US Court Enforces SPA’s Purchase Price Adjustment Dispute Forum Selection Clause

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May 24, 2020

Introduction

Many business acquisitions have post-closing purchase price adjustments based upon the financial position of the target company at closing. The parties usually provide for a dispute resolution procedure for resolving disagreements over the final numbers, and the amount in dispute can be a big number.

The deal

This deal involved a stock acquisition of a consumer finance company. The buyer agreed to pay $7.3 million plus the amount of the “Estimated Closing Net Assets” of the target, subject to post-closing adjustments, as well as pay off certain debt of the target.

The stock purchase agreement provided a dispute resolution mechanism, under which disagreements between the parties about the post-closing calculations must be submitted to an independent accounting firm for resolution. The accounting firm’s decision “shall be final and binding upon the Parties.”

The lawsuit

Not surprisingly, the buyer and seller did not agree upon the post-closing calculation and the matter was resolved by the accounting firm.  The seller challenged the accounting firm’s decision in a federal Delaware District Court. The buyer countered by filing its own action in the Delaware Court of Chancery seeking to confirm the independent accounting firm’s determination as an arbitration award.

The federal court held that the Delaware Court of Chancery probably has jurisdiction because the SPA provided for a Delaware Court of Chancery forum selection clause if that court had jurisdiction over the dispute. The federal court held that Delaware’s Court of Chancery probably had jurisdiction over the dispute because of its power to review arbitrations. However, the seller could come back to federal court if the Delaware Court of Chancery declines to exercise jurisdiction.

This case is referred to as FNB Corporation v. Mariner Royal Holdings, LLC, C.A. Nos. 19-1643-LPS-JLH, 19-1859-LPS-JLH, United States District Court, D. Delaware, (March 26, 2020).

Comment

The federal court concluded that the Delaware Court of Chancery had jurisdiction because under Delaware law, that court had jurisdiction to review arbitration decisions. The seller unsuccessfully argued that the accounting firm acted not in the capacity of an arbitrator but as an accounting expert.

The federal court rejected this argument: “… (The seller) … argues that the Court of Chancery lacks jurisdiction … because the SPA’s dispute resolution procedure is an ‘expert determination, not an arbitration. In support of its position, Seller cites to a different line of cases from the Court of Chancery. Those case are distinguishable because the contract language demonstrated the parties’ intent to engage in an expert determination. … Although the law in Delaware does appear to be evolving …, I am persuaded that the SPA at issue here, which lacks specific language disavowing arbitration, and which permits the accounting firm reasonable access to information, more closely resembles … (an) arbitration … (provision)…, than … (an) expert determination … (provision) …. Because … (the seller’s) … action seeks to void the independent accounting firm’s decision and … (the buyer’s) … action seeks to confirm it, I conclude that, if appropriate for this Court to make such a determination, the Court of Chancery has subject matter jurisdiction over these disputes …”

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 arbitration vs expert determination, dispute resolution provision, forum selection clause, purchase price adjustment Tagged with: ,

Owner Loses $14.5 Million Fraud Claim Against Majority Shareholder in Stock Deal

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May 22, 2020

Introduction

This deal is a reminder that a seller of a business needs to read the transactional documents (with the help of a competent lawyer) before signing. In this case it cost the seller $14.5 million.

The deal

A medical student and his college freshman brother, through their company, owned a minority interest in target, a pharmaceutical company. The brother’s investment company was managed by their father, a medical doctor.

The target shareholders agreed to sell their shares in the company to the buyer, also a pharmaceutical company for, $500 million. However, before the closing, the majority shareholder told the brothers that $100 million of the purchase price had to be paid to an unrelated company for work it had previously done for the target. Therefore, the purchase price for the shareholders was $400 million not $500 million, resulting in a $14.5 million reduction in the brothers’ share of the purchase price.

The lawsuit

The brothers signed the stock purchase agreement without reading it. Had they read it they would have discovered that the brothers’ investment company was the only target stockholder whose share allocation was modified downward (from 9% to 6.874%), and the money from the adjustment did not go directly to a non-party, but instead was redistributed among the other three stockholders. In addition, the brothers alleged that they were not given full copies of the transaction documents, but signed signature pages only.

