A buyer of a company often discovers after the closing that he or she overpaid for the business. And many times, it is because the target company did not match up to seller’s purchase agreement representations and warranties.
In that case a buyer who has obligations to make post-closing payments to the seller in the form of deferred purchase price, consulting fees, or noncompetition payments will consider not making those payments; at least to the extent of the buyer’s damages. Is that legal? Yes; if the buyer has the right to do so under the purchase agreement.
What if the buyer does not have the right to withhold post-closing seller payments under its purchase agreement?
That was the question for the buyer after it purchased the assets of a seller for $7.4 million. The seller operated public parking lots and garages in Washington, D.C., Virginia, and Maryland. Most of the purchase price was paid at closing. However, the seller was entitled to certain post-closing payments under the asset purchase agreement, and its owner was entitled to consulting fee payments under a consulting agreement.
After the closing the buyer refused to pay the seller $371.5K under the asset purchase agreement, and its owner $650K under the consulting agreement. The buyer claimed that it was legally justified to withhold payments because the seller and its owner materially breached representations and warranties they made in both contracts, thereby releasing the buyer from its contractual obligations and entitling it to damages.
The seller and its owner sued the buyer in a Maryland federal district court to obtain the promised $1 million owed under the two contracts.
The buyer argued that the seller and its owner breached the representations and warranties in these contracts as a matter of law through undisclosed fraudulent conduct at one parking lot that resulted in the customer’s post-closing cancellation of its contract with the buyer. And, through the seller and its owner’s failure to disclose, prior to the closing, that four other parking lot contracts faced substantial risk of being canceled, despite the seller and its owner’s awareness of plans for cancellation. (The owners of those 4 lots also cancelled their contracts with the buyer after the closing.)
The court said that the buyer can be excused from paying the seller and its owner the $1 million under the contracts if the seller and its owner’s contractual breaches were material. However, the question of whether those breaches were material is a question of fact for the jury, not a question of law for the court to decide. The result? The case goes on.
This case is referred to Slavin v. Imperial Parking (US), LLC, Civil Case No. PWG-16-2511, United States District Court, D. Maryland, Southern Division, (March 27, 2019)
The buyer can draw some comfort from the fact that it has some leverage over the seller when negotiating a settlement of the dispute because the buyer holds $1 million that the seller wants.
Much better than paying everything to the seller in cash at the closing; discovering a seller breach after the closing; and suing to recover buyer’s damages from the seller; or probably its owner because the seller has been dissolved.
By John McCauley: I help businesses minimize risk when buying or selling a company.
Telephone: 714 273-6291
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