Coal Mine Buyer’s Post-Closing Legal Battle Over Reclamation Costs

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Explore a detailed analysis of a complex legal battle over reclamation costs following an $88 million bankruptcy acquisition of a coal mine in Pennsylvania. Our latest M&A blog delves into the intricacies of environmental compliance, permit transfers, and the crucial importance of clear M&A documentation to mitigate post-closing risks. Learn how ambiguous contract terms led to multiple legal disputes and discover key takeaways for future acquisitions to avoid similar pitfalls. Ideal for legal professionals, industry experts, and anyone involved in M&A transactions.

M&A Stories

June 10, 2024

Coal mine owners must comply with state environmental laws requiring them to restore the land to its natural state after mining operations end. These reclamation costs can be significant, often running into millions of dollars. For larger mines, the costs can exceed $20 million. It’s crucial for buyers to mitigate these reclamation cost risks through well-drafted provisions in the M&A documents.

This case involves an $88 million bankruptcy acquisition of a coal mine in Pennsylvania, which included coal mining permits. The seller was required to provide security for its reclamation cost obligations, which it did through a bank line of credit.

After closing, the buyer applied to the state for a transfer of the permits, but the application was denied. The issue arose because the seller’s permit covered mining on lands not transferred to the buyer, as they were leased to the seller under an expired lease.

The buyer then submitted a revised permit application, reducing the land covered by the permit from approximately 111 acres to 21 acres. This change led to a series of legal disputes initiated by the seller’s bank, which demanded that the buyer replace the seller’s letter of credit with its own credit facility.

The dispute resulted in four legal skirmishes in bankruptcy court and two appellate decisions by the Pennsylvania federal district court. In the final appeal, the district court judge found the asset purchase agreement and related documents ambiguous regarding the buyer’s obligation to replace the seller’s letter of credit. The case was sent back to the district court for further resolution, requiring a review of external evidence such as emails, meeting notes, and verbal agreements to determine the true intent of the buyer and seller.

Don’t know if the parties could have foreseen this problem. This lengthy legal battle might have been avoided if the buyer had explicitly included in the asset purchase agreement that it had no obligation to replace the seller’s letter of credit with its own. Even if this language had been rejected, the issue would have been clearly identified, allowing for a precise resolution to be documented in the acquisition agreements. 

Case Reference: In Re Kimmel’s Coal and Packaging, Inc.  Civil No. 1:23-CV-00351 Related Bankruptcy Case No. 1:18-BK-01609-HWV, United States District Court, M.D. Pennsylvania, (Signed January 17, 2024).

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners management, as well as professionals who share an interest in the complexities of M&A law.

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

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling 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.

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The Reach of a Forum Selection Clause: Can M&A Buyer’s Fraud Suit against Seller and Multiple Owners and Managers Be Tried in Delaware?

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Dive into the complexities of M&A forum selection clauses with our latest blog post, which analyzes a case where a buyer’s fraud suit against a seller and multiple managers and owners was partially dismissed in Delaware. The court ruled in favor of the seller and four of the seller’s Delaware-based owners, while dismissing the suit against ten defendants who were either non-Delaware entities or residents. This post is essential for legal professionals and M&A enthusiasts aiming to understand the nuances and challenges of litigating across multiple jurisdictions.

M&A Stories

June 4, 2024

When it comes to M&A transactions, it’s standard practice for buyers and sellers to decide on a specific forum for any litigation that may arise. Often, that forum is Delaware, a popular choice due to its well-established body of corporate law. But what happens if the buyer claims fraud by several of the seller’s managers and owners who did not consent to litigate in Delaware and have no significant ties to the state?

This issue arose in a case involving an $88 million acquisition of a defense contractor. The buyer and seller had agreed that any disputes related to the acquisition would be resolved in Delaware courts. Post-closing, the buyer alleged that they had overpaid significantly due to fraudulent financial statements, accounting practices, and undisclosed issues with a major customer.

The buyer filed a lawsuit in the Delaware Superior Court’s complex commercial litigation division against the seller and fourteen other defendants, including managers and owners of the seller. However, ten of these defendants moved to dismiss the case against them, arguing they could not be sued in Delaware because they had neither signed the purchase agreement nor had the necessary connections to Delaware.

