BUYER NO LONGER REQUIRED TO PAY SELLER EARNOUT

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The buyer had purchased seller’s cloud-based secure messaging IP in part, for a royalty-based earnout. The buyer emerged from a bankruptcy reorganization free of the earnout obligation.

M&A Stories

July 17, 2023

Introduction

In this blog post, we discuss a case where a buyer purchased a seller’s cloud-based secure messaging intellectual property (IP) with a royalty-based earnout. However, due to the buyer’s bankruptcy reorganization, the earnout obligation was eliminated.

The deal

The seller sold their leading cloud-based secure messaging and enterprise data integration platform to the buyer. As part of the purchase price, a substantial earnout based on royalties was included.

The Bankruptcy Situation: A year later, the buyer filed for Chapter 11 bankruptcy protection. During the bankruptcy proceedings, certain contracts were assumed by the buyer, while others were rejected. The rejected contracts did not include any related to intellectual property contracts, licenses, royalties, or similar agreements.

The lawsuit   

After the bankruptcy court confirmed the buyer’s bankruptcy plan, the seller sought a declaration that the earnout provision in the purchase agreement had been assumed by the buyer, given that it was a royalty. However, the bankruptcy court denied this motion, ruling that the buyer only assumed ongoing intellectual property arrangements crucial to the business. The earnout was deemed deferred compensation for assets already transferred in full, rather than a royalty. The seller appealed to the federal district court and court of appeals but was unsuccessful.

See QMAX, Inc. v. Fusion PM Holdings, Inc., https://casetext.com/case/iqmax-inc-v-fusion-pm-holdings-inc-2, United States Court of Appeals, Second Circuit (March 1, 2023).

Comment

This case serves as a reminder that when selling a business, there is a significant risk that the seller may not receive the remaining portion of the purchase price if it is not paid at closing.

By John McCauley: I write about recent legal problems of buyer 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 earnouts Tagged with: , , , , , , , , ,

DISPUTE OVER INDEMNIFICATION FOR LICENSE FEES IN INDIA’S TELECOMMUNICATION SPECTRUM

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The parent company in a spin-off transaction was obligated to indemnify its former subsidiary for per-closing taxes. The parent company argued that $94 million in license fees were not taxes.

M&A Stories

July 12, 2023

Introduction:

In business acquisitions, the allocation of liabilities such as taxes can often lead to disagreements between buyers and sellers. This particular case involves a parent company and its former subsidiary in India, with the parent company’s shareholders receiving stock in the subsidiary.

Background:

In 2005, a global satellite telecommunication company spun off its subsidiary in India. The subsidiary operated in India under a telecommunications license granted by the Department of Telecommunications. As per the licensing agreement, the company agreed to pay an annual license fee based on its revenue to access India’s telecommunications airways. The agreement allowed the Department of Telecommunications to review the company’s accounting records to ensure compliance with the fee payment.

Prior to the closing of the transaction in 2005, India audited the subsidiary’s books and assessed an additional $5.6 million in license fees. The company contested the assessment until 2019 when the Indian Supreme Court ruled in favor of the government. By that time, with interest and penalties, the assessed amount had reached $94 million.

The parent company had agreed to indemnify the subsidiary for pre-closing tax assessments. However, when the subsidiary demanded indemnification for the license fees under the tax indemnification provision of the asset purchase agreement, the parent company refused.

Lawsuit:

The subsidiary filed a lawsuit against the parent company in a Manhattan federal district court.

Outcome:

Initially, the court ruled in favor of the parent company, stating that the license fees were not taxes. However, the appellate court overturned this decision. The appeals court referred to the purchase agreement, which defined “taxes” and included “franchise taxes.” They deemed India’s license fees similar to franchise taxes, as they were mandatory fees imposed for conducting telecommunications business in India, calculated based on revenue.

Case Reference:

See Hughes Communications India Private Limited v. The DirecTV Group, Inc. No. 21-3013-cv, United States Court of Appeals, Second Circuit (Argued: February 23, 2023. Decided: June 22, 2023.)

https://scholar.google.com/scholar_case?case=8815716511495789355&q=%22asset+purchase+agreement%22&hl=en&scisbd=2&as_sdt=2006&as_ylo=2022

Comment: It is worth noting that the additional pre-closing license fees were known before the deal was finalized. The parties involved in documenting the agreement could have specifically allocated these fees to either the parent company or the subsidiary within the purchase agreement.

