

This case involved the 2019 acquisition of a venture-backed robotic surgery startup by a global multi-billion-dollar company. The startup had developed two breakthrough surgical robots: one specialized in diagnosing and treating lung cancer, and another that advanced abdominal surgeries like gallbladder removal and hernia repairs. While the startup was making significant progress, the buyer, whose own surgical robot development was lagging, saw the acquisition as a strategic opportunity to enter the competitive surgical robotics market.

The deal closed with a $3.4 billion upfront payment and an additional earnout of up to $2.35 billion based on FDA regulatory milestones, primarily tied to the second surgical robot. To address concerns that the buyer might prioritize its own competing robot over the acquired technology, the merger agreement required the buyer to use “commercially reasonable efforts” to achieve FDA approval for the acquired robots, treating them as a priority medical device.

When the milestones weren’t met, the seller sued, claiming that the buyer had failed to meet its obligations. The court agreed, awarding the seller $1 billion in damages.

The buyer breached its efforts obligation in two key ways. First, it delayed work on FDA milestones by forcing the startup to compete in a “bakeoff” against the buyer’s own surgical robot, resulting in significant delays. Although the startup’s robot ultimately won, the distraction set back regulatory progress. Second, the buyer merged its own surgical robot team with the startup’s, which led to a breakdown in teamwork and the loss of key personnel.

The court also found that the buyer breached the implied covenant of good faith and fair dealing. After the acquisition, the FDA shifted the approval process for the startup’s robot to a more complex pathway, requiring clinical data due to its novel design. The buyer, instead of supporting this new approval process, chose to abandon the earnout, arguing that the milestones were tied to the easier pathway, which was no longer available.

Lastly, the court held the buyer accountable for fraud, as it had failed to disclose before closing that a key component the buyer was to supply for the startup’s robot had been delayed due to a patient death in clinical trials.

Despite the significant damages awarded, the seller was unable to recover its legal fees due to the absence of a fee-shifting provision in the merger agreement. Given the length of the court’s decision, it’s likely those fees were substantial.

This case underscores the risks of earnouts tied to regulatory milestones, especially when the buyer has a competing product. The seller had tried to mitigate this risk by requiring the buyer to treat the acquired robot as a priority medical device, but the buyer’s lack of support for the more difficult FDA pathway ultimately led to a costly legal battle.

Case Reference: Fortis Advisors LLC v. Johnson & Johnson., C.A. No. 2020-0881-LWW , Court of Chancery of Delaware, (September 4, 2024).

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners, management, as well as professionals who share an interest in the complexities of M&A law.

By John McCauley: I write about recenegal 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 earnouts Tagged with: , , , , , , , , , , , , ,

Challenges in Securing Post-Acquisition Contract Consents: A Case Study

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Explore the complexities of post-acquisition contract consents through an insightful case study on a high-stakes $80 million acquisition. This blog post delves into the challenges faced when key business value is linked to contracts requiring third-party consent, as exemplified by a contentious dispute involving a major account. Learn about the legal intricacies and the critical importance of due diligence and precise contract terms in M&A transactions. Discover how unforeseen issues can impact settlement and litigation, offering valuable lessons for buyers and sellers alike.

M&A Stories

September 10, 2024

M&A buyers favor asset acquisitions for the flexibility to select which seller liabilities to assume. However, significant complications can arise when key business value is tied to contracts that cannot be assigned without the other party’s consent.

Such was the situation in an $80 million strategic acquisition in 2021 involving a cleaning division with 600 customers. The seller promised to help transition by securing consents from ten critical accounts. If these consents were obtained within a specified timeframe, the seller stood to receive additional payments.

One crucial account was Ingram Micro. If consent for Ingram Micro was secured by the deadline, the seller would receive $1.5 million from escrow. Although consent was obtained on time, the seller later discovered that half of the Ingram Micro account’s revenue had been transferred to a third party. The Ingram Micro contract, which allowed termination with 30 days’ notice, was indeed terminated by the third party due to its own cleaning vendor.

