The buyer claims that the seller overstated revenue and understated costs, and that the target’s post-closing first quarter produced a $ 1 million loss
M&A Stories
April 24, 2022
Introduction:
In the world of mergers and acquisitions, it’s not uncommon for buyers to accuse sellers of misrepresenting financial information after a deal is closed. In a recent case, a strategic buyer of a roofing and solar energy company has taken legal action against the seller, alleging that the financial data provided was inaccurate.
The Deal:
The buyer, a public company, acquired a roof-contracting firm specializing in residential and commercial roofing and solar energy for a total price of $25.5 million. The payment included $3 million in cash and $22.5 million in the buyer’s common stock. As part of the deal, the seller was retained to manage his former company after the acquisition.
The Allegations:
After the deal was completed, the buyer launched an investigation into the target company’s financials, which raised concerns about revenue and costs. To aid in their inquiry, the buyer engaged an accounting firm to review the target company’s financials for the fiscal year ending 2020. The findings revealed that the target company’s net income was $178,000, significantly lower than the reported $337,000.
Furthermore, four months later, the buyer’s accountant suggested an additional downward adjustment of $629,000 to the target company’s revenue for the fiscal year ending 2020. This adjustment was needed because the target company had recognized revenue from contracts that were not completed.
The Lawsuit:
As a result of these discrepancies, the buyer terminated the seller and filed a lawsuit against them in a San Diego federal district court. The buyer seeks to cancel the deal and recover the $3 million cash payment and $22.5 million worth of buyer public stock. However, the court declined to order the seller to refrain from selling the buyer’s public stock, citing a lack of legal grounds to do so.
This case is referred to as Solar Integrated Roofing Corp. v. Ballew, Case No. 22-cv-0028-BAS-JLB, United States District Court, S.D. California, (March 28, 2022.)
Conclusion:
The buyer’s case, known as Solar Integrated Roofing Corp. v. Ballew, Case No. 22-cv-0028-BAS-JLB, United States District Court, S.D. California (March 28, 2022), is ongoing as it seeks to recover its funds and unwind the acquisition. The court’s decision not to restrict the seller’s sale of the buyer’s public stock has kept the litigation unresolved.
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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