Buyer, a Jacksonville, Florida based insurance company, purchased Target, a Ft. Lauderdale, Florida based private insurance company and its subsidiaries from Seller pursuant to a stock purchase agreement. In the stock purchase agreement, Seller represented and warranted, that a software application that a Target software application vendor had contracted to develop for Target was in adequate operating condition and repair.
Pursuant to the stock purchase agreement, Seller provided Buyer with a closing date statement setting forth Target’s adjusted book value as of the day before the closing. The adjusted book value was used as a mechanism for adjusting the purchase price, up or down, based upon the difference in the book value of Target the day before the closing to the book value of Target as of an earlier date.
After receiving the closing date statement, and pursuant to the dispute resolution procedures laid out in the stock purchase agreement, Buyer submitted its objections to the closing date statement prepared by Seller. One of Buyer’s objections was Seller’s inclusion of the software application at its fully amortized cost as of the closing date. Buyer claimed the software application was defective and thus worthless.
The accounting firm selected pursuant to the stock purchase agreement to decide this dispute, did not agree with Buyer, saying that the software application was correctly booked at its fully amortized cost as of the closing date. On other issues, the accounting firm found for Buyer. Subsequently, Buyer and Seller agreed in a signed release, that payment by Seller to Buyer of approximately $1.6 million would be payment in full satisfaction of all claims raised in the Buyer’s objection to Seller’s closing date statement.
Later, Buyer sued Seller for damages in a New York court, claiming that Seller breached its representation and warranty that the software application was in adequate operating condition and repair, when in fact it was defective and thus worthless. Seller asked the court to dismiss this claim, claiming that Buyer was barred from pursuing the claim because Buyer and Seller agreed that payment by Seller to Buyer of approximately $1.6 million fully satisfied all claims raised in Buyer’s objection, including Buyer’s claim that the software application was defective and thus worthless.
The court agreed with Seller and dismissed the claim.
This case is referred to as Cypress Group Holdings, Inc. v. Onex Corp. v. Schreiber, 7020, 653408/15, Appellate Division of the Supreme Court of New York, First Department (Decided October 9, 2018).
Comment. There is often a significant lag between execution of a purchase agreement and the closing. Buyer and Seller often want to adjust the purchase price to reflect the change in the value of the business between signing and closing.
There are many ways to adjust a purchase price. Changes in book value or working capital are common. The buyer and seller may not agree upon the adjustment and there usually is a dispute resolution procedure often involving a neutral accounting firm.
However, the complexity involved in a purchase price adjustment mechanism creates risks. In this case, a release given by Buyer when settling the purchase price adjustment dispute, barred Buyer from pursuing a claim for a breach of a Seller representation about the condition of an important Target application software.
By John McCauley: I help people start, grow, buy and sell their businesses.
Telephone: 714 273-6291
The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.