Consequently, the buyer refused to release the $1.5 million. The seller settled for $747,000 for the Ingram Micro consent, but the buyer continued to withhold these funds from escrow, citing indemnification issues. The dispute eventually led to litigation in the Delaware Superior Court. The seller sought the release of the $747,000 through a summary judgment motion.

The buyer contended that despite the timely consent, there was still a dispute over the total amount recoverable, arguing that the seller had breached the asset purchase agreement by not disclosing issues with the Ingram Micro account prior to closing. The court denied the seller’s motion for summary judgment, leaving the resolution of the dispute to further legal proceedings.

This case underscores that even with thorough document drafting, unforeseen issues can arise post-closing, highlighting the importance of due diligence and clear contractual terms.

Case Reference: JanCO FS 2, LLC v. ISS Facility Services, Inc., C.A. Nos. N23C-03-005 MAA CCLD, N23C-07-036-MAA CCLD , Superior Court of Delaware, (August 30, 2024).

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners, management, as well as professionals who share an interest in the complexities of M&A law.

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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Recovering Legal Fees When Enforcing M&A Restrictive Covenants

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Explore the intricate world of enforcing restrictive covenants in M&A transactions with our latest blog post. Dive into a compelling case study involving a $20 million acquisition in the education and risk management sector. We delve into the legal challenges faced when a seller defies non-compete agreements, and the implications for recovering legal fees. Learn about the pivotal court decisions that shaped this case and gain valuable insights on how to protect your investments and negotiate robust asset purchase agreements. Whether you’re a buyer or a legal professional, this post offers essential takeaways for navigating restrictive covenants in mergers and acquisitions.

M&A Stories

August 14, 2024

In mergers and acquisitions, buyers often seek to protect their investment and goodwill through restrictive covenants. These agreements typically involve the seller and their affiliates agreeing not to compete with the acquired business. However, enforcing these covenants can lead to costly and protracted legal battles.

Consider a case from 2018 involving a $20 million acquisition by a leading education and research provider in the risk management and property-casualty insurance sector. The buyer acquired assets from a company specializing in education for insurance claims resolution and litigation management. As part of the deal, the seller and its affiliates committed to not hosting educational conferences in this niche area.

Despite this agreement, a year after the acquisition, the seller’s group organized two conferences on claims and litigation management, defying the buyer’s demands to cancel. Further events related to this field were held in 2021. In response, the buyer filed a lawsuit in August 2019 in a Delaware federal district court.

The court found that the seller’s actions breached the non-compete agreement and issued an injunction. However, it also ruled that the buyer had not demonstrated compensatory damages. When the buyer sought to recover legal fees and costs, the court denied the request due to the absence of an attorney fee provision in the asset purchase agreement.

The buyer appealed the decision. The appellate court upheld the injunction but also denied the request for legal fees, confirming the trial court’s ruling.

This case highlights a critical lesson for buyers: unless an asset purchase agreement includes a clause specifying the award of legal fees to the prevailing party, each party typically bears its own legal costs. This principle applies under Delaware law and in many other jurisdictions.

Case Reference: American Institute For Chartered Property Casualty Underwriters v. Potter, Nos. 22-2967, 22-3025 & 22-3042 , United States Court of Appeals, Third Circuit, (August 5, 2024).

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners, management, as well as professionals who share an interest in the complexities of M&A law.

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 Attorney's Fee Provision, noncompetition covenant Tagged with: , , , , , , , , , , , ,

M&A Challenge: Selling a Mixed-Make Dealership Portfolio

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Explore the legal intricacies of selling a mixed-make dealership portfolio, with a spotlight on a real-life M&A dispute involving Honda’s right of first refusal. Delve into the complexities of dealership agreements, Oklahoma law, and the challenges that arise when selling multiple brands as a single package. This post provides valuable insights for entrepreneurs, legal professionals, and industry insiders navigating similar M&A scenarios.

