Reading boilerplate in a business purchase agreement helps me sleep. The language is a tough read. But beneath the dense language are words that can really matter when a fight breaks out after the closing.
The buyer purchased all stock of the seller’s company.
The buyer and the company promised in the stock purchase agreement that the company was exclusively responsible for the company’s debts after the closing. The provision went on to say that the company would indemnify the seller if the seller got stuck with any company debt.
After the closing a large auto financial company sued the company, the seller, and the buyer for breach of the company’s lease and loan documents in a Pennsylvania federal court.
The seller filed a claim against the company and buyer.
The buyer pointed to the stock purchase agreement and said only the company was responsible for this debt. Meaning, the seller can only sue the company not the buyer.
The court looked at the stock purchase agreement and agreed with the buyer.
This case is referred to Mercedes-Benz Financial Services Usa LLC v. Synergistiks, Inc., Case No. 3:18-cv-184, United States District Court, W.D. Pennsylvania, (February 12, 2019). https://scholar.google.com/scholar_case?case=14685828736300095129&q=%22stock+purchase+agreement%22&hl=en&scisbd=2&as_sdt=2006&as_ylo=2017
A buyer of a company does not want to be sued for any of the company’s liabilities unless the buyer voluntarily guarantees a company liability in writing.
A seller of a company’s stock does not want to be responsible for the company’s debt after the seller signs over the seller’s stock certificates to the buyer.
Therefore, the seller will want the company to promise in writing to reimburse the seller if the seller gets stuck with any company debt after the closing.
In a home run, the seller would want the buyer of the company to also promise to reimburse the seller for any company debt the seller pays after the closing.
In this case the seller could have sued the buyer if the boilerplate provision said that the company and the buyer would reimburse the seller for any company debt the seller pays after the closing.
By John McCauley: I help businesses minimize risk when buying or selling a company.
Telephone: 714 273-6291
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.