Resolving M&A Seller Earnout Disputes: Beyond Accountant Arbitration

Share

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.

Posted in problems with earnouts Tagged with: , , , , , , , , , , , , , , , , , , , , , , ,

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

Share

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.

Posted in problems with seller nondisclosure Tagged with: , , , , , , , , , , , , , , , , , , , ,

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

Share

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.

Posted in problems with earnouts Tagged with: , , , , , , , , , , , , , , , , , , , , , , , , , , ,

Navigating Earnout Disputes in M&A: Insights from Dolce v. WTS International, LLC

Share

Delve into the intricate world of M&A earnouts with insights from the landmark Dolce v. WTS International, LLC case. Explore the complexities and risks involved in earnout disputes, including the crucial role of EBITDA calculations. Gain valuable lessons on navigating such legal intricacies to ensure smoother M&A transactions.

M&A Stories

April 13, 2024

In the dynamic landscape of mergers and acquisitions, transactions often involve earnouts, adding a layer of complexity and risk for sellers. Earnouts, while offering potential upside, can also lead to disputes, particularly regarding the accuracy of financial metrics such as EBITDA.

Enter Dolce v. WTS International, LLC, a recent case heard in the Delaware Court of Chancery, shedding light on the intricate process of resolving earnout disagreements.

Background: In December 2021, the owners of a New York City-based business specializing in design and management services for meeting, conference, and amenity centers sold their assets to WTS International, a global provider of hospitality services. The deal included both cash and potential earnout payments, contingent upon the performance of the acquired business.

The Crux of the Dispute: At the heart of the disagreement lay the calculation of EBITDA, the metric upon which the earnout hinged. WTS International contended that the sellers had not met the agreed-upon EBITDA threshold, thus disputing the earnout payment. In response, the sellers challenged the accuracy of the EBITDA calculation and requested further clarification from WTS International, to no avail.

Legal Proceedings: With the impasse unresolved, the matter found its way to the Delaware Court of Chancery. Here, the sellers sought to bypass the typical recourse of submitting the EBITDA calculation to expert accountants for determination. However, the court ruled that establishing the EBITDA calculation through accounting experts was a prerequisite before addressing any allegations of bad faith on the part of WTS International.

Key Takeaways:

  1. Expert Determination: Earnout disputes often entail submitting contested calculations to accountants for resolution. This process, akin to expert determination, grants accountants the authority to make binding decisions, providing a swift resolution mechanism distinct from traditional arbitration.
  2. Separation of Issues: While disputes over financial calculations are common, allegations of bad faith require separate consideration. In the case of Dolce v. WTS International, LLC, the court emphasized the sequential nature of addressing EBITDA accuracy before delving into claims of buyer misconduct.

Conclusion: Earnouts can be a double-edged sword in M&A transactions, promising rewards while introducing complexities. The Dolce case underscores the importance of meticulous financial scrutiny and the procedural nuances involved in resolving earnout disputes. By understanding the intricacies of such disagreements, stakeholders can navigate M&A transactions with greater clarity and confidence.

By distilling complex legal proceedings into actionable insights, Dolce v. WTS International, LLC serves as a valuable reference for entrepreneurs, business owners, and professionals navigating the intricate realm of mergers and acquisitions.

Case Reference: Dolce v. WTS InternationaL, LLC. C.A. No. 2023-0789-SKR., Court of Chancery of Delaware(Submitted: February 16, 2024. Decided: February 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.

Posted in problems with earnouts Tagged with: , , , , , , , , , , , , , , , , , , ,

Understanding M&A Asset Buyer Responsibilities for Unassumed Seller Contracts

Share

Explore the intricacies of M&A asset acquisitions and buyer responsibilities through real-world legal cases. Delve into the complexities of unassumed seller contracts, as illustrated by Tower Automotive Operations USA I, LLC v. Vari-Form Manufacturing Inc. Learn how meticulous legal diligence and strategic foresight are essential for navigating the complexities of M&A agreements and safeguarding the interests of all parties involved.

