October 16, 2020
Business people often agree upon the terms of an acquisition in an atmosphere of goodwill. The details of the documentation are left to their inside and outside professional advisers. This friendly relationship is helpful to move the deal forward. However, it can lull one into thinking that terms and deadlines in the acquisition agreement are “merely guidelines.”
In this asset deal the buyer’s parent COO and the seller CEO apparently had a good relationship. They negotiated a deal that lead to an asset purchase agreement with a July 26, 2017 effective date. Apparently, there was not a physical closing.
The asset purchase agreement required that the buyer make a purchase price payment on July 26.
The buyer did not make the July 26 payment. The buyer parent COO told the seller CEO on July 30 that he needed to open a bank account in the United States to enable the buyer to make the $22,000 payment, which he intended to do on August 1. The seller CEO simply responded, “Great.”
When payment still had not been received by August 9, the seller notified the buyer that they were rescinding or cancelling the agreement.
The buyer resisted and the dispute ended up in a Michigan state court. The buyer lost at trial and appealed to an intermediate appellate court.
The appellate court affirmed the trial court’s decision: “Despite the clear and unambiguous language of § 3 of the Asset Purchase Agreement, … (the buyer) … argues that the timing of the specified payment was not crucial. However, it is also undisputed that … (the buyer) … had not established a bank account in this country to enable it to wire the money to … (the seller) … before … (the seller) … rescinded the agreement. Even if … (the buyer’s) … failure to pay the specified $22,000 amount on the stated effective date is not considered a substantial breach, … (the buyer) … substantially breached the agreement by failing to make any effort to make the specified payment for at least two weeks after the agreement’s stated effective date. While … (the buyer) … indicated that it would follow through with payment days after the agreement was signed, there was no progress toward making that payment. … (The seller) … waited more than two weeks for … (the buyer) … to make the necessary arrangements to make the required payment, but no payment was made.”
This case is referred to as Trillium Cyber, Inc. v. Canbushack, Inc., No. 345494, Court of Appeals of Michigan, (April 23, 2020)
It seems that the buyer’s failure to make the timely payment was not a cash flow issue. Instead, the buyer parent’s COO was too cavalier about making a timely payment. Unfortunately, the seller’s CEO was not so understanding and he had the language of the asset purchase agreement to back him up.
By John McCauley: I help people manage M&A risks involving privately held companies.
Telephone: 714 273-6291
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