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 taxes Tagged with: , , , , , , , , ,

NURSING HOME SELLER SUES BUYER FOR FAILING TO CLOSE TRANSACTION

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The buyer agreed to purchase the nursing home for $28 million. The deal did not close, and the seller blamed the buyer.

M&A Stories

July 10, 2023

Introduction:

Closing a deal becomes less likely as the transaction becomes more complex.

Background:

This case involves the sale of a nursing home by the seller, who operates a skilled nursing facility in Maryland. The nursing home is part of a larger property that includes an assisted living facility and adult daycare, which were not part of the sale. The seller and buyer agreed on a purchase price of $28 million in a letter of intent dated May 6, 2022.

After four months of negotiations, the buyer and seller entered into an Asset Purchase Agreement (APA) with a closing date set for February 1, 2023. The APA required the buyer to identify any service contracts it wanted to assume by October 12, 2022. Additionally, the seller needed to obtain approval for a condominium regime, which the buyer would operate, and finalize the related documents before closing.

The seller provided draft Condominium Agreements to the buyer in October 2022, but due to the buyer’s delays in providing feedback, the seller couldn’t obtain approval for the condominium regime. Furthermore, the buyer failed to timely identify the service contracts it wished to assume and informed the seller that it couldn’t fund the purchase price. On January 11, 2023, the seller asked the buyer to confirm in writing its ability to fund the purchase and close on time, but the buyer did not respond.

Believing that the buyer had definitively repudiated its obligations under the APA, the seller terminated the agreement on January 24, 2023. However, the parties later engaged in negotiations to reinstate and amend the APA. On February 10, 2023, the seller accepted the buyer’s offer to reinstate the APA with amended terms outlined in their emails. But the buyer refused to sign the prepared APA and continued to request additional terms.

Lawsuit:

The seller initiated legal action in a Maryland federal district court, seeking an order to release the buyer’s escrowed deposit of $1,350,000.

Outcome:

The seller claimed that the buyer anticipatorily breached the APA by stating it couldn’t fund the purchase price or close on time. The buyer attempted to have this claim dismissed, but the court denied their motion. The court agreed with the seller that if the buyer indeed expressed its inability to fund the purchase or close on time, it would constitute an anticipatory breach.

The buyer argued against the existence of anticipatory repudiation, stating that it remained willing to negotiate and work through the issues to ensure the transaction was closed. However, the court explained that this statement didn’t negate the possibility of the buyer having repudiated the previous agreement, suggesting the buyer’s willingness to negotiate a new agreement.

The buyer also requested the court to reject the seller’s attempt to add factual allegations supporting an additional claim of the buyer breaching the implied duty of good faith and fair dealing. The claim related to the buyer’s failure to cooperate in preparing the condominium documents and to communicate its desired service contracts assumption. The court allowed the seller to add this claim to their complaint.

Case Reference:

See Family Of Care Real Estate Holding Co., Inc. v. Chapman Property, LLC Civil Action No. DKC 23-0574, United States District Court, D. Maryland (June 22, 2023).

Comment: In hindsight, the buyer’s funding issues seemed to be the underlying cause of their inability to cooperate with the seller in finalizing the condominium arrangement and contract assumption tasks.

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 financing transaction Tagged with: , , , , , , , , ,

NON-PROFIT HOSPITAL BUYER CHALLENGES DENIAL OF PROPERTY TAX EXEMPTION FOR ACQUIRED HOSPITAL

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A non-profit hospital chain buys a for-profit hospital and its property tax exemption application for the hospital is denied by the county.

M&A Stories

July 8, 2023

Introduction:

Most hospitals in the United States are non-profit corporations, comprising over two-thirds of the market. These non-profits don’t pay federal income taxes or local property taxes.

