M&A Deal Lessons: Honesty and Due Diligence Are Key

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Learn from a real M&A case involving digital marketing and concessions. Discover the importance of honesty and due diligence in M&A deals. Get insights from the Cinema Scene Marketing & Promotions, Inc. v. Calident Capital, LLC case.

M&A Stories

November 27, 2018

This M&A story involves a Kansas City digital marketing and concessions company. An Austin-based private equity firm expressed interest in purchasing the company and received an information memorandum, which detailed the company’s operations and financial records. The deal seemed promising as the PE firm proposed a combination of equity and third-party senior debt for the acquisition.

However, during negotiations, it came to light that the company faced strong competition from a rival in the digital marketing sector. The company’s owners claimed they could resolve this competition issue due to their relationship with the competitor’s president. This assurance led to further negotiations and a letter of intent in November 2015, subject to due diligence.

As the deal progressed, negotiations stalled due to increasing demands from the company’s owners regarding employment agreements, salaries, and tax distributions. In March 2016, the exclusivity period was extended, but no agreement with the competitor materialized. Eventually, the company’s owners sold to another buyer. The PE firm then demanded payment from the company’s owners for fees incurred in connection with the purchase of the company. The company’s owners refused, and the dispute ended up in a federal district court in Kansas City.

The PE firm claimed that the company’s owners had negligently misrepresented their ability to eliminate competition from the competitor, which was a pivotal factor in pursuing the deal. The company’s owners argued that the PE firm had the right to conduct due diligence to verify the representation, and asked the court to dismiss the PE firm’s lawsuit.

The court disagreed with the company’s owners, suggesting that the PE firm’s reliance on the representation was reasonable unless they had information making that reliance unreasonable. The answer to that question will be decided at trial.

The case serves as a reminder for sellers not to make overoptimistic promises during negotiations and emphasizes the importance of clear, honest representations in purchase agreements.

Moreover, it’s worth noting that discussions with a competitor to reduce competition could raise antitrust concerns. It’s advisable to consult an antitrust lawyer before proceeding down that path.

Case Reference:

This case is referred to as Cinema Scene Marketing & Promotions, Inc. v. Calident Capital, LLC, Case No. 16-2759-JAR, United States District Court, D. Kansas (February 9, 2018).

By John McCauley: I help people start, grow, buy and sell their businesses.

Email: jmccauley@mk-law.com

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

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Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles

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Posted in anti-reliance clause, due diligence, extra-contractual fraud, negligent misrepresentation, reliance Tagged with: , , , , , , , , ,

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