The court sided with these ten defendants. The decision was based on the fact that none of these defendants had agreed to the forum selection clause in the purchase agreement, and they lacked other legal ties to Delaware. This group included four entities not organized under Delaware law and six individuals residing outside Delaware.

As a result, the court dismissed these ten defendants from the lawsuit, which complicates the buyer’s legal strategy. Despite the possibility that some of these defendants might be “deep pockets,” the buyer is now compelled to file separate lawsuits in various states, including Illinois, Texas, Colorado, Oregon, and Florida.

This case highlights the complexities and potential limitations of forum selection clauses in M&A agreements, especially when fraud and multiple defendants across various jurisdictions are involved. Buyers should be aware that such clauses might not bind all parties involved, and pursuing litigation may require navigating multiple legal landscapes.

Case Reference: Chumash Capital Investments, LLC v. Grand Mesa Partners, LLC  C.A. No. N23C-07-209 SKR CCLD., Superior Court of Delaware, (Submitted: February 22, 2024, Decided: April 10, 2024).

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners management, as well as professionals who share an interest in the complexities of M&A law.

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

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling 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.

Posted in fraud in business sale, Problems with financials, problems with forum selection clauses Tagged with: , , , , , , , , , , , , , , , , , , , ,

M&A Seller Asks Court to Order Buyer to Close Acquisition

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Explore the intricacies of M&A transactions in our latest blog post, where we delve into a landmark legal ruling that forced a buyer to close a $277 million acquisition. Discover the legal principles and court decisions that emphasize the importance of honoring purchase agreements. Ideal for legal professionals and industry insiders, this post sheds light on the enforceability of M&A contracts and the remedies available when parties attempt to renegotiate terms without justification. Stay informed about key legal precedents and enhance your understanding of M&A litigation.

M&A Stories

May 30, 2024

In the complex world of mergers and acquisitions, it’s not uncommon for buyers to balk at closing unless sellers agree to a reduced purchase price. But what happens when the buyer has no legal grounds for such a demand?

This issue came to a head in the recent $277 million acquisition of a casualty reinsurance business. Just before closing, the buyer claimed the target’s reserves were insufficient to cover claims and demanded a $78 million reduction in the purchase price. The seller refused and took the matter to court.

In a significant ruling, the Commercial Division of a Manhattan state court ordered the buyer to proceed with the acquisition at the original price. The court acknowledged that the seller’s request for a mandatory injunction—essentially forcing the buyer to close the deal—was an extraordinary remedy, typically granted only under unusual circumstances. However, the court found that the buyer had no legal justification for its refusal to close and was merely attempting to reduce the purchase price improperly by alleging a breach where none existed.

The court also highlighted that the stock purchase agreement allowed for a mandatory injunction or specific performance. Additionally, the court pointed out that the buyer could challenge the adequacy of the target’s reserves after closing during the determination of the final purchase price.

This case, James River Group Holdings, LTD. v. Fleming Intermediate Holdings LLC (Index No. 651281/2024, Supreme Court, New York County, decided April 6, 2024), underscores the importance of adhering to the terms of a purchase agreement and the legal recourse available when one party tries to back out without justification.

This ruling is a reminder to all involved in M&A transactions: clear agreements and adherence to legal principles are paramount to ensure smooth and enforceable deals. 

Case Reference: James Riv. Group Holdings, LTD. v. Fleming Intermediate Holdings LLC  Index No. 651281/2024., Supreme Court, New York County, (Decided April 6, 2024).

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners management, as well as professionals who share an interest in the complexities of M&A law.

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

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling 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.

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Could an Asset Buyer’s Due Diligence Uncover a Competitor’s Unfair Tactics?

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Explore the intricate world of M&A due diligence through the lens of a high-stakes legal battle in the commercial real estate sector. This blog delves into the complexities of identifying potential risks, the impact of unforeseen challenges, and the importance of thorough investigations. Learn from a real-world case involving trade secrets and competitive tactics that underscores the essential role of due diligence in M&A transactions. Whether you’re a legal professional, an M&A specialist, or just curious about the intricacies of corporate acquisitions, this post offers valuable insights and lessons.