The brothers’ investment company sued in a New York state trial court to recover the $14,5 million from the other shareholders. They lost.

The court said that the brothers should have read the transaction documents, which clearly disclosed that the purchase price was not reduced by $100 million and clearly disclosed that the documents wrongfully allocated $14.5 million of the purchase price from the brothers’ investment company to the other shareholders.

Furthermore, the court noted that the brothers’ investment company had, in the transaction documents, released the other stockholders from any claims connected to the deal, whether known or unknown.

This case is referred to as Shilpa Saketh Realty Inc. v. Vidiyala, Docket No. 157087/2019, Motion Nos. 001 & 002, Supreme Court, New York County, (April 16, 2020).

https://scholar.google.com/scholar_case?case=11345242416742325260&q=%22stock+purchase+agreement%22&hl=en&scisbd=2&as_sdt=2006&as_ylo=2017

Comment

The lesson from this deal is clear. Legal documents can have serious consequences. So, BEFORE YOU SIGN THE TRANSACTION DOCUMENTS: read the documents; have a competent lawyer read the documents; and then review the documents with your lawyer.

By John McCauley: I help companies and their lawyers minimize legal risk associated with private business acquisitions.

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, fraudulent inducement, shareholder release Tagged with: , ,

Buyer in All Cash Stock Deal Fights Mere Continuation Successor Liability Claim

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May 15, 2020

Introduction

A buyer of the stock of an unrelated company for cash usually does not worry about being directly liable for the target’s liabilities. Perhaps that is not the case when purchasing the stock a distressed business.

The deal

Here, the buyer purchased the stock of the target for cash.

The lawsuit

A claimant sued the target in an Arizona federal district court for damages suffered in an accident in a pre-closing accident allegedly caused by an employee of the target company. The plaintiff also sued the buyer alleging that the buyer of the target stock was liable to the plaintiff under Arizona’s successor liability doctrine.

The buyer asked the court to throw out the plaintiff’s claim against the buyer through a motion for summary judgment on the grounds that the plaintiff cannot and will not be able to establish successor liability for any liability of Target’s resulting from the accident between the plaintiff and the target’s employee.

The plaintiff filed a motion asking the court to defer ruling on the buyer’s summary judgement motion to allow time to take discovery on the issue of successor liability. The court gave the plaintiff more time.

The court noted that under Arizona law, in an asset acquisition, the buyer can be held liable for the asset seller’s debts if the asset buyer is a mere continuation of the asset seller. In the courts words: “a corporation is a mere continuation of a predecessor corporation if there is ‘substantial similarity in the ownership and control of the two corporations,’ and ‘insufficient consideration running from the new company to the old for the assets passing to the new company.’”

The court noted that the plaintiff had alleged that the buyer and the target have common ownership, executives, employees, or directors, and that the buyer pays salaries and other expenses of the target. “This sufficiently demonstrates commonality in the operation and control of the corporations such that Plaintiff should have the opportunity to discover more information related to the same. Plaintiff also submits that … (the buyer) … purchased the shares of … (the target) … for an amount equaling approximately half of Target’s revenue the previous year, which may demonstrate insufficient consideration for the purchase of Target shares. … In light of the early stages of this litigation, Plaintiff is entitled to limited discovery to develop the mere continuation theory.”

This case is referred to as Tillman v. Everett, No. CV-19-08231-PCT-JJT, United States District Court, D. Arizona, (April 17, 2020).

Comment

I am very surprised that the court did not throw out the plaintiff’s claim against the buyer. Successor liability usually applies only to a limited universe of asset acquisitions, not to stock acquisitions, and especially not in an all cash deal.

This case bears watching. In the future stock buyers of distressed businesses may want to think about doing a Bankruptcy Code 363 acquisition if the target is distressed to cut off potential successor liabilities.

By John McCauley: I help companies and their lawyers minimize legal risk associated with private business acquisitions.

