Business Asset Buyer May Face $100 Million Payroll Tax Successor Liability Claim

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June 30, 2020

Introduction

One M&A tax risk in an asset acquisition is seller’s unpaid payroll taxes.

The deal

The buyer in this case purchased the assets of a financially distressed business for approximately $7.3 million dollars payable at closing and $2.5 million payable over the next 41 months. The seller was in financial distress as the result of the discovery of unpaid federal and state payroll tax liabilities of $100 million. Nevertheless, the buyer closed the deal despite its knowledge of the payroll tax liabilities.

The lawsuit

The seller group filed for bankruptcy 5 months after the closing. The bankruptcy trustee then sued the buyer in the bankruptcy proceeding to recover amounts the buyer refused to pay the seller and to avoid the sale as a constructive fraudulent transfer.

The buyer challenged the suit arguing in part a right of set off for the potential $100 million in liability for unpaid payroll taxes. The court dismissed the buyer’s claim because the IRS and state tax agencies had not yet gone after the buyer.

This case is referred to as In Re Corporate Resource Services, Inc., Case No. 15-12329 (MG) (Jointly Administered) Adv. Pro. Case No. 16-01037 (MG), United States Bankruptcy Court, S.D. New York, (Signed March 1, 2017).

Comment

This was an unusual case because the buyer knew about the seller’s unpaid payroll tax liabilities before closing. The seller was owned by a public company. The auditors had not initially picked up the problem and when it broke publicly, it resulted in a change in seller’s top management.

These problems were all disclosed in SEC filings and were known by the buyer. The seller was financially distressed, and the buyer had a history of buying distressed businesses.

At closing, the buyer’s risk of having to pay seller’s unpaid federal payroll task was low because no buyer stock was involved in the deal and the buyer did not assume the federal payroll tax liability in the asset purchase agreement. State payroll tax risk depended upon the applicable state laws involved.

Nevertheless, one tool to manage buyer’s federal and state payroll tax risk would be for the buyer to have purchased the business out of bankruptcy under Bankruptcy Code Section 363. Section 363 permits the buyer to buy the business free of seller’s liabilities pursuant to a bankruptcy court order. This would probably have eliminated the risk.

A 363 acquisition would also have prevented the trustee or any seller creditor from trying to avoid or unwind the acquisition by claiming the deal was a constructive fraudulent transfer.

By John McCauley: I help manage the tax risks associated with buying or selling a business.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291 

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 asset purchase, payroll tax, successor liability Tagged with: ,

Buyer of Restaurant Assets Stuck with Seller’s Unpaid Sales Tax

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June 25, 2020

Introduction

One M&A tax risk in an asset acquisition is seller’s unpaid sales taxes.

The deal

The buyer in this case purchased the assets of a restaurant. The seller represented and warranted in the asset purchase agreement that there were no unpaid New York sales taxes.

The lawsuit

Turned out that the seller owed back sales taxes.  New York has a law that requires the buyer to notify New York at least 10 days before the closing of the acquisition. The buyer’s failure to comply makes the buyer personally liable for the seller’s unpaid sales taxes.

Notice was not given by the buyer in this case and New York collected the seller’s unpaid sales tax from the buyer. The buyer then sued the seller in a New York state court to seek reimbursement based upon the seller’s breach of its asset purchase agreement representation and warranty.

The seller agreed that it had not paid the sales tax. Nevertheless, the seller moved to dismiss the claim arguing that buyer’s personal liability for the sales tax was caused by buyer’s failure to provide New York the 10 day advance notice of the closing.

The court agreed and dismissed the claim. The court said that the buyer “had an absolute obligation to notify the Tax Commission of the impending purchase and the failure to do so, regardless of the good faith asserted, does not absolve …(the buyer)… from the tax obligations. While, …(the seller)… breached the contract in the strict sense, no damages are possible since the overriding harm to the purchaser was not that breach but rather …(the buyer’s)… own failure to notify the Tax Commission.”

