Explore a significant M&A legal case where a seller’s owner was held liable to pay $1.7 million in buyer’s legal fees. Learn how contractual guarantees and dispute resolution methods impact post-acquisition disputes. Case analysis of Summers Laboratories, Inc. v. Shionogi Inc.
February 7, 2020
Introduction:
Disputes often arise after business acquisitions, prompting questions about who bears the legal costs. A crucial consideration in such cases is whether the losing party should cover the reasonable legal expenses of the winner. Without a specific provision, the loser usually isn’t obligated to pay the winner’s legal fees.
In this scenario, even though the asset purchase agreement (APA) lacked a provision for legal fees, the buyer was granted $1.7 million in attorney’s fees following a post-closing dispute.
The Deal:
The APA outlined arbitration as the method for dispute resolution, with both parties responsible for their own attorney’s fees. However, the seller’s owner guaranteed the seller’s commitments under the APA through a separate agreement known as a guaranty. In this guaranty, the owner, acting as a guarantor, pledged to cover reasonable attorney’s fees incurred by the buyer to uphold their rights as per the guaranty.
The Lawsuit:
The buyer emerged victorious in arbitration and was awarded $1.7 million in attorney’s fees, with the seller’s owner being held accountable according to the terms of the guaranty. The owner contested the arbitration ruling in a federal district court in Manhattan but was unsuccessful.
The seller’s owner argued that the guaranty agreement obligated them to fulfill their company’s APA responsibilities. Since the company had no APA obligation to cover the buyer’s legal fees, the owner contended that they weren’t required to do so either. The court, however, ruled that the arbitrator’s decision on attorney’s fees “should be enforced, despite a court’s disagreement with it on the merits, if there is a barely colorable justification for the outcome reached.”
The court concluded that the arbitrator’s rationale for awarding attorney’s fees was sound. It aligned with the arbitrator’s view that the remedies available under the Guaranty and the APA were cumulative, not alternative. Consequently, the Guaranty provided the buyer with supplementary remedies beyond those outlined in the APA.
Comment:
In hindsight, the seller’s owner should have revised the guaranty language to explicitly state that the guarantor bore no obligation under the guaranty to cover the buyer’s legal fees.
Case Reference:
This case is referred to as Summers Laboratories, Inc. v. Shionogi Inc., No. 19 Civ. 2754 (AT), United States District Court, S.D. New York (Filed January 27, 2020).
By John McCauley: I help companies and their lawyers minimize legal risk associated with small U.S. business mergers and acquisitions (transaction value less than $50 million).
Email: jmccauley@mk-law.com
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Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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