M&A Stories

April 11, 2024

In the realm of mergers and acquisitions, the acquisition of a business’s assets offers buyers the strategic advantage of selectively assuming seller contracts. However, nuances arise when buyers find themselves accountable for unassumed seller contracts, as exemplified in a recent case.

In 2019, an acquisition unfolded in the automotive industry, involving a business specializing in highly specific components for automotive bodies and structural parts. Notably, the buyer opted not to assume a 2017 contract with a prominent manufacturer of engineered automotive components, despite its significance. This contract pertained to supplying a vital part for the Jeep Wrangler platform identified as lasting six years, but requiring the seller to supply the parts through the program’s lifespan.

Following the transaction, the buyer honored the contract’s terms, providing parts at the agreed-upon price until 2023. However, when proposing a 17% price adjustment thereafter, tensions arose. The customer, dissatisfied with the proposed increase, sought legal recourse, petitioning a Detroit federal district judge for relief.

In a notable ruling, the court sided with the customer, issuing a preliminary injunction compelling the buyer to continue supplying parts at the contractual price. Crucially, the court determined that by fulfilling the contract from 2019 to 2023, the buyer implicitly assumed its obligations, despite the absence of explicit agreement within the asset purchase agreement.

This case, Tower Automotive Operations USA I, LLC v. Vari-Form Manufacturing Inc., underscores the importance of understanding the implicit responsibilities associated with unassumed seller contracts in M&A transactions. It serves as a poignant reminder for buyers to meticulously evaluate contractual obligations and implications, even when not expressly assuming them.

As entrepreneurs, business owners, CFOs, CEOs, board members, and professionals across various industries consider acquisitions as growth strategies or exit opportunities, this case illuminates the complexities inherent in navigating M&A agreements. It underscores the critical role of legal diligence and strategic foresight in safeguarding the interests of all parties involved.

In conclusion, while M&A transactions offer lucrative prospects for expansion and consolidation, prudent attention to contractual nuances is paramount. Tower Automotive’s legal saga serves as a beacon, guiding stakeholders through the intricate terrain of asset acquisition and contractual obligations.

Case Reference: Tower Automotive Operations USA I, LLC v. Vari-Form Manufacturing Inc. Case No. 24-cv-10144, United States District Court, E.D. Michigan, Southern Division(February 15, 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 ratifying unassumed contract by post-closing action Tagged with: , , , , , , , , , , , , , , , , , , , , , , , , , ,

Navigating Real Estate Lease Assignments in M&A: A Case Study

Share

In this insightful blog post, we delve into the complexities of real estate lease assignments within the context of mergers and acquisitions (M&A). Using a compelling case study involving a marijuana cultivation facility in Phoenix, we explore the intricacies of securing landlord consent, navigating contractual obligations, and the legal ramifications of overlooking critical lease provisions. Gain valuable insights into the pivotal role of real estate in M&A transactions and learn from real-world examples to enhance your understanding of lease assignment dynamics.

M&A Stories

April 8, 2024

In the intricate world of mergers and acquisitions (M&A), real estate often stands as a cornerstone asset, with leases playing a pivotal role. However, the path to securing a smooth transition of leased properties can be fraught with complexities, as exemplified by a recent case involving a marijuana cultivation facility in Phoenix.

In December 2015, a buyer acquired assets, including equipment and inventory, while assuming the seller’s lease interest. Crucially, the lease stipulated that any assignment necessitated written consent from the landlord. Yet, neither the buyer nor the seller notified the landlord of the impending transaction, nor did they execute the assignment term in the lease.

For over two years post-acquisition, the buyer dutifully fulfilled lease obligations, unaware of potential complications looming on the horizon. Matters came to a head in August 2017 when the City of Phoenix, citing regulatory concerns, approached the buyer, highlighting the absence of their name on the lease—a prerequisite for compliance.

Seeking resolution, the buyer petitioned the landlord for an entity change on the lease, emphasizing the oversight from the time of acquisition. In response, the landlord provided a modified lease with the seller’s name replaced by the buyer’s. However, ambiguity shrouded the sufficiency of this alteration, with the landlord’s reassurance interpreted as tacit approval by the buyer.

