December 15, 2020
A buyer of a business usually manages unknown M&A risks by requiring the seller to provide a comprehensive set of representatives and warranties about the business. But occasionally, the buyer agrees to an “as is deal” where the seller makes little or no representations and warranties about the business.
The seller in this deal was in the business of designing systems for the testing of food products and food processing environments, and had developed and provided testing systems for different pathogens, such as Listeria and Salmonella. The seller had a product line which included (1) test kits for identifying Listeria and Salmonella, (2) hardware systems used to analyze the test kits; and (3) software used to run the test kits on the hardware systems.
The buyer partners with food companies to implement proactive approaches to manage food safety risks and was interested in the seller’s product line. The seller made positive representations about performance and certification of the products during negotiations.
The seller sold the product line to the buyer for $12 million pursuant to an “as is” deal evidenced by an asset purchase agreement. The seller made no asset purchase agreement representations and warranties about the product line.
The buyer discovered after the closing that the product line was not as represented by the seller in the negotiations. According to the buyer: “… the only commercial customer using the Listeria Test with the HT System cancelled its contract. … (1) the HT System was not capable of high-volume testing, such as running 96 tests at one time; (2) the Salmonella Test failed to detect numerous strains; and (3) the Salmonella Test had not been submitted for AOAC certification. … (and (4) … the HT System and Salmonella Test remain unprepared for market launch.”
The buyer sued the seller for fraud in a Delaware Superior Court. The buyer’s complaint described each seller misrepresentation along with the date and place of each misrepresentation, as well as the identity of the buyer and seller representatives present at each misrepresentation.
The seller filed a motion to dismiss the buyer’s fraud claim, arguing that the buyer had not alleged facts that if true could reasonably amount to fraud. The court disagreed, leaving it up to the jury to decide whether the seller in fact made the claimed misrepresentations about its product line, and whether if true, the misrepresentations amounted to fraud.
This case is referred to as Phage Diagnostics, Inc. v. Corvium, Inc., C.A. No. N19C-07-200 MMJ [CCLD], Superior Court of Delaware, (Submitted: January 7, 2020. Decided: March 9, 2020)
Of course. buyer would be in a better legal position if seller had made those representations and warranties in the asset purchase agreement.
Also, the buyer might have lost its fraud claim because the buyer and seller were sophisticated parties if (1) the seller had expressly stated in the asset purchase agreement that it is making no representations and warranties about the product line other than those contained in the asset purchase agreement; and (2) the buyer expressly disclaimed in the asset purchase agreement reliance upon any seller representations and warranties not contained in the asset purchase agreement.
By John McCauley: I help people manage M&A risks involving privately held companies.
Telephone: 714 273-6291
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