M&A Stories

May 27, 2024

In M&A transactions, due diligence is critical for identifying potential risks before closing a deal. A thorough investigation can lead to renegotiations, reduced purchase prices, or even walking away from a deal. However, many issues remain hidden despite rigorous due diligence, as illustrated by a 2012 bankruptcy asset sale involving two major players in the commercial real estate sector.

The case centers around a Santa Ana, California-based commercial real estate brokerage firm, once the largest independently owned and publicly traded firm in the country, which was acquired by a New York-based competitor. This buyer, having recently acquired another rival, aimed to become one of the industry’s largest brokerage and service companies. The seller’s decline was well-known, but the buyer was unaware that key employees were defecting to a global competitor headquartered in Toronto. This competitor, one of the largest commercial brokerages in North America, was led by the seller’s former CEO.

Post-closing, the buyer discovered that these employees had taken confidential information and seller employees to their new employer. This revelation led to lawsuits against the competitor and the former employees in New York and Nevada courts, alleging theft of trade secrets and unfair competition. Despite protective measures like nonsolicitation and noncompetition agreements, the seller’s secrets were compromised, resulting in a prolonged and costly legal battle.

This scenario raises an important question: Could the buyer’s due diligence have uncovered these issues before closing? The buyer’s allegations suggest a broad scheme involving numerous employees over several years. If industry rumors hinted at such activities, a more focused investigation could have been warranted.

The ongoing litigation, encapsulated in BGC Partners, Inc. v. Avison Young, Inc., highlights the complexities and limitations of due diligence in M&A transactions. While not all risks can be anticipated, thorough and tailored due diligence remains the best defense against unforeseen challenges. 

Case Reference: BGC Partners, Inc. v. Avison Young, Inc.  Case No. 2:15-cvRFB-EJY., United States District Court, D. Nevada, (March 31 2024).

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners management, as well as professionals who share an interest in the complexities of M&A law.

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

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling 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.

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M&A Buyer’s Earnout Risk

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Explore the complexities of M&A transactions with a deep dive into the legal battles surrounding earnouts. This post dissects a real-world case involving a $226 million acquisition in the insurance industry, where the buyer alleges overpayment due to fraudulent earnout practices. Uncover insights into the legal strategies, the implications of financial misrepresentation, and the critical importance of good faith in M&A agreements. Perfect for M&A professionals, legal experts, and anyone interested in the intricacies of acquisition deals and their legal repercussions.

M&A Stories

May 20, 2024

Earnouts are a common feature in M&A transactions, typically placing the risk on the seller who must achieve specific post-closing targets to receive additional payments. However, this isn’t always the case.

In a recent $226 million acquisition, a private equity-backed insurance brokerage from Utah purchased a Bellingham, Washington-based insurance agency. This 2021 deal included retaining the agency’s owner to run it as a division of the buyer’s company.

The agreement stipulated an earnout if the agency hit certain earnings growth targets within five years, with the first-year target being the most lucrative. If the agency’s EBITDA exceeded the closing EBITDA by more than 3% at the end of the first year, the buyer would pay ten times the amount of that growth. In subsequent years, the growth targets were higher to achieve the same multiple.

The seller’s owner secured a significant first-year earnout, but the buyer later claimed it had overpaid by $28 million. This led to a legal battle in a Seattle federal district court, with the buyer alleging breach of contract, fraud, and violation of the implied covenant of good faith and fair dealing.

The seller’s owner moved to dismiss the suit but was unsuccessful, leading to ongoing litigation. The court highlighted a pre-sale email where the seller’s owner instructed an employee to delay recording commission checks until after closing to inflate the earnout. The buyer also alleged the seller’s owner misrepresented earnings and maintained secret accounting systems.

The court noted the buyer’s claim that the seller’s owner failed to cooperate in good faith in preparing the estimated earnout EBITDA. This included not providing access to necessary books, records, and personnel. The buyer accused the seller’s owner of overstating revenues, understating expenses, and deliberately obstructing the buyer’s access to crucial financial information, thereby inflating the earnout payments. 

Case Reference: PCF Insurance Services of West, LLC  Case No. C23-1468-JCC., United States District Court, W.D. Washington, Seattle, (March 27 2024).