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 mere continuation exception, stock purchase agreement, successor liability Tagged with: , ,

No CGL Coverage for $25 Million Fire Damage Claim to Business Assets Sold to Buyer

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May 8, 2020

Introduction

A seller of a business often is allocated legal risks of the sold business. This is accomplished through comprehensive purchase agreement representations and warranties and indemnification provisions.  Such legal risks can turn out to be very expensive.

The deal

This deal involved the $625 million sale of the assets of an oil refinery. The seller in the asset purchase agreement represented and warranted that the refinery met industry standards and good engineering practices; complied with applicable environmental regulations and standards; and was adequate for its use in the business.

The seller promised, in the APA, to indemnify the buyer for breach of these representations and warranties.

The lawsuit

A fire extensively damaged the refinery months after the closing. The buyer sued the seller for damages under the APA’s indemnification provision.

The seller tendered the claim to its CGL insurer who refused to defend, claiming that there was no coverage for a breach of contract claim, as opposed to a tort property damage claim. The seller then sued the insurer in an Arkansas federal district court and lost.

On appeal the federal court of appeals affirmed the trial court’s decision. The court held that liability of the seller to the buyer in the underlying suit represents the “economic loss” from seller’s’ breach of the asset purchase agreement, which is not covered by the policy. Accordingly, the insurer had no duty to defend the seller.

This case is referred to as Murphy Oil Corporation v. Liberty Mutual Fire Insurance Company, No. 19-1140, United States Court of Appeals, Eighth Circuit, (Submitted: January 15, 2020. Filed: April 21, 2020).

Comment

The federal court of appeals said that the insurer may have had a duty to defend if the buyer had sued the seller in a tort suit for property damages: “The statute of limitations for tort liability ran before … (the buyer) … filed its complaint. Before the running of the statute of limitations, … (the buyer) … might have sued in tort for the property damage from the fire. Because … (the buyer) … did not sue before the statute of limitations ran, … (the seller) … was ‘absolved of liability’ for the underlying property damage. … (Any) … liability of … (the seller) … in the underlying suit represents the “economic loss” from … (the seller’s) … breach of contract, which is not covered by the policy.”

By John McCauley: I help companies and their lawyers minimize legal risk associated with private business acquisitions.

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 CGL Policy, Duty to Defend Tagged with: , ,

Business Asset Buyer Assumed Seller Contract by its Post-Closing Conduct

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May 2, 2020

Introduction

Buyers like to buy the assets of a business (as opposed to the company that runs the business) because it can pick and choose which seller contracts it wants to assume. Generally, a buyer would pick a seller contract by expressly assuming it in the asset purchase agreement. But there are some contracts that the buyer can assume just by the buyer’s post-closing conduct.

The deal

This deal involved the purchase of a Boise bar. The seller had an evergreen contract with a linen service provider, meaning that it had a 5 year term that would automatically renew unless terminated by either party during the last 90 days of the term.

The lawsuit

The seller entered into the linen service agreement in 2011 and sold the bar in 2013. The buyer continued to use the linen service supplier. The supplier picked up used linen, laundered and delivered clean linen to the bar. The buyer paid the supplier in accordance with the supplier agreement.

No one terminated the contract during the last 90 days of the 5 year term which ended in March 2016. In fact, the buyer continued to use the supplier’s services for another year. Then it terminated the supplier replacing it with a lower cost vendor.

The supplier sued the buyer for breach in an Idaho state court. The buyer argued that it had not assumed the contract. The court disagreed finding that the buyer’s conduct of accepting the supplier’s linen services for 4 years amounted to impliedly assuming the contract. The court awarded the supplier $51K in liquidated damages, attorney fees and costs.

The buyer appealed and lost in the Idaho Supreme Court which said: “Reviewing the record here, once … (the buyer) … reopened … (the bar) … in March 2013, … (the linen supplier) … continued to perform under the Agreement, making weekly deliveries and pick-ups at … (the bar) …. (The buyer) … accepted and paid for these services until March 2017. … (The buyer) … showed its ability to contact … (the linen supplier) … and modify the Agreement by: (1) notifying … (the linen supplier) … that … (the bar) … ownership had changed; (2) changing the billing process; and (3) amending the schedules under the Agreement to request new items or add inventory. … (The buyer’s) … acceptance of benefits and performance of obligations under the Agreement, as well as its affirmative acts in alerting … (the linen supplier) … to the existence of a new owner and changing the Agreement, all support the district court’s application of legal principles that … (the buyer) … impliedly assumed the liabilities under the Agreement. The bottom line is that … (the buyer) … acquiesced in the terms of the contract by receiving benefits from … (the linen supplier) … and paying for those benefits for years.”