This case is referred to as Shakeen LLC v. Courtelyou Wine LLC, Docket No. 521415/2019, Supreme Court, Kings County, (April 27, 2020). https://scholar.google.com/scholar_case?case=13162546052815355373&q=taxes+%22asset+purchase+agreement%22&hl=en&as_sdt=400006&as_ylo=2017

Comment

Does not seem fair.

New York’s bulk sale law which was contained in the Uniform Commercial Code was repealed some time ago. Nevertheless, an asset buyer of a New York business has the sales tax risk faced by this buyer found in Section 1141(c) of Article 28 of the New York State Sales and Use Tax Law.

By John McCauley: I help manage tax risks associated with buying and selling businesses.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291 

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 asset purchase, New York, sales tax Tagged with: ,

Plausible Trademark Infringement Claim for Sub-licensee Remote Marketing Out of Region Prospects

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June 12, 2020

Introduction

Sometimes a seller of a business wants to sell just a regional market and kept the rest. In such a case, the seller may license trademarks to be used in regional market he is leaving.  However, the seller wants to make sure that the buyer does not try to compete against the seller in the markets the seller is keeping.

The deal

The seller operated a baseball training/coaching/development business. He sold part of the business. In the deal the seller granted the buyer an exclusive, perpetual, royalty-free, and non-cancelable license to use and to sub-license his 3 trademarks, but only within a 7 state region: Maryland, Pennsylvania, Delaware, New Jersey, New York, Connecticut, and Florida.

The seller retained the exclusive right to use his 3 trademarks in his business outside the region.

The lawsuit

After the closing, the buyer sublicensed the trademarks to a competitor who was based in New Jersey. This competitor used the trademarks from his base in New Jersey to remotely market baseball programs outside of the trademark license 7 state region.

The seller sued the competitor/sublicensee for trademark infringement in a federal New Jersey district court. The sublicensee asked the court to dismiss the claim, arguing that since he is operating from his New Jersey base that he is using the licensed marks within the permitted trademark region.

The court disagreed and denied the sublicensee motion to dismiss the trademark infringement claim: “… the License Agreement means the marketing, advertising, and selling of baseball programs IS PERMITTED ONLY IN THE REGION. To be clearer, … since marketing would include online advertising, social media websites, etc., use of the marks from a base within the Region to market or operate baseball programs OUTSIDE OF THE LICENSED REGION … could implicate trademark infringement.”

This case is referred to as Barth v. Vulimiri, Civil No. 19-20755 (RBK/JS), United States District Court, D. New Jersey, Camden Vicinage, (May 26, 2020).

Comment

It is much easier today to remotely sell and market your goods and services. You do not have to have brick and mortar stores or travelling salespeople to service out of state markets.

This fact has upended the traditional physical connection issues in taxation. It also impacts how you protect intellectual property when carving out protected IP territories, in acquisitions.

Buyers and sellers of businesses must think carefully about how remote marketing and selling can impact post-closing noncompetition regions.

By John McCauley: I help companies and their lawyers minimize legal risk associated with private business acquisitions.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291 

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 remote use of trademark out of territory, trademark infringement Tagged with: ,

Court Rejects Buyer TRO-Prelim Injunction Request Because No Arbitration Pending

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June 8, 2020

Introduction

Both a buyer and a seller of a business often prefer to resolve post-closing disputes through binding arbitration. They are often seen a faster and less costly dispute resolution procedure alternative to litigation in the courts.

Nevertheless, it can take time to appoint arbitrators and get the process started. This may be a problem if a business buyer, for example, needs to ask a court to prohibit the seller from engaging in activities that may violate a confidentiality, nonsolicitation or noncompetition covenant, pending resolution of the dispute.

The deal

The buyer in this deal acquired a Louisiana based IT consulting business that was founded by its owner in 1984 for about $850K at the end of 2018. The deal also included a $150K earnout if the 2019 revenue of the acquired business was at least 80% of 2019 revenue.

