Learn about a crucial M&A case involving a buyer’s lawsuit against a seller due to missing due diligence binder. Explore the legal implications and lessons from Cardinal v. Lupo.
October 29, 2019
Introduction:
Purchasing a company involves legal risks, and one key tool to manage these risks is conducting a thorough due diligence investigation of the business.
The Deal:
In this case, a California kitchen remodeling business worth $2 million was up for acquisition. The seller restricted the buyer’s access to company documents to prevent employees from leaving if they knew about the potential sale. As a result, the buyer could only review company documents during a meeting at the seller’s attorney’s office, using a binder provided for this purpose. However, the buyer couldn’t keep the binder.
The Lawsuit:
After the deal closed, the buyer filed a lawsuit against the seller in a California federal district court. The buyer alleged that many of the representations made in the stock purchase agreement by the seller were false. Furthermore, they claimed that the seller’s company had undisclosed debts, paid employees off the books to avoid deductions, and lacked proper financial records.
The seller argued that the buyer should have been aware of any irregularities in the seller’s company through the due diligence process. Specifically, they mentioned that the due diligence binder, which the buyer reviewed in the seller’s attorney’s office, should have contained Bank of the West and American Express account statements.
Surprisingly, the buyer didn’t realize this and only asked for the binders during the litigation’s discovery phase. The seller, however, stated that they didn’t have the binders and didn’t know their whereabouts.
The buyer requested the court to penalize the seller for not producing the binder, asking for an order to exclude any evidence related to the documents claimed to be in the binder. The buyer argued that this information, especially the later-obtained Bank of the West and American Express records, couldn’t replace the actual documents reviewed in the due diligence binder before the deal closed.
However, the court refused to bar the seller from presenting this information as evidence since the seller had no obligation to preserve the binder.
Comment:
In hindsight, it would have been wise for the buyer to insist on keeping the due diligence binders or include a provision in the stock purchase agreement requiring the seller to preserve them for a reasonable period after the deal’s closure.
Case Reference:
This case is referred to as Cardinal v. Lupo., Case No. 18-cv-00272-JCS, United States District Court, N.D. California (September 17, 2019) https://scholar.google.com/scholar_case?case=5341473029730680698&q=%22stock+purchase+agreement%22&hl=en&scisbd=2&as_sdt=2006&as_ylo=2017
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
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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