Background:

This case revolves around the sale of an underserved, stand-alone acute care hospital located 40 miles west of Philadelphia. The seller is a publicly traded company and a leading healthcare provider in the nation, operating in 44 markets across 15 states. The buyer is a not-for-profit healthcare system based in Pennsylvania, operating hospitals, and medical centers in the region.

The buyer purchased the hospital in 2017 for $82 million, with $40 million in cash and the remainder invested in capital improvements. The buyer operated the hospital in a new LLC.

Lawsuit:

The acquired hospital applied with the county for a real estate property tax exemption. The county denied the hospital’s property tax exemption application, and the buyer challenged the denial in a Pennsylvania trial court.

Outcome:

The trial court upheld this denial, stating that the hospital did not qualify as a tax-exempt charity. The court found that the hospital was not a charity, because it had not provided free, uncompensated patient care and highlighted an excessive compensation scheme for the hospital’s senior executives and management fee for the buyer’s services.

An intermediate appellate court dismissed the buyer’s appeal on procedural grounds but expressed agreement with the trial court that the hospital did not operate as a charity. The appellate court emphasized the criteria for a tax-exempt charity, including advancing a charitable purpose, relieving government burdens, donating a substantial portion of services, and operating without profit motives. The court said that the hospital did not act like a charity because of excessive compensation for the hospital’s senior executives, excessive management fees to the buyer, and not providing donated or gratuitous medical services to those unable to pay. The court stressed that donated or gratuitous medical services do not include treating individuals reimbursed by Medicaid at rates lower than desired.

Case Reference:

See Brandywine Hosp. v. Bd. of Assessment, 291 A.3d 467 (2023), Commonwealth Court of Pennsylvania (Argued November 16, 2022. Decided February 10, 2023. Reargument Denied April 14, 2023).

https://scholar.google.com/scholar_case?case=1180646883598182739&q=%22asset+purchase+agreement%22&hl=en&scisbd=2&as_sdt=2006&as_ylo=2022

Comment: The buyer will likely appeal to the Pennsylvania Supreme Court.

In the first quarter of 2023, 14 out of 15 announced hospital acquisitions involved non-profit healthcare system buyers. In the future, non-profit buyers must consider the risk of denial of their application for property tax exemptions for acquired hospitals. To manage this risk, non-profit healthcare system buyers should structure acquisitions with commercially reasonable management fees, and executive compensation within IRS guidelines, and provide adequate evidence of uncompensated care.

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 taxes Tagged with: , , , , , , , , ,

BUYER OF DENTAL PRACTICE ASSETS FACES LAWSUIT OVER ALLEGED MEDICAID FRAUD BY SELLER

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A whistleblower claims that the buyer of the assets of a dental practice is responsible for allegedly false Medicaid claims filed by the seller.

M&A Stories

July 6, 2023

Introduction:

In this M&A story, we discuss a case where the buyer of a dental practice is being sued for alleged Medicaid fraud committed by the seller.

Background:

A whistleblower has accused dentists in eastern Ohio of performing unnecessary dental procedures and submitting false claims to Medicaid. Under the False Claims Act, which aims to prevent fraud against the government, the whistleblower filed a legal action against multiple dental practices.

Lawsuit:

Following the purchase of a dental practice in Ohio by a Pittsburgh-based dental service organization, the whistleblower sued the buyer, claiming that they were responsible for the Medicaid fraud committed by the seller. However, the buyer sought to dismiss the claim, arguing that they were not legally liable for the seller’s fraudulent activities.

Outcome:

The court agreed with the buyer and dismissed the claim against them. The court noted that the buyer would have been held responsible if they had assumed the seller’s Medicaid fraud liability in the purchase agreement or paid the seller using buyer equity. However, neither of these circumstances applied to this transaction.

Case Reference:

See United States Ex Rel. Kramer v. Doyle, Case No. 1:18-cv-373, United States District Court, S.D. Ohio, Western Division (June 20, 2023).

Comment: It’s important to note that this risk of liability may not have been discovered during the due diligence process since the lawsuit was not publicly available before the transaction was completed.