The lawsuit

The buyer told the seller in late 2019 that it was not going to pay the $150K earnout because the business 2019 revenue fell below 80% of 2018 revenue.

Not surprisingly, the relationship between the parties quickly deteriorated. Buyer accused the seller’s founder and others of damaging the business by unlawfully competing against the buyer in violation of confidentiality, nonsolicitation and noncompetition provision of the transaction documents.

The buyer sued the seller group in a Manhattan federal district court. Furthermore, the buyer requested that the court order that the seller’s owner and others be prohibited from competing against the business by way of a temporary restraining order and preliminary injunction until the dispute was resolved.

The seller group asked the court to deny buyer’s request for a TRO and preliminary injunction and to compel the buyer to resolve the dispute through binding arbitration, as required by the asset purchase agreement. The buyer disagreed arguing that the APA authorized it to go into court for injunctive relief.

The court concluded that the APA permitted the buyer to seek injunctive relief only after it had commenced arbitration. Therefore, the court denied the buyer’s request for a TRO and preliminary injunction because the buyer had not yet commenced arbitration:Lastly, the Court disagrees with… (the buyer’s) …argument that even if the arbitration provision in the APA controls, it is nonetheless ‘entitled to seek temporary and preliminary injunctive relief from this Court.’ Buyer points to Section 18.4 of the APA as ‘expressly allowing a party to seek interim relief or provisional remedies from a court.’ But reading the entirety of Section 18.4, the Court concludes that it does not provide … (the buyer) … with the basis to seek the “interim relief” it now pursues. Instead, that section provides that … (the buyer) … ‘may seek from a court an order to compel arbitration, or any other interim relief or provisional remedies pending an arbitrator’s resolution of any controversy or claim.’ The Court also rejects… (the buyer’s) …apparent attempt to alter the words of this provision, suggesting at oral argument that it may seek injunctive relief from this Court ‘pending the filing of an arbitration and an arbitrator’s decision on the merits.’ Section 18.4 clearly contemplates that an arbitration would actually be pending before a party could seek ‘interim relief or provisional remedies’ from a court, not merely that it would or could be filed at some point in the future. As there is no pending arbitration here, the Court determines that … (the buyer) … cannot seek ‘interim relief or provisional remedies’ under Section 18.4 of the APA at this time.”

This case is referred to as NUMSP, LLC v. Etienne, No. 20-CV-2916 (RA, United States District Court, S.D. New York, (May 22, 2020).

Comment

Looks like a few added words would have permitted the buyer to seek a TRO and preliminary injunction with a court before the dispute was submitted to arbitration.

The original language said that the buyer “may seek from a court an order to compel arbitration, or any other interim relief or provisional remedies pending an arbitrator’s resolution of any controversy or claim …”  The buyer would have had a right to request a TRO and preliminary injunction before filing for the arbitration if the APA provision permitted the buyer to “seek from a court an order to compel arbitration, or any other interim relief or provisional remedies before filing the arbitration or pending an arbitrator’s resolution of any controversy or claim …”

By John McCauley: I help companies and their lawyers minimize legal risk associated with private business acquisitions.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291 

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 arbitration, TRO/preliminary injunction before filing for arbitration Tagged with: ,

No Fraud for Positive Projections Proved Inaccurate in Hindsight

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May 31, 2020

Introduction

It is all too common for an acquired business to not perform as well as expected after the closing. But the fact that the target’s projections were inaccurate do not amount to a fraud claim.

The deal

This deal involved a $195 million stock acquisition, which closed June 12, 2017. The target produces architectural aluminum window, curtainwall, storefront and entrance systems for small and mid-size commercial construction projects.

The lawsuit

Over the next two years, the buyer periodically disclosed challenges it was having with the business it inherited from the target. In April 2019, Buyer announced that it would take a $45.7 million charge, due in large part to the problems with the target.