This case is referred to as Alsco, Inc. v. Fatty’s Bar, LLC, Docket No. 46184 Supreme Court of Idaho, Boise, December 2019 Term (Opinion Filed: April 14, 2020).

Comment

The lesson for a business asset buyer is to look at all significant contracts before you close; even those that you are not assuming under the asset purchase agreement. You may be on the hook for them anyway; especially if you continue the relationship with the other party, whether it be a customer or supplier.

By John McCauley: I help companies and their lawyers minimize legal risk associated with private business acquisitions.

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 asset seller's liabilities, implied assumption of seller contract/liability Tagged with: ,

Bankruptcy Court Approves 363 Sale of Business to Buyer Connected to Seller Insiders

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May 1, 2020

Introduction

A buyer of a distressed business often prefers to accomplish the transaction through the bankruptcy courts under a Bankruptcy Code Section 363 acquisition. One reason for this is that the buyer can generally purchase the assets free and clear of seller liabilities, including seller liabilities otherwise imposed on buyer by various federal and state successor liability theories.

The deal

The seller in this transaction was formed to develop a commercially sustainable offshore mussel farm. It experienced financial difficulties and ended up in bankruptcy. A buyer offered to purchase the seller’s assets in a Bankruptcy Code Section 363 sale.

The lawsuit

A seller creditor was the estate of a man that died as the alleged result of the negligence of the seller. The creditor objected to the sale of the business to the buyer free and clear of this creditor’s $10 million tort claim, which was based upon successor liability.

This creditor filed an objection with the bankruptcy court to the sale of the business to the buyer. One reason given was the fact that seller insiders had “multiple connections” to the buyer.

The court noted the “many direct and indirect connections between” the seller and the proposed buyer, including the fact that the buyer was the seller’s prepetition secured lender and post-petition debtor in possession lender; the buyer took over seller’s operations after the seller shut down, because the seller had no employees; and the buyer is owned and/or controlled by 2 members of the seller board of directors, and one of which is the seller CEO.

Therefore, because the buyer was the only bidder, and the involvement of insiders means that the proposed sale was subject to greater scrutiny by the bankruptcy court. In this case the court concluded that “the sale process was … structured to obtain the highest and best bid for the assets.” Meaning that the court approved the transaction.

This case is referred to as In Re Catalina Sea Ranch, LLC, Case No. 2:19-bk-24467-NB United States Bankruptcy Court, C.D. California, Los Angeles Division (Decided April 13, 2020).

Comment

The court noted that it is common for a 363 buyer to have insider connections with the bankrupt seller: “the involvement of insiders means that the proposed sale is subject to greater scrutiny; but that itself does not mean the proposed sale is improper. To the contrary, for a variety of perfectly legitimate reasons insiders often are willing to bid more than other prospective buyers for assets or equity interests.

The court went on to give some of those reasons: “Sometimes insiders can avoid tax liabilities or gain tax benefits. … Sometimes insiders are exposed to joint liability with the debtor, under written guarantees or under tort law or other principles. In that situation, a higher sales price may mean a lower deficiency that can be collected from the insider. … Sometimes insiders have skills and knowledge that can only be gained by actually having run the business, so they are best qualified to purchase the assets and maximize the value of those assets in future. Or they might simply have more confidence than others — warranted or not — in their ability to realize future growth and profits from the assets. … The point is that there is nothing inherently suspicious in the fact that … (the buyer) … has offered to purchase Seller’s assets at a price that no other prospective purchaser is willing to compete against.”

By John McCauley: I help companies and their lawyers minimize legal risk associated with private business acquisitions.

