An acquisition of a company is sometimes done in one step: the buyer and seller sign a purchase agreement and immediately close the transaction on the same day. This is called a simultaneous closing.
Alternatively, the buyer and seller can do what is called a deferred closing. There, the buyer and seller sign the purchase agreement on one day, and then close the transaction on a future date after certain conditions have been satisfied. This is called a deferred closing.
This deferred closing deal involved the sale of multiple nursing homes located in several southern states. Here, the buyer and seller signed an asset purchase agreement in February of 2014. The deal would close in the future after certain conditions had been satisfied.
The seller represented and warranted to the buyer in the asset purchase agreement that the seller had the authority to sell all the nursing homes. That was not the case as one nursing home was in financial difficulty and subject to a receivership action (like a bankruptcy proceeding). This meant that a court appointed receiver had the power to control and sell this nursing home, not the seller.
The seller represented and warranted to buyer that it would not enter into any new leases of the seller’s nursing homes after signing the asset purchase agreement. Nevertheless, the seller entered into 2 new nursing home leases after the asset purchase agreement was signed.
The seller represented and warranted to buyer that the only pending or threatened litigation affecting the nursing homes were listed on a schedule to the asset purchase agreement. However, there were whistleblower actions against one of the seller’s nursing homes for making false claims for federal health care reimbursements (such as Medicare) that were not disclosed in the asset purchase agreement schedule.
The seller also promised in the asset purchase agreement to provide audited financial statements for the 2010 through 2013 fiscal years. The seller never furnished the financial statements to the buyer.
Two years and 152 asset purchase agreement amendments later, the buyer terminated the deal because of the seller’s breaches. The buyer sued the seller to recover the $400K deposit remaining in escrow, other damages, and its legal fees and costs; and the lawsuit ended up in a New York federal district court.
The buyer asked the court to rule that the seller breached the representations and warranties for failure to disclose the receivership and whistleblower lawsuit; that the seller breached its promise that it would not agree to any new nursing home leases after the asset purchase agreement was signed; and that the seller breached its promise to provide 4 years of financial statements to the buyer.
The seller did not dispute that it breached those provisions of the asset purchase agreement. However, the seller argued that the buyer had waived or given up its rights to sue for these breaches of the asset purchase agreement because the buyer signed asset purchase agreement amendments after knowing of the seller breaches.
The court was not impressed with the seller’s argument. It said that the asset purchase agreement stated that the buyer could only waive its rights under the asset purchase agreement by a written waiver. The seller lost this argument because the buyer did not waive any asset purchase agreement rights in writing.
This case is referred to Trodale Holdings LLC v. Bristol Healthcare Investors, No. 16 Civ. 4254 (KPF), United States District Court, S.D. New York, (March 21, 2019)
The court noted that under New York law, a buyer could waive its rights to a known seller breach if the buyer closed the deal, if the purchase agreement did not require the buyer’s waiver to be in writing. However, in this case the seller loses first because the deal never closed; and second, because the asset purchase agreement did require the buyer’s waiver to be in writing.
Here is another case were a boilerplate provision in the back of the acquisition agreement can save the day. Requiring a written waiver of rights made this easy for the buyer to prevail on this part of the dispute.
By John McCauley: I help businesses minimize risk when buying or selling a company.
Telephone: 714 273-6291
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