Court Greenlights Business Asset Buyer’s Fraudulent Inducement Claim Re 2-Year Noncompete Term

Introduction

Sometimes being a good guy in an M&A deal can come back to bite you. If the buyer’s allegations are true, then this feels like a no good deed goes unpunished story.

The deal

Here, both the buyer and seller were in the customer printing business. The seller’s founder and owner told the buyer that he wanted “to exit the custom folder printing business forever because they saw no future in the business”.

The buyer purchased the business from the seller for approximately $15 million. The deal was done through an asset purchase agreement.

The seller’s owner and seller gave the buyer a 2 year noncompetition covenant; short but the buyer felt ok given that the seller and its owner were getting out of the custom printing business.  Also, the buyer leased the seller’s customer printing facility for 2 years from an LLC owned by the Seller’s owner.

The lawsuit

Things went well for about 21 months. Then the seller’s owner told the buyer that it was not going to renew the 2 year lease and that the buyer was going to have to vacate the premise.

The buyer vacated the premises. After that the seller’s owner relaunched a custom printing business out of his old facility; and it was after the expiration of the two year noncompetition covenant term.

The buyer sued the seller and its owner in an Omaha federal district court. One of its claims was for fraudulent inducement. The buyer claimed that it agreed to a short 2 year noncompetition term because the seller’s owner had said that he was getting out of the customer printing business forever.

The buyer claimed that it would never have paid $15 million for the business with a 2 year noncompetition covenant had it known that the seller’s owner’s true intent was to pay off his crushing debt with the $15 million purchase price and then relaunch the business after the 2 year noncompetition covenant term expired.

The court agreed with the buyer: “The Court concludes that … (the buyer) … has stated a claim for fraudulent inducement. Assuming … (the buyer’s) … allegations are true, the operative complaint contends that … (seller and its owner) … committed fraud by ‘falsely representing that they desired to exit the custom folder printing business forever because they saw no future in the business’ when … (their) … ‘true intent was to generate funds to pay down crushing debt… (they) … had accumulated and then to reenter the business in direct competition’ … Relying on … (their) … representation, … (the buyer) … agreed to a short, two-year restrictive covenant and paid… (the seller) … for its printing business. … As a result of that conduct, … (the buyer) … was damaged.”

This case is referred to as Crabar/GBF, Inc. v. Wright, No. 8:16-CV-537, United States District Court, D. Nebraska (August 26, 2019)  

Comment

With 20/20 hindsight, the buyer would want a four or five year noncompetition covenant term.

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

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