Learn about the legal consequences of deceptive practices during a business acquisition, as a CEO’s false promises lead to a non-dischargeable judgment in bankruptcy. Explore a notable M&A case and discover the importance of honesty in negotiations.
M&A Stories
Taking the high road in M&A negotiations is good business: “It’s a rough road that leads to the heights of greatness.” — Lucius Amnaeus Senaca
January 14, 2021
The Background:
In a notable acquisition involving a technology company, the target was a software developer. The CEO of the acquiring company assured the target’s leaders that they would receive buyer stock and a share of royalties from the sale of target products after the merger.
Promises Unfulfilled:
Unfortunately, the promised stock and royalties were never delivered to the target’s principals. Feeling misled, they took legal action against the buyer CEO. The court found the CEO liable for intentional misrepresentation and violation of the Connecticut Unfair Trade Practices Act. The judgment against the CEO amounted to over $1.3 million, including punitive damages, legal fees, and interest accruing at a rate of 4% per year from February 17, 2011.
Bankruptcy and Non-Dischargeability:
Facing financial difficulties, the buyer CEO filed for personal bankruptcy. However, the target’s principals objected to the discharge of the judgment in bankruptcy proceedings. The bankruptcy court ruled in favor of the target principals, deeming the judgment non-dischargeable. Consequently, the CEO remained responsible for repaying the target principals, with the total amount owed reaching approximately $1.8 million, including interest.
This case is referred to as In Re Parrella, Case No. 18-51613 (JAM), Adv. Pro. No. 19-5008 (JAM), United States Bankruptcy Court, D. Connecticut, (October 28, 2020).
Key Takeaway:
This case underscores a straightforward lesson: honesty is crucial when navigating acquisitions. Failing to keep promises can lead to legal ramifications, even potential bankruptcy may not fully absolve such 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
Legal Disclaimer
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.
Recent Comments