The plaintiffs, who were shareholders in the buyer, filed a class action in a Minnesota federal district court asserting that buyer and two of its executive officers committed securities fraud. The shareholders allege that the buyer, and its CEO and CFO repeatedly misrepresented the status and nature of the target business. Buyer and its two top officers moved to dismiss the lawsuit for failure to state a claim under the Private Securities Litigation Reform Act (a law designed limit frivolous lawsuits). The court granted the motion to dismiss.

The plaintiffs claimed that the buyer’s team induced them to purchase the buyer stock with rosy post-closing projects of target performance. The plaintiffs argued that this was securities fraud because they claimed that the buyer team knew or should have known that the target had significantly underestimated project costs of certain large construction projects that the buyer acquired in the target transaction.

However, the court rejected the fraud claim because the plaintiffs could only point to the buyer team’s knowledge of these costs well after the closing, and there were no plaintiff allegations that the buyer team should have known about the significance of the cost problems before the buyer team released optimistic target projections.

This case is referred to as In Re Apogee Enterprises, Inc. Securities Litigation, Case No. 18-CV-3097 (NEB/BRT), United States District Court, D. Minnesota, (March 25, 2020).

Comment

It often happens that target’s post-closing performance falls far short of the seller’s pre-closing projections. But that does not amount to fraud. It may be fraud if rosy projections were based upon facts known by the seller to be untrue, or upon fact if unknown to seller, should have been known to the seller.

By John McCauley: I help companies and their lawyers minimize legal risk associated with private business acquisitions.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291 

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 constructive fraud, federal securities fraud, fraud in business sale Tagged with: , ,

Creditor’s Post 363 Successor Liability Claim Thrown Out by Bankruptcy Court

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May 27, 2020

Introduction

There is more legal risk when buying a distressed business, especially the risk of post-closing claims against the buyer by seller’s creditors, under a successor liability theory. This risk can be substantially minimized if the buyer purchases the assets of the business in a Bankruptcy Code 363 sale.

The deal

The seller was the in the popsicle business. It produced and sold gourmet popsicles that operated in locations throughout Alabama, Texas, and Kentucky.

For several months prior to the commencement of this bankruptcy case, the seller undertook an “aggressive strategy for expansion” that proved improvident. Indeed, “delays, cost overruns, and lower than expected sales in these new and prospective locations drained the seller of cash until their basic operations were at risk. The failed expansion strategy, coupled with typically slow sales in the fall and winter months, reduced cash available for the seller’s operations. And with debts owed to lenders approaching $7 million, bankruptcy became imminent.”

Thus, the seller filed for chapter 11 bankruptcy. From the outset of this chapter 11 case, the seller’s goal was to market and sell their assets as going concerns. To that end, the seller, with prior court approval, closed the sale of the business on February 18, 2020 under Bankruptcy Code Section 263.

Prior to the closing, certain creditors holding claims of about $650K objected to the sale taking place but took no formal steps to stay the sale. The court approved the sale and it closed 4 days later.

The lawsuit

The creditors filed a motion to have the court set aside the court’s approval of the sale, 10 days after the closing. Specifically, the creditors challenged the sale order’s approval of the 363 sale free and clear of successor liability. The court denied the motion.

In doing so the court quoted the following language: “’There is no question that confidence in the finality of bankruptcy sales is of critical importance, and there are only limited circumstances in which a bankruptcy sale should be set aside.’ … The reality here, and what the evidence substantiates, is that this business was up to its eyeballs in debt and going nowhere fast by trying to sell popsicles during the colder months. Further, the credit bid for the sale of the business was not the greatest deal ever, but it was the only deal. Dire straits notwithstanding, the Court authorized the sale only upon evidence of good faith, ‘good business reasons and sound justification,’ proper notice with an opportunity to object and present evidence, and a fair and reasonable purchase price. … ‘The purpose of section 363(m) is to maximize the sale price of estate assets by providing assurances to the purchaser of the finality of the sale by eliminating the prospect of litigation concerning claims to the property.’ … ‘Thus, confirmed sales may be vacated only when compelling equities outweigh the interest in finality.’ … In support of their arguments, the … (creditors) … have ‘not set forth facts or law of a strongly convincing nature to induce the court to reverse its prior decision,’ nor is the Court persuaded that extraordinary relief is justified here.”

