Explore the legal intricacies of M&A in our latest blog post, “Asset Buyer Responsible for Liability of Unpurchased Seller Division.” Dive into a real-life case, Intuitive Surgical Operations, Inc. v. Midbrook, LLC, that sheds light on the critical importance of precision in drafting asset purchase agreements. Uncover the lessons for M&A practitioners, entrepreneurs, CFOs, lawyers, and wealth advisers as we navigate the complexities of assumed liabilities and legal foresight.
M&A Stories
July 5, 2018
In a recent M&A case, the intricacies of asset purchase agreements came to the forefront, emphasizing the critical need for precision in drafting. The scenario involved a seller specializing in washer products that secured a loan from a creditor to develop an ultrasonic medical device washer product. The buyer, in an $872 K asset purchase agreement, acquired the seller’s assets excluding those in the medical division.
The asset purchase agreement outlined the buyer’s assumption of the “executory obligations of [the seller’s] continued performance arising in the ordinary course of business under any contracts and commitments that become performable or payable on or after the Closing Date[.]”. Despite the exclusion of medical division assets, the court ruled that the buyer had expressly assumed the seller’s obligation to repay the $583 K loan to the creditor, asserting that the agreement explicitly covered such liabilities.
This case, Intuitive Surgical Operations, Inc. v. Midbrook, LLC, highlights the importance of meticulousness in defining assumed liabilities. Post-closing, the buyer found itself entangled in the creditor’s lawsuit due to the defaulted loan. The court’s decision underscores that buyers must be cautious, even in asset purchases, as they can be held responsible for expressly assumed liabilities, regardless of the excluded divisions.
The lesson for M&A practitioners is clear – clarity is paramount. While the buyer here could have avoided assuming the loan by explicit language in the agreement, the absence of such specificity led to legal ramifications. When navigating asset purchases, buyers should ensure that their agreements unambiguously delineate the liabilities they are undertaking and those they are explicitly excluding.
This case serves as a reminder for professionals involved in M&A transactions, including entrepreneurs, CFOs, lawyers, and wealth advisers, to approach asset purchase agreements with precision and foresight. Understanding the potential reach of assumed liabilities is crucial in avoiding post-closing disputes and legal entanglements.
Case Reference:
This case is referred to as Intuitive Surgical Operations, Inc. v. Midbrook, LLC, Case No. 2:17-cv-10391, United States District Court, E.D. Michigan, Southern Division (June 25, 2018).
By John McCauley: I help people start, grow, buy and sell their businesses.
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