Explore the complexities of indemnification claims in M&A deals. Understand how contractual and statutory limitations impact buyer’s claims based on the Kilcullen v. Spectro Scientific case. Learn from this legal dispute to navigate future acquisitions effectively.
December 11, 2019
Introduction:
In acquisitions of privately held businesses, buyers often have a limited timeframe to make indemnification claims for breaches of seller representations and warranties. This period typically ends within the 1st to 2nd year after the deal’s closing.
The Deal:
In this case, a stock acquisition involved a company that designs and sells oil analyzers. Prior to the acquisition, the company shipped products with unlicensed Microsoft software, contrary to their representations. The buyer discovered this after the deal closed.
Indemnification Claim and Settlement:
The buyer notified the seller of the breach in November 2015 and later settled with Microsoft for using unlicensed software in some legacy products. However, this settlement didn’t cover potential claims from end-users of these products.
Legal Dispute:
The buyer sued the seller for indemnification in 2018, but the seller argued the claim was time-barred. The court considered a three-year statutory limitations period, as well as a one-year contractual limit set in the purchase agreement.
Tolling Argument and Court Ruling:
The buyer claimed its notice in 2015 tolled both limitations periods based on a contractual provision. However, the court ruled that this provision only tolled the contractual one-year limit, not the statutory three-year limit.
Outcome and Lesson:
The court concluded that the buyer’s indemnification claim for breach of representations was time-barred. However, claims related to third-party claims were not time-barred, as they accrue after the third-party claims are resolved.
Takeaway for Future Cases:
When Delaware law applies, buyers should specify that an indemnification claim tolls both the shorter contractual period and Delaware’s statute of limitations for the longest protection. This is especially important given Delaware’s extension of the statute of limitations for certain deals.
In summary, the case highlights the complexities of indemnification claims in acquisitions, involving both contractual and statutory limitations periods. Buyers should be mindful of these limitations and their implications for making timely claims.
Case Reference:
This case is referred to as Kilcullen v. Spectro Scientific, Inc., C.A. No. 2018-0429-KSJM, Court of Chancery of Delaware (Decided: July 15, 2019)
By John McCauley: I help companies and their lawyers minimize legal risk associated with small U.S. business mergers and acquisitions (transaction value less than $50 million
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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