This case is referred to as In Re Steel City Pops Holding, LLC, Case No. 19-04687-DSC11 (Jointly Administered), United States Bankruptcy Court, N.D. Alabama, Southern Division, (May 20, 2020).

Comment

This case illustrates the importance that a 363 acquisition of a business plays in eliminating the risk of successor liability. In fact, bankruptcy court approval of 363 sales free of successor liability are in the words of the court “commonplace in § 363 sale orders.”

The court noted the “commonplace” language in the sales order that it approved which freed the buyer from claims for successor liability: “Without limiting the generality of the foregoing, and except as otherwise specifically provided herein and in the Asset Purchase Agreement, the Buyer shall not be liable for any claim against the Debtor or any of its predecessors or affiliates, and the Buyer shall have no successor or transferee liabilities of any kind or character whether known or unknown as of the Closing. … The transfer of the Assets to the Buyer does not amount to a consolidation merger, or de factor merger of the Buyer and the Debtors or the Buyer and Debtors’ estates. There is not substantial continuity between the Buyer and Debtors or the Buyer and the Debtors’ estates, the Buyer is not a mere continuation of the Debtors or the Debtors’ estates, and the Buyer does not constitute a successor to the Debtor or the Debtors’ estates.”

By John McCauley: I help companies and their lawyers minimize legal risk associated with private business acquisitions.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291 

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 successor liability Tagged with: ,

US Court Enforces SPA’s Purchase Price Adjustment Dispute Forum Selection Clause

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May 24, 2020

Introduction

Many business acquisitions have post-closing purchase price adjustments based upon the financial position of the target company at closing. The parties usually provide for a dispute resolution procedure for resolving disagreements over the final numbers, and the amount in dispute can be a big number.

The deal

This deal involved a stock acquisition of a consumer finance company. The buyer agreed to pay $7.3 million plus the amount of the “Estimated Closing Net Assets” of the target, subject to post-closing adjustments, as well as pay off certain debt of the target.

The stock purchase agreement provided a dispute resolution mechanism, under which disagreements between the parties about the post-closing calculations must be submitted to an independent accounting firm for resolution. The accounting firm’s decision “shall be final and binding upon the Parties.”

The lawsuit

Not surprisingly, the buyer and seller did not agree upon the post-closing calculation and the matter was resolved by the accounting firm.  The seller challenged the accounting firm’s decision in a federal Delaware District Court. The buyer countered by filing its own action in the Delaware Court of Chancery seeking to confirm the independent accounting firm’s determination as an arbitration award.

The federal court held that the Delaware Court of Chancery probably has jurisdiction because the SPA provided for a Delaware Court of Chancery forum selection clause if that court had jurisdiction over the dispute. The federal court held that Delaware’s Court of Chancery probably had jurisdiction over the dispute because of its power to review arbitrations. However, the seller could come back to federal court if the Delaware Court of Chancery declines to exercise jurisdiction.

This case is referred to as FNB Corporation v. Mariner Royal Holdings, LLC, C.A. Nos. 19-1643-LPS-JLH, 19-1859-LPS-JLH, United States District Court, D. Delaware, (March 26, 2020).

Comment

The federal court concluded that the Delaware Court of Chancery had jurisdiction because under Delaware law, that court had jurisdiction to review arbitration decisions. The seller unsuccessfully argued that the accounting firm acted not in the capacity of an arbitrator but as an accounting expert.