M&A Stories

August 08, 2024

Selling a car dealership requires approval from the manufacturer, and when multiple dealerships with different brands are involved, the process can become particularly complex—especially when a manufacturer holds a right of first refusal.

In Stillwater, Oklahoma, a seller owned a Honda dealership at one location and Hyundai and Chrysler dealerships at another. The seller received an unsolicited offer to purchase all three dealerships as a package. They were only interested in selling the entire portfolio, not individual dealerships.

The Honda dealership agreement included a right of first refusal, allowing Honda to purchase the dealership’s assets under the same terms as those offered by the prospective buyer. Oklahoma law supports this right, provided Honda matches the buyer’s offer and meets specific conditions. Upon notification of the offer, Honda requested a separate Asset Purchase Agreement for its dealership.

The seller complied, stipulating that the sale of the Honda dealership would only close concurrently with the sale of the Hyundai and Chrysler dealerships. However, when Honda exercised its right of first refusal, the seller refused to proceed with the Honda sale alone, citing the contractual requirement for all three sales to close simultaneously.

As a result, the seller withdrew the entire portfolio from the market. Honda then sued in an Oklahoma federal court, seeking to compel the sale of the Honda dealership. The seller countered by asking the Oklahoma Motor Vehicle Commission to block Honda from enforcing its right, arguing that Honda’s terms did not align with those offered by the original buyer, specifically the requirement for concurrent closings.

The federal court agreed to stay the proceedings pending the outcome of the Motor Vehicle Commission’s review. This means that the decision on Honda’s right to purchase will ultimately be determined by the Oklahoma agency and, if necessary, by state courts.

This case highlights the complexities and potential pitfalls of selling a portfolio of dealerships involving multiple brands. The process can be significantly longer and more expensive than selling a single dealership.

Case Reference: American Honda Motor Co., Inc. v. M&N Dealerships VI, LLC, Case No. CIV-24-165-D , United States District Court, W.D. Oklahoma, (July 25, 2024).

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners, management, as well as professionals who share an interest in the complexities of M&A law.

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 sale of auto dealerships Tagged with: , , , , , , , , , , , , , ,

M&A Buyer’s Restrictive Covenants Tested Under Delaware Law

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Explore the complexities of M&A restrictive covenants in our latest blog post, “M&A Buyer’s Restrictive Covenants Tested Under Delaware Law.” This post delves into a recent case involving a strategic acquisition in the timberland management and forestry consulting industry. The discussion focuses on the enforceability of non-compete and non-solicitation clauses under Delaware law, examining how these covenants impact business transactions and legal disputes. Learn about the court’s reasoning in denying a preliminary injunction, the challenges of enforcing restrictive covenants across multiple regions, and the concept of “blue penciling” in contract law. This insightful analysis is essential reading for business owners, legal professionals, and anyone involved in M&A transactions, providing valuable lessons on drafting and enforcing restrictive covenants to protect business interests.

M&A Stories

August 03, 2024

In many M&A transactions, goodwill is a crucial asset, and restrictive covenants, such as non-compete and non-solicitation clauses, are key to protecting that goodwill.

This case involved the $1 million strategic acquisition of a Wisconsin-based timberland management, forestry consulting, and appraisal services business. As part of the deal, the principal seller owner, who continued in his role managing forests and natural resources and providing expert witness consulting, agreed not to compete with the Maine-based buyer for five years across the United States, Canada, South America, Central America, Australia, New Zealand, Europe, and Africa. Additionally, the owner promised not to solicit the company’s employees or customers for five years.

However, less than four months after the closing, the owner left the buyer and began working for a competitor. Subsequently, two former employees and at least one client joined him at the new company. In response, the buyer filed a lawsuit in a Maine federal district court, alleging the owner violated the restrictive covenants. The buyer sought a preliminary injunction to prevent the owner from competing and soliciting employees and clients pending the lawsuit’s outcome.

