A crucial part of a potential business buyer’s due diligence is evaluating the seller’s projections. However, those projections often do not materialize, and disappointing projections do not usually amount to a breach of the seller’s acquisition agreement representations and warranties.
This case involved a private equity firm’s $80 million asset acquisition of a Wichita aircraft parts supplier. The seller’s largest customer was Boeing and their business relationship was governed under many separate parts contracts which had expiration dates. Many expiring contracts had been renewed in the past.
During due diligence the seller prepared projections for revenue which included contracts that would expire but which the seller expected would have an opportunity to renew.
The seller, however, was not aware at the time it executed the asset purchase agreement and at the closing that it would not have the opportunity to bid on some of the expiring parts contracts because Boeing had already awarded those parts contracts to other suppliers.
The seller and buyer discovered loss of these parts contracts after the closing resulting in a $8 million revenue loss. The buyer accused the seller of breaching its customer, MAE and full disclosure representations and warranties. The seller denied the claim and the dispute ended up in the Delaware Court of Chancery.
The court ruled that the seller had not breached any of these three reps and warranties.
First, the seller represented that since 2015, Boeing had not terminated or materially reduced or altered its business relationship with the seller. There was no breach of this rep because the lost contracts were awarded to other suppliers before the end of 2015.
The seller had also not breached its MAE rep where it said that there had not been any event, occurrence, or development since 2015 that has had, or reasonably could be expected to have, a material adverse effect. The loss of $8M in Boeing contracts may be a MAE but if so, the MAE occurred before the end of 2015.
Finally, the court found that the seller did not breach its full disclosure representation and warranty: “The APA does not include an explicit representation or warranty as to the accuracy of the projections … (the seller) … shared with … (the buyer) … prior to entering into the APA. The parties did not attach … (the seller’s) … sales projections to the APA. The APA does not reference the sales projections, nor does it incorporate them by reference. Nor does the APA guarantee that … (the buyer) … would be able to renew expiring parts, or even that Boeing would allow… (the buyer) … to bid on such parts.”
This case is referred to as Julius v. Accurus Aerospace Corporation, C.A. No. 2017-0632-MTZ, Court of Chancery of Delaware (Decided October 31, 2019)
In 20/20 hindsight the buyer could have asked the seller to represent that the business would have an opportunity to bid on the expiring contracts.
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
Telephone: 714 273-6291
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