The federal court rejected this argument: “… (The seller) … argues that the Court of Chancery lacks jurisdiction … because the SPA’s dispute resolution procedure is an ‘expert determination, not an arbitration. In support of its position, Seller cites to a different line of cases from the Court of Chancery. Those case are distinguishable because the contract language demonstrated the parties’ intent to engage in an expert determination. … Although the law in Delaware does appear to be evolving …, I am persuaded that the SPA at issue here, which lacks specific language disavowing arbitration, and which permits the accounting firm reasonable access to information, more closely resembles … (an) arbitration … (provision)…, than … (an) expert determination … (provision) …. Because … (the seller’s) … action seeks to void the independent accounting firm’s decision and … (the buyer’s) … action seeks to confirm it, I conclude that, if appropriate for this Court to make such a determination, the Court of Chancery has subject matter jurisdiction over these disputes …”

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291 

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 arbitration vs expert determination, dispute resolution provision, forum selection clause, purchase price adjustment Tagged with: ,

Owner Loses $14.5 Million Fraud Claim Against Majority Shareholder in Stock Deal

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May 22, 2020

Introduction

This deal is a reminder that a seller of a business needs to read the transactional documents (with the help of a competent lawyer) before signing. In this case it cost the seller $14.5 million.

The deal

A medical student and his college freshman brother, through their company, owned a minority interest in target, a pharmaceutical company. The brother’s investment company was managed by their father, a medical doctor.

The target shareholders agreed to sell their shares in the company to the buyer, also a pharmaceutical company for, $500 million. However, before the closing, the majority shareholder told the brothers that $100 million of the purchase price had to be paid to an unrelated company for work it had previously done for the target. Therefore, the purchase price for the shareholders was $400 million not $500 million, resulting in a $14.5 million reduction in the brothers’ share of the purchase price.

The lawsuit

The brothers signed the stock purchase agreement without reading it. Had they read it they would have discovered that the brothers’ investment company was the only target stockholder whose share allocation was modified downward (from 9% to 6.874%), and the money from the adjustment did not go directly to a non-party, but instead was redistributed among the other three stockholders. In addition, the brothers alleged that they were not given full copies of the transaction documents, but signed signature pages only.

The brothers’ investment company sued in a New York state trial court to recover the $14,5 million from the other shareholders. They lost.

The court said that the brothers should have read the transaction documents, which clearly disclosed that the purchase price was not reduced by $100 million and clearly disclosed that the documents wrongfully allocated $14.5 million of the purchase price from the brothers’ investment company to the other shareholders.

Furthermore, the court noted that the brothers’ investment company had, in the transaction documents, released the other stockholders from any claims connected to the deal, whether known or unknown.

This case is referred to as Shilpa Saketh Realty Inc. v. Vidiyala, Docket No. 157087/2019, Motion Nos. 001 & 002, Supreme Court, New York County, (April 16, 2020).

https://scholar.google.com/scholar_case?case=11345242416742325260&q=%22stock+purchase+agreement%22&hl=en&scisbd=2&as_sdt=2006&as_ylo=2017

Comment

The lesson from this deal is clear. Legal documents can have serious consequences. So, BEFORE YOU SIGN THE TRANSACTION DOCUMENTS: read the documents; have a competent lawyer read the documents; and then review the documents with your lawyer.

By John McCauley: I help companies and their lawyers minimize legal risk associated with private business acquisitions.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291 

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, fraudulent inducement, shareholder release Tagged with: , ,

Buyer in All Cash Stock Deal Fights Mere Continuation Successor Liability Claim

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May 15, 2020

Introduction

A buyer of the stock of an unrelated company for cash usually does not worry about being directly liable for the target’s liabilities. Perhaps that is not the case when purchasing the stock a distressed business.

The deal

Here, the buyer purchased the stock of the target for cash.

The lawsuit

A claimant sued the target in an Arizona federal district court for damages suffered in an accident in a pre-closing accident allegedly caused by an employee of the target company. The plaintiff also sued the buyer alleging that the buyer of the target stock was liable to the plaintiff under Arizona’s successor liability doctrine.

The buyer asked the court to throw out the plaintiff’s claim against the buyer through a motion for summary judgment on the grounds that the plaintiff cannot and will not be able to establish successor liability for any liability of Target’s resulting from the accident between the plaintiff and the target’s employee.