The central issue was whether the restrictive covenants were enforceable under Delaware law, as stipulated in the asset purchase agreement. The court denied the buyer’s request for a preliminary injunction, indicating that the covenants were likely unreasonable and, thus, unenforceable.

The court found the non-compete clause unreasonable because it covered regions where the seller had not operated, including South America, Central America, Australia, New Zealand, Europe, and Africa. While the seller’s owner had plans to expand into these areas, the lack of current operations, combined with the five-year duration, rendered the non-compete likely unenforceable. Similarly, the court questioned the reasonableness of the five-year non-solicitation clause, finding no Delaware court upholding  such lengthy term.

Moreover, the court acknowledged its power to modify restrictive covenants to make them reasonable, a process known as “blue penciling.” However, it emphasized that Delaware courts rarely use this power, as it could encourage parties to draft overly broad covenants, relying on the courts to correct them.

Case Reference: Huber Resources Corp. v. Olson, Docket No. 1:23-cv-00410-NT , United States District Court, D. Maine, (July 19, 2024).

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners, management, as well as professionals who share an interest in the complexities of M&A law.

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 noncompete area, noncompetition covenant term, nonsolicitation of employees and customers, problems with noncompetition covenants, restrictive post-closing covenants Tagged with: , , , , , , , , , , , , , , , , , , , ,

Wisconsin Court Examines M&A Survival Clause

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Explore the complexities of M&A survival clauses in our latest blog post, ‘Wisconsin Court Examines M&A Survival Clause.’ This insightful analysis delves into a recent Wisconsin appellate court decision involving a strategic acquisition dispute. The case uncovers the critical role of representations and warranties in M&A transactions, examining issues like undisclosed business problems, state-required repairs, and the interpretation of survival clauses. Perfect for legal professionals, business owners, and anyone interested in the intricacies of M&A law. This post reminds readers that states view survival clauses differently. Stay informed on best practices and legal nuances to protect your interests in future deals.

M&A Stories

August 03, 2024

In M&A transactions, representations and warranties play a crucial role. They serve two primary functions: allowing the seller to disclose potential issues with the business and assuring the buyer of the accuracy of these disclosures.

However, it’s not uncommon for buyers to later find that the acquired business is worth less than they paid, often due to undisclosed issues. This scenario unfolded in the case of a strategic acquisition of a Wisconsin water distribution business. Eighteen months after closing, the buyer sued the seller in a Wisconsin state court, alleging breaches of representations and warranties. The buyer cited numerous undisclosed problems, including unsafe delivery vehicles suspended by the state, broken water coolers, costly state-required repairs, an overstated customer base, and sloppy bookkeeping.

The seller responded with a motion for judgment on the pleadings, arguing that the lawsuit was untimely since it was filed more than a year after the closing. The seller referenced the agreement’s survival clause, which stated that representations and warranties “shall survive the Closing for a period of one year from the Closing Date.”

The trial court denied the seller’s motion, prompting an appeal to a Wisconsin intermediate appellate court. The appellate court sided with the seller, reversing the trial court’s decision and directing dismissal of the buyer’s breach of representation and warranty claim on the grounds that it was filed too late.

The appellate court noted the absence of state precedents addressing M&A survival clauses, thus conducting an extensive review of case law from other jurisdictions, professional articles, and legal treatises, as well as a brief from a University of Wisconsin law professor.

This case highlights the inconsistency across states in interpreting M&A survival clauses. The key takeaway for both buyers and sellers is to understand the applicable laws in their jurisdiction.

It’s also worth noting that the ABA Model Asset Purchase Agreement does not require the filing of a lawsuit before the survival period expires; a notice with reasonable detail of the claim is sufficient. This case might have avoided an appeal if the survival clause had explicitly required filing a lawsuit within the one-year period.

Case Reference: Ripp Distributing Co. v. Ruby Distribution, Appeal No. 2023AP778 , Court of Appeals of Wisconsin, (March 21, 2024).

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners, management, as well as professionals who share an interest in the complexities of M&A law.

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

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