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 buyer connected to seller insiders, distressed business acquisitions, Section 363 sale Tagged with: ,

CA Bankruptcy Court Approves Sale of Business Free of Successor Liability

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April 30, 2020

Introduction

One risk in buying the assets of a business is the risk that the buyer may be sued by one of the seller’s creditors under a theory of successor liability. This risk is heightened if the buyer purchased a distressed business.

The deal

The seller in this transaction was formed to develop a commercially sustainable offshore mussel farm. It experienced financial difficulties and ended up in bankruptcy. A buyer agreed to purchase the seller’s assets in a Bankruptcy Code Section 363 sale.

The lawsuit

A seller creditor was the estate of a man that died as the alleged result of the negligence of the seller. The creditor objected to the sale of the business to the buyer, which sale as submitted to the bankruptcy court for approval, would be free and clear of this creditor’s claim, which was based upon a successor liability theory.

Under California law, a buyer of the assets of a business is not responsible for a seller liability not assumed by the buyer except under certain exceptions. One exception, under California’s successor liability theory, would be that the buyer “is a mere continuation of the seller.”

The bankruptcy court said that facts “that may bear on whether a purchaser is a “mere continuation” of the seller include whether there is “inadequate consideration” paid, or “if one or more persons are officers, directors, or stockholders of both corporations.”

In this case one of the principals of the buyer was also a CEO of the seller. However, this case involved a sale of a business under Bankruptcy Code Section 363. Under § 363(f) the seller, as a chapter 11 debtor, may sell its business “free and clear of any interest in in the assets of the business. The court concluded that the free and clear language applied to this creditor’s successor liability claim.

In the court’s words: “This Court joins numerous other courts in holding that a claim for “successor liability” is an “interest” in the property being sold. … The plain meaning of the statute cuts off successor liability. In other words, the buyer acquired the business free of this creditor’s claim.

This case is referred to as In Re Catalina Sea Ranch, LLC, Case No. 2:19-bk-24467-NB United States Bankruptcy Court, C.D. California, Los Angeles Division (Decided April 13, 2020).

Comment

A buyer of the assets of a business runs the risk of being sued by a seller creditor based upon successor liability. The buyer can probably eliminate this risk if the seller’s business is distressed and sold to the buyer under Bankruptcy Code Section 363.

By John McCauley: I help companies and their lawyers minimize legal risk associated with private business acquisitions.

Email:             jmccauley@mk-law.com

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

Telephone:      714 273-6291

 Legal Disclaimer

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

Posted in bankruptcy sale, distressed business acquisitions, Section 363 sale, successor liability Tagged with: , ,

Business Seller Must Reimburse Buyer for Costs Incurred to Fight Pre-Closing Claims

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April 30, 2020

Introduction

A buyer of the assets of a business is often sued for damages caused by the seller’s operation of the business; a liability that the buyer expressly did not assume in the asset purchase agreement;  a liability that the seller promised the buyer to take care of. One tool to manage this risk is to have a deep pocket seller promise to indemnify the buyer for any loss it suffers in dealing with the liability, including reimbursement of the buyer’s legal defense costs.

The deal

This December 2008 acquisition involved a buyer and seller who were successors to the original buyer and seller. The deal involved the sale of the assets of a prescription opioid line. Under the asset purchase agreement, the seller promised to indemnify the buyer for the seller’s pre-closing use of the opioid marketing materials, and for any third party claims resulting from the seller’s ownership and operation of the opioid business.

Further, the seller agreed to reimburse buyer “on a quarterly basis” for the buyer’s “reasonable and verifiable costs and expenses, including fees and disbursements of counsel” incurred “in connection with any claim,” with a right of refund in the event that the seller was found not to be obligated to indemnify the buyer.

The lawsuit

The buyer was named in over one thousand lawsuits brought by more than one thousand plaintiffs, including state attorneys general, cities, counties, hospitals, third-party payors, Native American tribes, and individuals, against manufacturers of prescription opioids alleging that these manufacturers, including the buyer when selling the opioid, engaged in deceptive marketing practices that caused a nationwide opioid addiction crisis.

