In this M&A legal blog, we explore a case where a buyer tried to back out of an acquisition agreement due to pandemic challenges. Discover how the Delaware Court of Chancery ruled in favor of the seller, emphasizing the importance of fulfilling obligations in M&A deals.
M&A Stories
July 25, 2021
Introduction:
In some M&A deals, the parties agree to a deferred closing, where the buyer and seller sign the acquisition agreement but postpone the actual closing to a later date. During such deals, the buyer typically commits to securing financing for the closing.
The Deal:
In this particular case, a private equity-owned buyer agreed to purchase a company that sells cake decorations and technology to supermarkets for $550 million on March 6, 2020. However, shortly after the onset of the Covid-19 pandemic, the buyer had second thoughts due to government stay-at-home orders and a decline in the target’s weekly sales.
Buyer’s Actions Instead of diligently working towards securing the agreed financing, the buyer began looking for ways to back out of the deal. They created a pessimistic sales forecast without consulting the target’s management, which they used to demand better financing terms from their lenders. When the lenders refused, the buyer claimed that debt funding was no longer available and made a feeble attempt to find alternative financing, which was unsuccessful.
The Lawsuit:
The seller responded by taking legal action and filed a case in the Delaware Court of Chancery seeking specific performance, i.e., forcing the buyer to fulfill their obligations. The court ruled in favor of the seller, stating that the buyer had not made reasonable efforts to obtain the agreed financing and had seemingly manufactured excuses to avoid closing the deal.
This case is referred to as Snow Phipps Group, LLC v. KCAKE Acquisition, Inc., C.A. No. 2020-0282-KSJM, Court of Chancery of Delaware, (Submitted: March 22, 2021. Decided: April 30, 2021.).
Conclusion:
This case highlights the risks associated with deferred closings in M&A deals, especially during uncertain times like a pandemic. Simultaneous closings can help avoid such issues, but deferred closings may be necessary when approvals from third parties or government entities are involved. Both buyers and sellers should be aware of the additional risks associated with deferred closings and act in good faith to fulfill their obligations.
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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