Buyer Faces Suit for Not Disclosing Merger Disapproval Issue



Many M&A deals require approval of some federal or state regulator before closing. The timeline is that the buyer and seller sign a definitive acquisition agreement and then work to get the deal approved by the regulators. Either or both parties usually have a right in the agreement to terminate the transaction if governmental approval does not occur by a stated deadline.

The deal

This case involved two banks. The buyer agreed to acquire the target in a merger transaction for $39.4 million. The target had certificates of deposit under college savings programs and had investments in student loans and mortgage-backed securities. The buyer only wanted the target’s deposits. Thus, target agreed to sell its investment portfolio before the closing.

The FDIC and two state regulators had to approve the deal before it closed. The merger agreement was signed in October 2014 and the FDIC approved the merger in December 2014, followed shortly by state approvals.

However, starting earlier (March 2014) the buyer had embarked on a program of significant purchases of high-risk leveraged lending participations. The buyer’s top management became concerned about this practice about the time the merger agreement was signed and how it might impact its upcoming annual FDIC bank examination.

This risk was emphasized when the FDIC published concerns about bank purchases of this class of high-risk investments in November 2014. Also, in February 2015 an investment banking firm advised the buyer of the FDIC disapproval of leveraged lending participations as an asset class.

The deal had not closed by April 2015 when the FDIC started its annual examination of the buyer. The FDIC focused on the buyer’s leveraged lending portfolio and told the buyer that these purchases could result in the FDIC withdrawing approval of the merger.

Buyer did not mention this fact to the target before the target sold most of its student loan portfolio on April 28, 2015. In fact, on May 5, 2015 the buyer told the target to sell the target’s remaining investment assets (mortgage-backed securities) so they could close May 12th.

On May 8th the FDIC told the buyer that the FDIC was suspending merger approval. The buyer then told the target on May 11th that there was an issue about the closing; not mentioning the FDIC suspension of its merger approval.

On May 12th the target sold its mortgage-backed securities portfolio and first learned about the FDIC’s suspension of its approval of the merger from a state bank regulator.

The deal did not close, and the target ended up selling to another purchaser for $5 million less that the price the target was to receive from the buyer. Furthermore, the target claimed that the it lost $7 million of profits by selling its student loan and mortgage-backed securities portfolio in order to close the deal with the buyer at a time when the buyer had failed to disclose to the target that the deal might not go through because of the FDIC problem.

The lawsuit

The target sued the buyer in a Chicago federal district court. The target accused the buyer of fraud when it told the target on May 5, 2015 that there was an issue with the closing without disclosing the fact that the FDIC “very well could” withdraw its approval for the merger.

The target also accused the buyer of failing to promptly notify the buyer of the FDIC’s decision to suspend its approval of the merger in violation of the merger agreement. The target said that the buyer knew on May 8, 2015 of the FDIC’s suspension of its approval to the merger; and that the buyer should have said something to the target then; but did not. As a result, the target sold off its mortgaged-backed securities on May 12th; which happened to be the same day the target first learned from  a state regulator of the FDIC decision.

The buyer launched a preliminary attack on the target’s claims by filing a motion for summary judgment. The buyer asked the court to throw the target’s claims out of court, arguing that there was no buyer fraud or breach of the merger agreement, even assuming all the above facts are true. The court disagreed and permitted the target’s claims to proceed.

This case is referred to O’Donoghue v. Inland Bank and Trust, No. 15 C 11603, United States District Court, N.D. Illinois, Eastern Division, (March 19, 2019)


Honesty is the best policy. The buyer should have told the target of the FDIC problem when it first learned about it; especially knowing that the target was liquidating its investment portfolio in order to close the deal.

By John McCauley: I help businesses minimize risk when buying or selling a company.



Telephone:      714 273-6291

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