In a bankruptcy asset sale of Sears, the buyer had the option of purchasing the equity of the foreign subsidiaries in the event of problems with a foreign asset transfer. The buyer did and to the surprise of all, the subsidiaries held $6.3 million in cash.
M&A Stories
May 17, 2022
Introduction:
In May 2022, a bankruptcy asset sale of Sears took an unexpected turn when the buyer chose to purchase the equity of the foreign subsidiaries instead of the assets. This decision allowed the buyer to obtain the subsidiaries’ cash, totaling $6.3 million, which had not been initially included in the sale.
The Deal:
Sears was selling its assets, including subsidiaries in Hong Kong and India, as part of its bankruptcy proceedings. The sale agreement excluded cash from the deal. However, to address potential issues with transferring assets from the foreign subsidiaries, the buyer was given the option to buy the equity of these subsidiaries instead, which would include any cash held by them. Sears didn’t anticipate significant cash in the subsidiaries, so the purchase price for the equity option was not adjusted for it.
The Surprise Cash:
After the sale was completed, Sears found out that the foreign subsidiaries held $6.3 million in cash on the closing date. Sears asked the buyer to pay them the amount, but the buyer refused.
The Lawsuit:
The disagreement led to a legal battle, with both the bankruptcy court and a Manhattan federal district court ruling in favor of Sears. They decided that Sears was entitled to the $6.3 million in cash from the equity sale of the foreign subsidiaries.
This case is referred to as In Re Sears Holdings Corporation, No. 21 CV 5782 (VB), United States District Court, S.D. New York, (May 6, 2022.)
Conclusion:
Had Sears been aware of the $6.3 million in cash during the negotiation of the purchase agreement, the buyer would likely have agreed to exclude it from the equity deal. This case highlights the importance of thorough due diligence and the need to include provisions in purchase agreements to ensure proper compensation for any hidden assets, even if they are initially thought to be insignificant.
By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.
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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