The primary basis for the allegations against the buyer in the various lawsuits is the allegedly improper marketing and sale of the opioid, including in the months and years before the original buyer acquired the opioid product line in December 2008. Therefore, the buyer sought indemnification from the seller, and specifically requested reimbursement for its defense costs. The seller rejected any obligation to indemnify the buyer and refused to reimburse the buyer for any of its defense costs, denying that these lawsuits involve any pre-2009 conduct.

The buyer sued the seller in a New York state court. The seller moved to dismiss the seller’s lawsuit arguing that the buyer’s lawsuit was premature because the buyer has not yet been held liable for any pre-closing conduct, and that it was speculative whether the buyer ever will be held liable.

The trial court denied the seller’s motion noting that the opioid lawsuits clearly focused on the pre-closing 2009 conduct of the seller. The court noted that the lawsuits describe deceptive marketing techniques going as far back as the 1990s, including through the circulation of the opioid patient brochures starting in 2003, publications in medical journals regarding the opioid in or about 2005, and through representations made by sales representatives concerning the opioid between 2006 and 2008; that the original buyer did not acquire the opioid line from the original seller until December of 2008; that sales and marketing of the opioid prior to December 2008 was conducted by the seller and its predecessors and the asset purchase agreement made it clear that the seller was  “solely responsible for” such pre-closing conduct.

Furthermore, the court said that the indemnification provision did not require an adverse determination against the buyer as a precondition to the buyer’s right to receive indemnification. In fact, the provision entitled the buyer “to receive reimbursement on a quarterly basis — i.e., now —” and, provided that seller may obtain a refund “in the event” that the seller is “ultimately held not to be obligated to indemnify”. “Put another way, … (the APA’s indemnification provision) … contemplates this exact situation where there is a dispute as to whether indemnification will ultimately be required and provides for reimbursement of costs and expenses on a quarterly basis in the interim, with the possibility of a refund at a future time.

This case is referred to as ALLERGAN FIN., LLC v. PFIZER INC.., Index No. 651237/2019, Supreme Court, New York County (Decided April 13, 2020).

https://scholar.google.com/scholar_case?case=15742145614673493405&q=%22asset+purchase+agreement%22&hl=en&scisbd=2&as_sdt=2006&as_ylo=2017

Comment

This deal closed at the end of 2008. Nobody saw the opioid crisis coming. Nevertheless, the indemnification provision worked the way it was intended to.

By John McCauley: I help companies and their lawyers minimize legal risk associated with private business acquisitions.

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 indemnification Tagged with: ,

Delaware Court Permits Business Buyer’s APA Breach and Fraud Claims Against Seller

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April 24, 2020

Introduction

Buying a business is risky. And buyers all too often find out after the closing that the business was not as represented in the data room, meetings, emails, messages, phone calls, or in seller’s acquisition agreement representations and warranties.

Therefore, Buyer’s ability to recover its losses from the seller depends significantly upon the provisions in the acquisition agreement.

The deal

In this deal, the buyer was a large privately-owned Swiss company in the fragrance and flavor business. The buyer sought to expand its natural and organic product manufacturing and was interested in the seller.

This seller was a second generation family-owned, privately held New Jersey based manufacturer of high-quality, organic flavors to the organic and natural segment of the food and beverage industry. As such, it must meet specific industry standards to qualify as natural. A U.S. National Organic Program determined whether the seller’s flavors were certifiably organic in accordance with specific regulations.

It was critical for the buyer that the seller had a substantial portfolio of qualifying flavors that complied with industry standards and organic certifications. And the seller assured the buyer during due diligence of such compliance and provided the buyer in its data room with organic certificates attesting that a significant percentage of the seller’ portfolio was certified organic in compliance with government regulations.

As a result, the seller and buyer executed an asset purchase agreement for the buyer’s acquisition of the seller’s business for $115M. The transaction closed on February 1, 2018.

The lawsuit

Shortly after closing, the buyer discovered that the ingredients used to produce flavors were different from the ingredients listed on the formula sheets submitted for organic certification. Also, the buyer learned that the seller maintained two sets of books: one set reflected the flavors as they were produced, and the second purported to show the flavors as they should have been produced according to the certified formulas.