Subsequently, a rift ensued between the buyer and the landlord, culminating in the buyer’s eviction and subsequent legal recourse. The ensuing legal battle turned on the pivotal question of whether the landlord had indeed consented to the lease assignment.

In the ensuing legal battle, the trial court sided with the landlord, invoking the absence of explicit consent. However, the intermediate appellate court adopted a different stance, recognizing the buyer’s assertions as constituting a plausible legal claim. This decision reverberated beyond the confines of the case, underscoring the paramount importance of securing landlord consent in lease assignments, a practice ubiquitous in the realm of M&A transactions.

The case, Growth Opportunities, Inc. v. Tenbar, Inc., serves as a poignant reminder of the intricate dance between contractual obligations and practical exigencies inherent in M&A dealings. Indeed, the buyer’s predicament could have been averted had they diligently sought the landlord’s consent in adherence to lease stipulations.

In essence, this case encapsulates the nuanced interplay between legal frameworks and real-world ramifications, underscoring the imperative for meticulous due diligence and proactive engagement in navigating the labyrinthine landscape of M&A transactions.

Case Reference: Growth Opportunities, Inc. v. Tenbar, Inc. No. 1 CA-CV 23-0143, Court of Appeals of Arizona, Division One(Filed February 8, 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 Real Estate Leases Tagged with: , , , , , , , , , , , , , , , , , , , , , ,

Navigating Earnout Disputes in Mergers & Acquisitions

Share

Delve into the complexities of earnout disputes in mergers and acquisitions through the lens of the Barnard v. Marchex, Inc. case. Explore how earnouts, though crucial for aligning buyer-seller interests, can lead to litigation due to ambiguous terms and breaches of good faith. Learn about the importance of meticulous drafting and clear contractual safeguards to mitigate disputes and ensure post-transaction integration success. Navigate the volatile landscape of M&A with insights into earnout structures and legal pitfalls.

M&A Stories

April 7, 2024

In the intricate landscape of mergers and acquisitions, earnouts serve as a crucial mechanism for aligning buyer and seller interests on purchase price. However, beneath their apparent simplicity lies a potential minefield of disputes, as illustrated by the case of Barnard v. Marchex, Inc.

In this case, a strategic stock acquisition involving a business-to-business call analytics company unfolded with promise but ended in litigation. The initial deal saw a $10.1 million cash payment at closing, coupled with a tantalizing $3 million earnout opportunity, contingent upon the target’s sales meeting predefined financial goals over two twelve-month periods.

However, the post-closing phase revealed fractures in the buyer-seller relationship. Allegations flew as the sellers accused the buyer of operating the acquired business in bad faith, purportedly to evade the earnout obligation. Claims centered on restrictive measures limiting the former CEO’s client interactions, allegedly steering them towards the buyer, and triggering an earnout acceleration event due to a drop in employee count below the agreed threshold of thirty-five.

The dispute escalated to a Delaware federal district court, where the buyer sought dismissal, contesting the sufficiency of the seller’s allegations. Nevertheless, a magistrate’s recommendation to continue the lawsuit underscored the complexity and volatility of earnout arrangements.

This case underscores the inherent risks in earnout structures and highlights the importance of clear contractual safeguards. While earnouts can align incentives and bridge valuation gaps, meticulous drafting is essential to safeguarding the seller’s interests post-closing. Specific provisions, such as defining acceleration events like maintaining a minimum employee count, can mitigate disputes and foster smoother post-transaction integration.

In the dynamic realm of M&A, where certainty is elusive and disputes are rife, prudent navigation of earnout agreements can spell the difference between fruitful collaboration and protracted legal battles.

Case Reference: Barnard v. Marchex, Inc C.A. No. 1:22-cv-01382-RGA, United States District Court, D. Delaware(February 2, 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 Uncategorized Tagged with: , , , , , , , , , , , , , , , , , , , ,

Navigating Due Diligence Risks in M&A: Lessons from Competitor Acquisitions

Share

Explore the complexities of M&A due diligence in competitor acquisitions with our latest blog post. Discover lessons learned from real-world cases, such as the challenges faced by a prominent manufacturer in its acquisition journey. Gain insights into navigating legal risks and ensuring compliance in strategic business endeavors.