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 successor liability Tagged with: , , , , , , , , ,

RESOLVING DISPUTES IN BUSINESS SALES: FORUM SELECTION CLAUSES AND LOCATION CHALLENGES

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The court applied the purchase agreement’s Michigan forum selection clause and refused to transfer the case from Detroit to Houston, even though it will be inconvenient for both the Houston-based seller’s owner, the Houston business, and its employees, not to mention all documents and evidence are in Texas.

M&A Stories

July 5, 2023

Introduction:

When a smaller business is purchased by a larger buyer in a different market, disputes can arise after the transaction. In such cases, the buyer often files a lawsuit in their own city, even if it is far from the location of the sold business. This article explores the impact of forum selection clauses and the difficulty sellers face in transferring disputes to a different location.

Background:

In this recent case, a Michigan-based civil engineering firm acquired a Houston-based civil engineering and construction management services company in 2021. The buyer aimed to expand its services regionally, and the seller’s owner became the buyer’s Regional Business Director as part of the deal. Additionally, the seller’s owner agreed not to compete with the buyer.

Lawsuit:

After leaving the buyer and starting a competing engineering firm, the seller’s owner faced a lawsuit filed by the buyer in a Detroit federal district court. The seller’s owner requested the transfer of the lawsuit to Houston, where the business, employees, witnesses, and documents were located.

Outcome:

Despite the practical inconveniences for the Houston-based seller, the court denied the transfer request. The decision was based on the forum selection clause included in the asset purchase agreement, which required litigating disputes in Michigan.

Case Reference:

See Professional Engineering Associates, Inc. v. Kaakouch, Case No. 23-cv-10967, United States District Court, E.D. Michigan, Southern Division (June 20, 2023).

Comment: Large buyers often prefer litigating in their own city to gain a home court advantage. This case highlights the challenges faced by sellers when attempting to break a forum selection clause, emphasizing the importance of carefully considering the implications before entering into such agreements.

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 forum selection clauses Tagged with: , , , , , , , , ,

SELLER IN BANKRUPTCY AUCTION SEEKS DAMAGES FROM SUCCESSFUL BIDDER’S MISCONDUCT

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In a David and Goliath deal, the small bankruptcy auction seller accuses the successful multinational bidder of primary antibiotic assets of sharp dealing.

M&A Stories

July 2, 2023

Introduction:

In this case, a small pharmaceutical company, facing bankruptcy, has accused the winning bidder of engaging in unfair practices while acquiring its primary antibiotic asset. The bankruptcy trustee has filed a claim seeking damages for the bidder’s misconduct.

Background:

The bankrupt seller developed two antibiotics to combat drug-resistant bacterial infections. However, the expected sales volume did not materialize, leading to financial difficulties. To address this, the seller initiated a bankruptcy auction on April 15, 2019, to sell its assets. The successful bidder, a large Indian multinational pharmaceutical company, acquired global rights (excluding China) for the first antibiotic and exclusive worldwide rights for the second antibiotic. A Chinese pharmaceutical company became the successful bidder for the China rights.

Negotiations between the buyer, the seller, and the Chinese rights buyer were initiated to finalize a licensing agreement for the China rights. However, the buyer delayed the process and provided extensive changes to the draft agreement, significantly deviating from the original terms. The Chinese rights buyer eventually decided to withdraw from the negotiations, citing difficulties caused by the buyer’s actions and lack of good faith. The seller then informed the buyer that it must proceed with purchasing the China rights as the backup bidder.

However, on July 31, 2019, the buyer informed the seller that it would not fulfill its obligation to purchase the China rights. The seller alleges that the buyer deliberately delayed negotiations to find another buyer willing to pay a higher amount, intending to make a profit. Nevertheless, the buyer’s efforts failed.

As negotiations continued for the other antibiotic sale, the buyer displayed mixed signals and failed to finalize the agreement. Eventually, the seller sold the China rights for a significantly lower amount than what the buyer or the Chinese rights buyer had offered. Additionally, the seller could not find a buyer for the other antibiotic, decreasing its value.

Lawsuit:

In response to these disappointing outcomes, the seller filed a claim for damages against the buyer in bankruptcy court, accusing them of misconduct. The buyer, in turn, filed a motion to dismiss the claims.

