Today I want to talk about how a boilerplate provision in an asset purchase agreement can be important when a post-closing dispute breaks out between the buyer and the seller.
This example is drawn from a recent case involving the acquisition by Massachusetts based Smith & Wesson (we will call “Buyer”) of the business of Idaho based Gemini Technologies, a maker of silencers (which we will call “Seller”).
In this case Buyer promised in the asset purchase agreement to pay Seller an earn out in the form of 15% of the first 3 years of post-closing sales, over a floor and capped at about $18 M. The earn out did not materialize and Seller brought a multi-million-dollar lawsuit in Idaho federal district court against Buyer, claiming that Buyer intentionally prevented Seller from receiving an earn out, by among other tactics, postponing international sales efforts until the earn out period expired.
This is where the boilerplate provision came into the dispute. Buyer requested that the lawsuit be dismissed because the asset purchase agreement requires the Seller to bring its suit in Delaware, not Idaho.
The court agreed, noting that it is very hard for someone to get out of this kind of boilerplate provision. The lawsuit was dismissed by the court without prejudice meaning that Seller can still refile the suit in Delaware.
This United States District Court case is referred to as Gemini Technologies, Inc. v. Smith & Wesson Corp., Case No. 1:18-cv-00035-CWD, United States District Court, D. Idaho (May 16, 2018).
Comment. A post-closing dispute between the buyer and seller is very common; even more so if part of the purchase price is in the form of an earn out. And one of the most important boilerplate provisions or legalese found at the end of the agreement is the provision requiring buyer and seller to litigate their disputes in the federal or state courts of a specified state.
Suing in Boise, Idaho was more convenient for the Boise, Idaho seller. Flying to Delaware is expensive and very time consuming, and since 9/11, not much fun.
Furthermore, a good deal of the evidence and witnesses were probably located in Idaho. Nevertheless, the Massachusetts buyer was successful in convincing the Idaho court to respect the provision in the asset purchase agreement that requires the Idaho seller to sue in Delaware.
By John McCauley: I help people start, grow, buy and sell their businesses.
Telephone: 714 273-6291