Learn about a recent M&A case where a buyer alleges the seller concealed credit risks before closing, leading to legal action and a court ruling denying the seller’s motion to dismiss.
M&A Stories
April 13, 2021
Introduction:
When buying a business, the buyer relies on past performance and future projections to determine its value. The purchase agreement typically includes promises from the seller that they haven’t changed any important practices since the last financial statements were released. A recent case involving the acquisition of a timeshare resort highlights the importance of these promises in managing risk.
The Deal:
In this case, the buyer acquired a timeshare business along with its existing contracts, while the seller retained the majority of payment rights from those contracts. The buyer was responsible for collecting payments from the timeshare members.
The Lawsuit:
After the deal was closed, the buyer took legal action against the seller in Delaware state court. One of the claims was that the seller had secretly changed its underwriting practices after the last financial statements were issued. They had started accepting new members with significantly lower FICO scores than before, which the buyer was not informed about. The buyer alleged that the seller had deceitfully induced them to sign the purchase agreement without disclosing this change.
The Outcome:
The seller attempted to have this claim dismissed, but the court denied the motion, allowing the lawsuit to proceed.
This case is referred to as CRE NIAGARA HOLDINGS, LLC v. RESORTS GROUP, INC., C.A. No. N20C-05-157 PRW CCLD , Superior Court of Delaware, (Submitted: February 19, 2021. Decided: April 7, 2021.).
Key Point:
Apart from the fraudulent inducement claim, the buyer also sued the seller for breaking the promises made in the purchase agreement. However, the damages for the breach of promises are subject to an agreed-upon limit, while damages related to fraudulent inducement may not be restricted by this limit.
By John McCauley: I help people manage M&A legal risks.
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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