Outcome:

The court determined that if the presented facts were accurate, they could support claims of tortious interference with business relations, interference with prospective economic advantage, promissory estoppel, breach of the implied covenant of good faith and fair dealing, and contempt for willful violation of the bankruptcy court’s bidding procedure and sale orders.

Case Reference:

See In Re Achaogen, Inc., Case No. 19-10844 (BLS) Adv. Proc. No. 21-50479 (BLS), United States Bankruptcy Court, D. Delaware (Signed January 30, 2023).

Comment: The contempt claim includes a demand for punitive damages. It serves as a reminder to larger companies that mistreating smaller sellers can have financial consequences.

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 Bankruptcy Auction Sales Tagged with:

LIABILITY OF BUYERS IN BUSINESS ACQUISITIONS: LANDLORD’S CLAIM AGAINST RADIO NETWORK BUYER

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The New York court permits the seller’s landlord to pursue the buyer based on the successor liabilities doctrines of (1) actual fraud to hinder the landlord and (2) de facto merger.

M&A Stories

June 29, 2023

Introduction:

When acquiring a business, buyers have the ability to choose which liabilities they assume. However, there are instances where certain liabilities may still be attached to the acquisition, despite the buyer’s preference.

Background:

In this case, the buyer was involved in the consolidation of radio stations. They purchased the assets of the seller’s radio network for $3.5 million. The seller’s founder/president and COO obtained ownership in the buyer’s acquisition subsidiary and continued to operate the network for two years after the transaction.

The deal closed about 8 months after the landlord of the seller’s Manhattan offices had filed a lawsuit against the seller for unpaid rent. The court awarded a judgment of $500K against the seller about two years after the closing.

Lawsuit:

Since the seller failed to pay the landlord, the landlord took legal action against the buyer in a Manhattan state court, relying on New York’s successor liability doctrines. The buyer requested the court to dismiss the lawsuit.

Outcome:

The court denied the buyer’s motion and allowed the landlord to proceed with the claim against the buyer using two successor liability doctrines. First, the court permitted the landlord to explore, through discovery, the claim that the buyer intentionally defrauded the landlord. Second, the court allowed the pursuit of successor liability against the buyer under the theory that although the transaction was structured as an asset purchase, it effectively merged the seller into the buyer, according to New York’s de facto merger doctrine.

The critical factor for the court was the fact that the seller’s founder/president obtained an ownership interest in the buyer’s acquisition subsidiary.

Case Reference:

See Trinity Centre LLC v. Gen Media Partners LLC, Index No. 656215/2021, Motion Seq. No. 002, Supreme Court, New York County (June 7, 2023)

https://scholar.google.com/scholar_case?case=12082305554713648961&q=%22asset+purchase+agreement%22&hl=en&scisbd=2&as_sdt=2006&as_ylo=2022

Comment: While it may be difficult for the landlord to prove that the buyer intended to defraud them, the de facto merger theory could potentially favor the landlord due to the seller’s founder holding equity in the buyer group. The receipt of buyer equity, commonly known as “rollover equity,” is a common occurrence in private equity deals.

The lesson learned from this case is the importance of conducting thorough due diligence. The landlord’s lawsuit was a matter of public record during the buyer’s due diligence process. By being aware of the potential risk and taking appropriate measures such as having the seller settle the landlord’s debt before the closing or withholding a portion of the purchase price, the buyer could have mitigated the exposure to the landlord’s claim.

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 Problem with seller lessor or landlord Tagged with:

SHAREHOLDER’S CLAIM THAT DIRECTORS FAILED TO DISCLOSE HIGHER ACQUISITION OFFER REJECTED BY MISSOURI COURT

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The shareholders accused the directors of pushing an inferior deal in exchange for lucrative director seats on the buyer’s board.

M&A Stories

June 26, 2023

Introduction:

In a recent case involving the sale of a Missouri bank, a shareholder claimed damages against the board of directors for not disclosing a superior acquisition offer. However, the shareholder’s claim was unsuccessful.

Background:

The bank’s board of directors began exploring the sale of the bank in 2016. The first potential buyer presented an offer to purchase all the bank’s outstanding stock, which was discussed with the bank’s top shareholders on September 13, 2016. The directors proceeded with this offer and withheld information about other interested buyers and potentially higher offers from the shareholders.