The plaintiff filed a motion asking the court to defer ruling on the buyer’s summary judgement motion to allow time to take discovery on the issue of successor liability. The court gave the plaintiff more time.

The court noted that under Arizona law, in an asset acquisition, the buyer can be held liable for the asset seller’s debts if the asset buyer is a mere continuation of the asset seller. In the courts words: “a corporation is a mere continuation of a predecessor corporation if there is ‘substantial similarity in the ownership and control of the two corporations,’ and ‘insufficient consideration running from the new company to the old for the assets passing to the new company.’”

The court noted that the plaintiff had alleged that the buyer and the target have common ownership, executives, employees, or directors, and that the buyer pays salaries and other expenses of the target. “This sufficiently demonstrates commonality in the operation and control of the corporations such that Plaintiff should have the opportunity to discover more information related to the same. Plaintiff also submits that … (the buyer) … purchased the shares of … (the target) … for an amount equaling approximately half of Target’s revenue the previous year, which may demonstrate insufficient consideration for the purchase of Target shares. … In light of the early stages of this litigation, Plaintiff is entitled to limited discovery to develop the mere continuation theory.”

This case is referred to as Tillman v. Everett, No. CV-19-08231-PCT-JJT, United States District Court, D. Arizona, (April 17, 2020).

Comment

I am very surprised that the court did not throw out the plaintiff’s claim against the buyer. Successor liability usually applies only to a limited universe of asset acquisitions, not to stock acquisitions, and especially not in an all cash deal.

This case bears watching. In the future stock buyers of distressed businesses may want to think about doing a Bankruptcy Code 363 acquisition if the target is distressed to cut off potential successor liabilities.

By John McCauley: I help companies and their lawyers minimize legal risk associated with private business acquisitions.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291 

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 mere continuation exception, stock purchase agreement, successor liability Tagged with: , ,

No CGL Coverage for $25 Million Fire Damage Claim to Business Assets Sold to Buyer

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May 8, 2020

Introduction

A seller of a business often is allocated legal risks of the sold business. This is accomplished through comprehensive purchase agreement representations and warranties and indemnification provisions.  Such legal risks can turn out to be very expensive.

The deal

This deal involved the $625 million sale of the assets of an oil refinery. The seller in the asset purchase agreement represented and warranted that the refinery met industry standards and good engineering practices; complied with applicable environmental regulations and standards; and was adequate for its use in the business.

The seller promised, in the APA, to indemnify the buyer for breach of these representations and warranties.

The lawsuit

A fire extensively damaged the refinery months after the closing. The buyer sued the seller for damages under the APA’s indemnification provision.

The seller tendered the claim to its CGL insurer who refused to defend, claiming that there was no coverage for a breach of contract claim, as opposed to a tort property damage claim. The seller then sued the insurer in an Arkansas federal district court and lost.

On appeal the federal court of appeals affirmed the trial court’s decision. The court held that liability of the seller to the buyer in the underlying suit represents the “economic loss” from seller’s’ breach of the asset purchase agreement, which is not covered by the policy. Accordingly, the insurer had no duty to defend the seller.

This case is referred to as Murphy Oil Corporation v. Liberty Mutual Fire Insurance Company, No. 19-1140, United States Court of Appeals, Eighth Circuit, (Submitted: January 15, 2020. Filed: April 21, 2020).

Comment

The federal court of appeals said that the insurer may have had a duty to defend if the buyer had sued the seller in a tort suit for property damages: “The statute of limitations for tort liability ran before … (the buyer) … filed its complaint. Before the running of the statute of limitations, … (the buyer) … might have sued in tort for the property damage from the fire. Because … (the buyer) … did not sue before the statute of limitations ran, … (the seller) … was ‘absolved of liability’ for the underlying property damage.  (Any) … liability of … (the seller) … in the underlying suit represents the “economic loss” from … (the seller’s) … breach of contract, which is not covered by the policy.”

By John McCauley: I help companies and their lawyers minimize legal risk associated with private business acquisitions.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291 

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