M&A Stories

April 2, 2024

In the realm of mergers and acquisitions, the pursuit of a competitor as an acquisition target introduces a unique set of due diligence challenges, distinct from those encountered in transactions with noncompetitor entities.

Consider the case of a prominent manufacturer specializing in fluorochemical products for industrial applications in over 70 countries. In its strategic expansion efforts within the fluorochemicals market, the company set its sights on acquiring a competitor’s Arkansas-based fluorine chemical business, as outlined in a December 14, 2007 asset purchase agreement (APA), culminating in the transaction’s closure on January 31, 2008.

Given the competitive nature of the parties involved, the buyer’s capacity for precontractual scrutiny of the seller’s facilities and operations was notably restricted. A solitary, post-business hours tour of the plant was the extent of the buyer’s due diligence before finalizing the APA. Consequently, the seller provided representations and warranties in the agreement, affirming the assets’ good condition, operational sufficiency, and compliance with relevant laws.

Subsequent to the acquisition, the buyer unearthed deficiencies in certain plant components, prompting claims for indemnification from the seller. Specifically, concerns arose regarding refrigeration units leaking refrigerant at unacceptable rates and fire suppression systems failing to meet legal requirements at the time of purchase.

Despite the buyer’s efforts to substantiate non-compliance with federal and state regulations concerning the aforementioned equipment, the court, in a Connecticut trial, ruled against the buyer’s claim, a decision upheld on appeal.

Reflection on this case prompts considerations regarding the efficacy of standard due diligence procedures, particularly for large-scale buyers. Could a more comprehensive assessment have identified these issues pre-APA execution, allowing for preemptive solutions within the agreement? Alternatively, the inherent reliance on representations and warranties in competitor acquisitions underscores the pivotal role of contractual assurances in mitigating risks.

The legal precedent set forth in the case of EI Du Pont De Nemours And Company v. Chemtura Corporation sheds light on the intricacies involved in navigating due diligence pitfalls within M&A transactions, particularly when engaging with competitors.

As entrepreneurs, business owners, CFOs, CEOs, and other stakeholders contemplate growth strategies or exit plans, understanding the nuances of due diligence in M&A, especially in competitor acquisitions, becomes paramount. Such insights empower informed decision-making and mitigate the inherent risks associated with strategic business endeavors.

Case Reference:

EI Du Pont De Nemours And Company v. Chemtura Corporation, (AC 45707), Appellate Court of Connecticut, (Argued October 17, 2023. Officially Released January 23, 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 Uncategorized Tagged with: , , , , , , , , , , , , , , , , ,

Mitigating M&A Buyer Risks: Safeguarding Against Former Seller Employees Competing with Stolen Trade Secrets

Share

Dive into the legal intricacies of M&A transactions with our latest blog post, exploring how to mitigate risks associated with former seller employees competing with stolen trade secrets. Learn from real-life legal disputes and discover proactive measures for safeguarding your acquisitions. Stay informed on the latest in M&A legal practices and protect your business assets effectively. #M&A #LegalRisks #TradeSecrets #DueDiligence #IntellectualProperty

M&A Stories

March 26, 2024

In the realm of mergers and acquisitions, the acquisition of a manufacturing business brings forth a plethora of opportunities and risks, particularly concerning the protection of trade secrets and confidential information. A recent case highlights the significance of vigilance in safeguarding these assets to mitigate potential pitfalls for buyers.

In April 2018, a buyer ventured into the acquisition of the assets of a quaint valve maker nestled in small-town Oklahoma. Following the transaction, the seller’s longstanding general manager transitioned to the buyer’s workforce. However, this seemingly routine transition soon unraveled into a legal conundrum.