One of the potential buyers, Alliant Bank, made an offer to purchase the bank for a higher price after the initial offer had expired. Despite receiving legal advice to explore other offers, the directors pushed for exclusive negotiation with the initial buyer, urging shareholders to ignore other potential buyers.

The directors excluded a dissenting director from meetings and did not solicit any other offers after November 28, 2016. Ultimately, 70% of the shareholders signed a stock purchase agreement with the initial buyer, which forced all shareholders to accept the buyer’s terms. The directors themselves benefited from the agreement and secured positions on the buyer’s board of directors.

Lawsuit:

The shareholder filed a class action petition on behalf of all the bank stockholders who sold their bank stock to the buyer. In the petition, the shareholder alleged the directors breached their fiduciary duties of care and loyalty to act in the best interest of the shareholders by securing a transaction that offered the best value available to the shareholders, and the directors breached their fiduciary duties through self-dealing by securing substantial compensation as members of the buyer board of directors.

The shareholder alleged that he and the class were directly harmed by the directors’ actions. The directors filed a motion to dismiss, which was granted by the trial court because the shareholders lacked standing to bring a direct action against the directors. The trial court held that the shareholder must bring a derivative action against the directors on behalf of the corporation. A derivative lawsuit is a much more cumbersome and time-consuming process. The trial court issued an order granting the directors’ motion to dismiss.

Outcome:

The trial court’s decision to dismiss the claim was affirmed on appeal by the Court of Appeals, based upon a 2014 Missouri Supreme Court decision involving similar facts. The shareholder may consider appealing to the Supreme Court. Notably, the Delaware courts, known for their expertise in corporate law, have rejected the requirement for derivative lawsuits in similar cases, a stance followed by California.

Case Reference:

See Laske v. Krueger, WD 85173, Missouri Court of Appeals, Western District (OPINION FILED: January 10, 2023).

Comment: It is possible that the shareholder may appeal to the Missouri Supreme Court, as the Court of Appeals acknowledged that Delaware law would permit this type of lawsuit but was bound by a 2014 decision by the Missouri Supreme Court.

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 Selling shareholders problem with their board of directors Tagged with:

BUYER AWARDED $6.2 MILLION IN PUNITIVE DAMAGES FOR DENIED FIRE INSURANCE COVERAGE

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The buyer leased the auto dealership real estate. It purchased fire insurance coverage. After the facility was destroyed the buyer made a claim for coverage. The carrier denied coverage because the buyer did not own the building, nor did the lease require the buyer to purchase insurance.

 M&A Stories

June 6, 2023

Introduction:

Businesses face various risks, including the possibility of a devastating fire incident.

Background:

In 2013, the buyer acquired the assets of an auto dealership in northern California, which included leasing the dealership building comprising a showroom, sales offices, and service and parts facilities. As a precautionary measure, the buyer obtained fire insurance coverage.

Unfortunately, an October 2014 fire destroyed the dealership building. The buyer filed a claim with the insurance carrier, but coverage was denied. The carrier argued that the buyer lacked an “insurable interest” in the structure because they neither owned the building nor were required by the lease to purchase fire insurance.

The buyer argued that their franchise agreement compelled them to operate from that location, necessitating the rebuilding of the structure to maintain the franchise. Despite this, the carrier persisted in denying coverage, leading to the closure of the dealership.

Lawsuit:

The buyer took legal action against the carrier in a California state court.

Outcome:

Following the jury trial, a judgment was rendered in favor of the buyer, resulting in damages totaling $7.7 million. This amount included $6.2 million awarded as punitive damages. Furthermore, the buyer was awarded $716,000 in attorney fees, $241,000 in prejudgment interest, and $120,000 in costs.

The buyer’s judgment was affirmed on appeal to the Court of Appeals.

Case Reference:

See Borjon Auto Center King City, Inc. v. Sentry Select Ins. Co., Nos. H048021, H048084, Court of Appeals of California, Sixth District (Filed May 31, 2023).

Comment: It appears that the buyer had taken appropriate steps to manage the risk of fire insurance coverage denial, leaving limited options to prevent this outcome.

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

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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

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