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners management, as well as professionals who share an interest in the complexities of M&A law.

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

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling 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.

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Legal Clash: M&A Buyer and Seller Tangle in Federal Court Over Post-Closing Payment Dispute

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Dive into the realm of M&A legal intricacies with our latest blog post, ‘Legal Clash: M&A Buyer and Seller Tangle in Federal Court Over Post-Closing Payment Dispute.’ Explore the nuances of acquisition agreements, post-closing conflicts, and federal court litigation as we dissect a real-life legal battle between an M&A buyer and seller. Uncover the importance of precise legal drafting and the impact of ambiguous contract terms in navigating buyer-seller disputes. Stay informed and empowered in the world of M&A law with our insightful analysis and case studies.

M&A Stories

May 15, 2024

In the intricate world of mergers and acquisitions, the devil often lurks in the details of the acquisition documents. A recent legal skirmish between an M&A buyer and seller underscores the importance of precision in drafting to mitigate the risk of post-closing conflicts.

In 2017, a prominent Virginia-based IT staffing firm made an acquisition move, snapping up the assets of a smaller Boston-based cybersecurity staffing agency. The crux of the acquisition lay in the seller’s prized possessions: staffing agreements with clients and employment contracts with cybersecurity consultants engaged in client projects.

At the close of the deal, a nominal sum of $5,000 changed hands, with an agreement in place for the buyer to share profits from client contracts. This profit-sharing arrangement was contingent upon the continued service of consultants now under the buyer’s employ.

Smooth sailing ensued for six years, until a snag emerged. With just one client contract remaining, the buyer sought to either buy out the profit-sharing agreement or terminate the deal altogether.

Refusing to budge, the seller initiated legal action, seeking to prevent the termination of the arrangement. The dispute found its way to a federal district court in Boston, where the buyer sought dismissal of the lawsuit, citing the purchase agreement’s selection of Florida law, which deems contracts without a fixed term as terminable at will.

However, the court ruled against the buyer’s motion, deeming the contract ambiguous regarding termination clauses. Consequently, further litigation was deemed necessary to resolve the ambiguity.

This protracted legal battle could likely have been averted with clearer language in the purchase agreement, explicitly stating that the profit-sharing provision was not subject to termination at will.

Case Reference: Aiello v. Signature Commercial Solutions, Inc.  Civil Action No. 23-cv-11930-ADB., United States District Court, D. Massachusetts, (March 25, 2024).

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners management, as well as professionals who share an interest in the complexities of M&A law.

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

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling 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.

Posted in Problems with Deferred Purchase Price, Problems with description of purchase price Tagged with: , , , , , , , , , , , , ,

The Importance of Due Diligence When Acquiring a Business in a Regulated Industry

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Navigating the complex landscape of acquiring a business in a regulated industry can be a minefield without thorough due diligence. In our latest post, we delve into the critical importance of meticulous pre-acquisition audits to ensure compliance with stringent regulations and avoid costly legal entanglements. Using a real-world case involving an Oklahoma City investment firm and a major broker-dealer, we illustrate how lapses in due diligence led to significant compliance violations and subsequent litigation. This compelling story underscores the necessity of effective due diligence for successful mergers and acquisitions in regulated sectors.

M&A Stories

May 14, 2024

Acquiring a business in a regulated industry presents unique challenges, particularly regarding compliance with rules and regulations. Thorough due diligence is essential to mitigate these risks.

Consider a case involving an Oklahoma City investment firm that purchased assets from a Columbus, Ohio firm for $2 million in cash and a $140,000 promissory note. The seller’s owner was retained to manage the Columbus office. Post-acquisition, the buyer formed a new partnership with a major broker-dealer to execute trades.

Both the buyer and the broker-dealer were subject to stringent federal securities laws. Within a year, concerns arose about the Columbus office’s compliance with these laws, prompting a broker-dealer audit. The audit revealed significant violations, leading the broker-dealer to demand the termination of the seller’s owner as a condition for continuing the business relationship.

The buyer’s CEO complied, firing the seller’s owner. This action sparked litigation involving the seller’s owner, the buyer, the buyer’s CEO, and the broker-dealer, now pending in a federal district court in Columbus.