The grandson of the seller’s owner embarked on the establishment of a competing entity, subsequently recruiting the aforementioned general manager. This triggered a legal dispute, with the buyer initiating legal action in an Oklahoma City federal district court, alleging the misappropriation of the valve maker’s trade secrets and confidential information.

The laundry list of allegedly pilfered assets included a gamut of crucial documents and data, ranging from quality manuals and technical specifications to customer lists and pricing information. The gravity of the situation underscored the buyer’s imperative to protect its intellectual property and proprietary information.

Despite challenges raised by the general manager, the court greenlit the lawsuit, particularly emphasizing the validity of claims pertaining to trade secrets and confidential information. Notably, the court discerned that while certain assets may not qualify as trade secrets, they remain eligible for protection as confidential information, reinforcing the need for robust safeguards in M&A transactions.

This cautionary tale serves as a poignant reminder for entrepreneurs, business owners, CFOs, CEOs, board members, and professionals involved in M&A transactions. Vigilance in protecting trade secrets and confidential information is paramount, underscoring the necessity for meticulous due diligence and proactive measures to mitigate risks and uphold the integrity of acquisitions.

Case Reference:

Aceco Valves, LLC v. Neal, Case No. CIV-21-368-D, United States District Court, W.D. Oklahoma, (January 23, 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 Uncategorized Tagged with: , , , , , , , , ,

Navigating the Legal Landscape: A Tale of Restaurant IP in M&A

Share

Dive into the captivating world of mergers and acquisitions with our latest blog post, ‘Navigating the Legal Landscape: A Tale of Restaurant IP in M&A.’ Uncover the twists and turns of a high-stakes case involving the sale of intellectual property from a renowned NYC Italian restaurant chain. Explore the complexities of trade dress infringement, court verdicts, and the delicate dance between preserving intellectual property and the ever-evolving landscape of restaurant M&A. Join us on this legal journey that unveils the intricacies shaping the future of M&A stories.

M&A Stories

March 11, 2024

In the dynamic realm of mergers and acquisitions, the intertwining of success and intellectual property is a common narrative. Today, we delve into a riveting case involving the sale of intellectual property connected to a prestigious New York City Italian restaurant chain, tracing its roots back to 1981.

The spotlight of this legal saga is the Tribeca branch, a focal point despite the restaurant chain’s high acclaim. Like many others, the Tribeca establishment faced financial challenges spurred by the COVID-19 pandemic, ultimately leading the entire chain into bankruptcy. In a turn of events, the intellectual property assets were auctioned off in a July 2020 bankruptcy sale.

Fast forward to 2023, and the original owners resurface with a new restaurant at the former Tribeca location. The buyer alleges that the new establishment replicated specific elements of the original restaurant’s trade dress, presenting a compelling case. This includes a curated art collection of black and white photographs forming a symmetrical design, custom artwork referencing the Tribeca location, white-washed brick paired with matte black ceilings, and distinctive hand-blown glass pendants near the entrance.

In response, the buyer initiates legal action, filing a lawsuit in a Manhattan federal district court for trade dress infringement under federal law. The crux of their plea lies in seeking a preliminary injunction to halt the alleged infringing use of trade dress during the ongoing litigation.

The court’s verdict, issued on January 16, 2024, delivered a mixed outcome. It found merit in the buyer’s claims related to the restaurant’s trade dress, issuing a preliminary injunction based on a likelihood of proving a violation of federal trademark law. However, the attempt to secure an injunction for the new restaurant’s recipes and certain furniture was unsuccessful. The court reasoned that the facts presented did not sufficiently establish the buyer’s likelihood of prevailing in these specific matters.

This case underscores the intricate dance between the preservation of intellectual property and the ever-evolving landscape of mergers and acquisitions. As we dissect these legal intricacies, we gain insights into the delicate balance required when dealing with the multifaceted aspects of restaurant M&A.

Case Reference:

Asset Co IM Rest, LLC v. Katzoff, No. 23 Civ. 9691 (JPC), United States District Court, S.D. New York, (January 16, 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 intellectual property, trademark infringement Tagged with: , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

Recent Comments

Categories