Under the asset purchase agreement, the buyer only acquired specifically identified contracts. This did not include the service vendor contract. The result? The buyer’s claim against the service vendor was thrown out of court.
M&A Stories
August 26, 2021
Introduction:
In the world of business acquisitions, one way to buy a company is by purchasing its assets rather than its ownership. However, a recent court case highlights a crucial legal risk that asset buyers need to be aware of – ensuring that the asset purchase agreement explicitly includes all the desired assets.
The Deal:
In this particular case, the buyer was an investor in a distressed business that went bankrupt. To understand the reasons behind the business’s failure, the buyer decided to purchase the assets of the bankrupt company.
The Lawsuit:
Upon investigation, the buyer believed that a service vendor had significantly contributed to the company’s downfall. As a result, the buyer sued the service vendor in a Texas state court, hoping to hold them accountable. However, the court’s decision hinged on whether the service vendor contract was part of the assets purchased by the buyer.
The Asset Purchase Agreement:
The court carefully examined the asset purchase agreement, which outlined the assets being transferred from the seller to the buyer. The agreement stated that the buyer would acquire all of the seller’s property, except for certain excluded assets, which were specified as “Contracts not set forth on the Assumed Contracts Schedule.”
The Verdict:
Upon close inspection, the service vendor contract was not listed on the Assumed Contracts Schedule, and as per the agreement, the seller retained full rights and ownership over any assets not listed there. Consequently, the court ruled that the service vendor contract was not part of the assets purchased by the buyer, leading to the dismissal of the buyer’s claim against the service vendor.
This case is referred to as Obsidian Solutions, LLC v. KBIDC Investments, LLC, No. 05-19-00440-CV, Court of Appeals of Texas, Fifth District, Dallas, (Opinion Filed July 30, 2021).
Takeaway:
The key lesson from this case is crystal clear: when engaging in asset purchases, it is crucial to ensure that the asset purchase agreement explicitly includes all the assets you intend to buy. Failing to do so might result in losing rights over specific assets and could potentially weaken your legal position in the future.
By John McCauley: I help people manage M&A legal risks.
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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