This costly legal battle might have been avoided if the buyer had conducted a pre-purchase audit of the Columbus office’s compliance with federal securities laws. Effective due diligence, rather than reliance on acquisition document provisions, is crucial for managing legal compliance in regulated industries. 

Case Reference: Eischen v. Adaptation Financial Advisers Inc.  Case No. 2:21-cv-5837., United States District Court, S.D. Ohio, Eastern Division, (March 21, 2024).

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners management, as well as professionals who share an interest in the complexities of M&A law.

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

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling 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.

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Resolving M&A Seller Earnout Disputes: Beyond Accountant Arbitration

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Delve into the intricacies of M&A earnout disputes with our latest blog post. Explore the complexities beyond accountant arbitration, as we dissect a notable case and offer insights into drafting M&A agreements for clarity and foresight.

M&A Stories

May 9, 2024

In the dynamic realm of mergers and acquisitions (M&A), the concept of an earnout often serves as a crucial bridge between buyer and seller, particularly when valuations differ. Typically, both parties agree upon post-closing metrics to determine the earnout, with the expectation that any disputes will find resolution through arbitration by an accounting firm. However, recent cases remind us that the journey from agreement to resolution can be fraught with complexities.

Consider a notable instance from 2017, where a global industry giant acquired a small Buffalo-based wholesale distributor specializing in commercial AV projectors. The seller, a modest entity with $280 million in revenue and 210 employees, joined forces with a behemoth boasting $16 billion in revenue and a presence spanning 20 countries.

Central to their agreement was an earnout arrangement tied to net income, payable over three 12-month periods contingent upon meeting specified metrics. Per the stock purchase agreement, the buyer assumed responsibility for calculating the earnout, with any disputes earmarked for resolution through independent accountant arbitration.

Following a customary path, the parties invoked arbitration to settle a dispute arising from the initial 12-month earnout calculation. However, the plot thickened when the seller escalated matters by filing a $24 million suit against the buyer in a Buffalo federal district court. Allegations swirled around the buyer’s alleged breach of promises outlined in the purchase agreement, particularly regarding the commitment to operate the acquired entity in good faith and with a focus on maximizing profits.

The buyer countered by seeking dismissal of these claims, contending that they fell squarely within the purview of the arbitration provision, covering all earnout disputes. However, the court’s ruling diverged from this expectation. In denying the motion to dismiss, the court emphasized that the arbitration provision exclusively pertained to earnout calculations and did not extend to broader earnout-related disputes.

Of particular note is the court’s refusal to reform the earnout provision in light of the COVID-19 pandemic. Despite the seller’s plea to adjust the provision to accommodate unforeseen challenges, the court held firm, underscoring the absence of an agreement stipulating the use of only uninterrupted or minimally profitable quarters.

This case, exemplified by Kelly v. DCC Technology Holdings, Inc., underscores the importance of clarity and foresight in drafting M&A agreements. While accountant arbitration remains a linchpin in dispute resolution, the boundaries of its application merit careful delineation to preclude future ambiguities.

In the intricate dance of M&A transactions, where fortunes pivot on the minutiae of contractual language, navigating the terrain demands vigilance and precision. As entrepreneurs, business owners, advisors, and stakeholders contemplate the path forward, the saga of earnout disputes serves as a poignant reminder of the intricacies inherent in the pursuit of M&A success.

Case Reference: Kelly v. DCC Technology Holdings, Inc.  No. 22-CV-518S., United States District Court, W.D. New York, (March 20, 2024).

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners management, as well as professionals who share an interest in the complexities of M&A law.

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

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling 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.

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Mitigating Buyer Risks in M&A: Managing Asset Seller Liabilities

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Explore the intricate world of M&A in our latest blog, where we delve into buyer risk mitigation and seller liability management in asset acquisitions. Join us as we dissect real cases, like the recent dispute over undisclosed software fees in a New York landscape architecture firm acquisition. Gain insights into due diligence, contractual obligations, and litigation strategies from legal experts. Stay ahead in the dynamic M&A landscape.

