Case Demonstrates Risk of Trying to Operate Business Before Acquisition Closing

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M&A Stories

September 25, 2020

Introduction

It is not unusual to sign a definitive acquisition agreement and defer the closing until some important third-party approvals are obtained. There is a temptation sometimes to structure the deal so that the buyer can take over the business before the required approvals and closing.

The buyer and seller in this deal structured the transaction to give the buyer access to the business before the closing occurred. In the end it did not go well for the buyer.

The deal

The seller in this deal was a Manhattan surgical center. The buyer’s owner, a surgeon who, since 1998, had acquired an ownership interest in around 20 surgical centers that he managed in California, Las Vegas, New York, and New Jersey.

The buyer and seller agreed to structure the deal as an asset acquisition that was signed effective August 4, 2015. However, the closing could not occur until the buyer received a certificate of need from a local health department, and that might not happen until June 2016.

So, the parties gave the buyer access to the surgical center pending approval of the application for a certificate of need through the device of an administrative services agreement. But, under the deal, the buyer had to come up with $6 million of financial collateral to secure the buyer’s obligation to close the deal. The collateral was required to be furnished to the seller by September 1, 2015.

The buyer could not get a bank to provide the necessary financial collateral, even after getting an extension to perform until October 1, 2015.  The buyer tried to renegotiate the deal but was unsuccessful and the parties ended up in a New York state court.

The lawsuit

There was a liquidated damages provision in the acquisition documents in the amount of $6.5 million.  The seller asked the court for summary judgment in the amount of the liquidated damages and the court granted the seller’s request. The buyer appealed and the intermediate appellate court affirmed the trial court’s decision noting an earlier court’s observation that a: “liquidated damages provision negotiated at arm’s length is entitled to deference where parties to agreement are sophisticated businesspeople represented by experienced counsel”

This case is referred to as Center for Specialty Care, Inc. v. CSC Acquisition I, LLC v. Fontanella, 653849/16, Appellate Division of the Supreme Court of New York, First Department, (Decided June 25, 2020) https://scholar.google.com/scholar_case?case=11080597099317843710&q=%22asset+purchase+agreement%22&hl=en&as_sdt=2006&as_ylo=2020 

Comment

Buyers want to take over the seller’s business as soon as possible. Long governmental approval processes appear to be mere formalities that should not slow up the takeover. Thus, buyers and seller often work out complex legal arrangements that give the buyer the keys to the business before the closing.  But such arrangements add additional risks to both a buyer and a seller.

By John McCauley: I help people manage M&A risks involving privately held companies.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291 

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Posted in certificate of need, deferred closing, governmental approval, liquidated damages provision Tagged with: ,

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