The seller also had shared a physical plant with another company. The buyer found out that the seller placed suspect raw materials in that company’s section of the plant to prevent discovery by the seller’s compliance auditors.

Not surprisingly, the buyer sued the seller in a Delaware Superior Court for seller’s breach of the asset purchase agreement; and sued the seller for using fraud to induce the buyer to sign the APA. The seller moved to dismiss the fraud claim arguing that the buyer could only sue for breach of the asset purchase agreement and not for fraud. The court disagreed and denied the seller’s motion to dismiss the fraud claim.

This case is referred to as Firmenich Incorporated v. Natural Flavors, Inc., C.A. No. N19C-01-320 MMJ [CCLD], Superior Court of Delaware (Submitted: February 10, 2020. Decided: April 7, 2020).

Comment

The seller and buyer spent 8 months and significant legal fees fighting over whether the buyer could also bring a fraud claim against the seller. Why the fight? Because buyer’s damages for seller’s alleged breach of the APA was capped at $11 million by the APA. There was no cap on the buyer’s fraud claim.

The APA had an “exclusive remedy” provision that stated that the APA indemnification provision (which capped buyer’s damages at $11 million) was the buyer’s exclusive remedy with respect to the APA and the transaction. However, that exclusive remedy provision expressly stated that it did not apply to claims for fraud. The fraud language is called a fraud “carve-out.”

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 damages, exclusive remedy, fraud carveout, indemnification cap Tagged with: , ,

Business Seller Carries Purchase Price, Prevents Buyer Bankruptcy Discharge

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April 20, 2020

Introduction

A seller of a business is often asked by the buyer to carry a significant portion of the purchase price. Agreeing to defer receipt of the purchase price carries a significant risk of nonpayment.

The deal

The seller in this deal owned a jewelry store. In February 2014, the seller agreed to sell her business to the buyer’s acquisition LLC for $215,000. The buyer and his LLC signed the asset purchase agreement.

The buyer promised to pay seller $30,000 at the closing, followed by several monthly $1,000 payments, with a balloon payment a month later (May 31, 2014) in the amount of $182, 000.

The lawsuit

The buyer made the $1,000 monthly payments, then asked for more time to pay the rest. The buyer said that he could service the remaining lion share of the purchase price out of his retirement funds.

The seller and buyer agreed to a modification of the APA, that would restructure the payment schedule for the balance of the purchase price. The new deal required the buyer to pay $100,000 on June 30, 2014, and the balance in $1,000 monthly payments.

No further payments were made by the buyer. The buyer filed for bankruptcy after being sued by the seller.

The seller objected to buyer’s bankruptcy discharge on several grounds. The court denied the buyer a discharge and held that any debt owed by the buyer to the seller is nondischargeable.

The court denied the buyer’s discharge in bankruptcy on the following grounds: (1) the buyer transferred his home (which he owned by himself) to he and his wife as tenants by the entirety (which put the house out of reach of Seller); (2) the buyer failed to keep adequate business records, the court noting that even seller’s forensic accounting expert was unable to recreate the buyer’s financials and material business transactions because they were so incomprehensible; (3) the buyer failed to explain how the level of jewelry inventory reported on the bankruptcy petition of the buyer’s LLC was 1/3rd of the inventory level sold to the buyer by the seller; and (4) the buyer intentionally deceived the seller by inducing her to restructure the deferred purchase price payments by promising to pay $100,000 on June 30, 2014 out of the buyer’s retirement funds.

This case is referred to as In Re Jones, Case No. 17-22147-GLT, Adv. Pro. No. 17-02222-GLT, United States Bankruptcy Court, W.D. Pennsylvania (April 1, 2020).

Comment

The seller may have a difficult time recovering the purchase price. It is always risky to turn over your business to a buyer before you have been paid. Securing a deferred purchase price by assets helps. But sometimes, it is best to walk away from a deal if you cannot cash out at closing.

Email:             jmccauley@mk-law.com

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Telephone:      714 273-6291 

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