M&A Stories

April 29, 2024

In the realm of M&A, buyers often navigate the terrain of acquiring businesses with specific seller liabilities, a strategic move that demands precision.

Consider a recent deal involving the acquisition of assets from a New York landscape architecture firm. The buyer opted to inherit select seller contracts with customers, while withholding $225K of the purchase price for a year, anticipating potential budget overruns on these contracts.

Post-closure, the buyer contested releasing the holdback funds to the seller, citing substantial undisclosed software license and user fees. The dispute escalated to a New York state trial court.

The seller’s defense rested on the argument that undisclosed software fees did not constitute budget overruns, the provision intended solely for customer contracts where labor costs exceeded agreed-upon budgets.

The court sided with the seller, dismissing the claim. Additionally, the buyer’s failure to promptly notify the seller of the claim, as mandated by the asset purchase agreement, further weakened their position.

The takeaway for prospective buyers is clear: comprehensive disclosure within the purchase agreement regarding software fees could have served as grounds for breach of representations and warranties. 

Case Reference: Thayer v. Paulus, Sokolowski & Sartor, LLC.  Index No. 652747/2023., Supreme Court, New York County, (Decided March 12, 2024).

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners management, as well as professionals who share an interest in the complexities of M&A law.

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

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling 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.

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Challenging a M&A Buyer’s Good Faith in an Earnout Dispute

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Explore the intricacies of M&A earnouts and legal disputes in this compelling blog post dissecting the Butler v. Ferguson Enterprises Inc. case. Gain valuable insights into contract negotiations, operational matters, and the pivotal role of judicial scrutiny in post-closing disputes. Ideal for entrepreneurs, business magnates, CFOs, and legal practitioners navigating the labyrinthine terrain of mergers and acquisitions.

M&A Stories

April 24, 2024

In the intricate realm of mergers and acquisitions (M&A), earnouts serve as a pivotal component, yet often spark contentious post-closing debates.

Enter the scene of a notable M&A transaction involving a prime online retailer in Cincinnati, hailed as one of the city’s premier entities in home, kitchen, and bath products. In October 2016, the founder orchestrated the sale to a prominent plumbing supply giant in the U.S., renowned for its distribution prowess in HVAC parts, waterworks supplies, and MRO products. The deal, valued at $210 million in cash, included earnout provisions tethered to the company’s 2017 and 2018 performances.

Central to the dispute was the clause granting the buyer sole discretion over operational matters, coupled with a commitment not to take actions aimed at undercutting the seller’s earnout. Concurrently, the founder assumed the mantle of president, signifying continuity post-acquisition.

While the 2017 earnout sailed smoothly, turbulence loomed in 2018 as profitability figures fell short of the agreed threshold of $31.7 million. The buyer contended a $1.1 million deficit, triggering a legal showdown in a Cincinnati federal district court.

The seller levied four core grievances against the buyer’s conduct: alleged disbursement of annual employee bonuses despite profit shortfalls, imposition of an inventory accounting tweak unfavorably impacting profits, purported negligence in addressing competitor malpractice, and failure to honor a pledge to augment 2018 profits by $1.1 million.

In response, the buyer contended that even if these accusations held water, they reflected benign oversight rather than malevolent intent to deprive the seller of the 2018 earnout.

The court, however, granted the seller the platform to pursue legal recourse, citing the plausibility of the allegations aligning with bad faith intentions to deprive the seller of the earnout.

In summary, the case of Butler v. Ferguson Enterprises, Inc., underscores the intricacies and potential litigious ramifications surrounding earnouts in M&A transactions. It serves as a clarion call for stakeholders to navigate contractual nuances meticulously, safeguarding against post-closing disputes.

By dissecting this legal saga, entrepreneurs, business magnates eyeing acquisitions, CFOs, legal practitioners, and other stakeholders glean invaluable insights into the labyrinthine terrain of M&A earnouts and the pivotal role of judicial scrutiny in resolving contentious disputes.

Case Reference: Butler v. Ferguson Enterprises, Inc..  Civil Action No. 19-94-DLB-CJS., United States District Court, E.D. Kentucky, Northern Division, Covington, (March 7, 2024).

Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.

Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners management, as well as professionals who share an interest in the complexities of M&A law.

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

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling 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.

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