Seller’s Highly Leveraged Exit Strategy Collapses with Buyer’s Post-Closing Default

Share

M&A Stories

December 07, 2020

Introduction

There is a lot more risk in selling your business when you turn over the keys to the buyer before getting all of your purchase price.

The deal

This deal involved the sale of a third-generation family business to a long-time friend and business owner. The Evanston, Illinois based company manufactured and distributed advertising specialties and promotional items.

The buyer principal owned an athletic apparel business. He formed a limited liability company which purchased the seller’s assets for $ 1 million payable in installments after the closing starting with $5,000 per month for the first five months, and then $16,250 per month for the remaining sixty months.

The lawsuit

The buyer never made any payments and the seller owner sued the buyer LLC and the LLC owner for breach of the asset purchase agreement in a Chicago federal district court. The seller owner was a party to the APA. The buyer owner was not. The buyer owner asked the court to dismiss the claim against him and the court granted the request because a member or manager of a limited liability company is generally not responsible for the liabilities of the LLC.

This case is referred to as Shevin-Sandy v. Athletic Specialties, LLC.,  No. 20 C 1181, United States District Court, N.D. Illinois, Eastern Division, (August 17, 2020) 

Comment

Assume the owner of the seller did not ask for better legal protection because they were longtime friends. Probably not friends now.

Red lights should go off when all of the purchase price is to be paid after the closing. This risk should have been managed. At a bare minimum the buyer should have put up its assets as collateral; the buyer owner should have personally guaranteed the purchase price; and possibly the buyer owner should have put up additional collateral.

Even better, the seller should have gotten some or all of the purchase price at closing.

By John McCauley: I help people manage M&A risks involving privately held companies.

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 Guaranty, securing buyer's note, securing deferred purchase price, security agreement, seller carried purchase price Tagged with: ,

ADR Procedure Was Probably Arbitration and not an Expert Determination, Giving Delaware Chancery Court Jurisdiction

Share

M&A Stories

December 04, 2020

Introduction

An acquisition often involves a post-closing purchase price adjustment reflecting the value of the net assets at closing. The parties often agree to submit any dispute over this calculation to an independent accounting firm.

The deal

This deal involved the 2018 stock acquisition of consumer finance company that provides loans to consumers with limited access to credit. The deal was priced at $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 target debt.

The parties agreed to submit any dispute over the post-closing calculation to an independent accounting firm for resolution. And any challenge to the independent accounting firm’s decision was to be decided by the Delaware Court of Chancery unless “such court does not have subject matter jurisdiction over such suit, action or proceeding.”

The lawsuit

After the closing the seller did not like the calculation approved by the independent accounting firm and tried to challenge it in a Delaware federal district court (which was the backup forum selected by the parties if the Delaware Court of Chancery did not have jurisdiction over the independent accounting firm’s decision).

The dispute came down to whether the dispute resolution by the independent accounting firm was an arbitration or an expert determination. The Delaware Chancery Court would have jurisdiction over an arbitration but not an expert determination.

The federal court held that the ultimate decision was up to the Delaware Court of Chancery, but in the meantime, it felt the dispute resolution procedure selected by the parties in the stock purchase agreement was probably an arbitration and not an expert determination. Thus, it dismissed the federal litigation to give the Delaware Court of Chancery an opportunity to decide whether it would take jurisdiction over the dispute.

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 court here found it persuasive that the dispute resolution procedure selected by the buyer and seller was an arbitration because the SPA’s dispute resolution provision “lacks specific language disavowing arbitration.”

By John McCauley: I help people manage M&A risks involving privately held companies.

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 Tagged with: ,

Generous Interpretation of Guaranty of Buyer Owner in Stock Acquisition Gives Seller a Break

Share

M&A Stories

December 03, 2020

Introduction

The biggest risk that a seller of a business runs is not being paid all of the purchase price at closing. On way to manage this risk is to require the owners of the buyer to personally guaranty the buyer’s post-closing payment obligations.

The deal

This 2008 deal involved the sale of an Alaskan commuter airline owned by an Alaskan family and partner to a Portland real estate developer. The buyer purchased the stock of the company that owned all of the operating certificates and other airline business assets except for the hanger and planes, which were owned by an affiliate company.

A buyer affiliate purchased the hanger from the seller affiliate and the target company purchased by the buyer leased airplanes from the seller affiliate.

The lawsuit

Then, the financial crisis put the buyer group into financial distress. This resulted in litigation in the Alaskan state courts. One of the issues was whether the buyer owner’s guaranty given in connection with the stock purchase agreement applied to the target’s lease of the airplanes from the seller affiliate.

The guaranty said that the buyer owners were guaranteeing the buyer’s stock purchase agreement obligations owed to the seller. The trial court read the guaranty and ruled for the buyer owner on its motion for summary judgment. This meant that the buyer owner was not responsible for the airplane lease payments and won with no trial.

The seller appealed. The Alaska Supreme Court reversed, holding that the references in the guaranty to the lease agreement raised enough ambiguity as to whether the guaranty applied to the target’s lease obligations, decided to let the jury decide whether the buyer owners had also guaranteed the target corporation’s airplane lease obligations.

This case is referred to as Beardsley v. Jacobsen, No. 7481, Supreme Court of Alaska, (September 18, 2020) https://law.justia.com/cases/alaska/supreme-court/2020/s-17190.html 

Comment

The seller was lucky on appeal. I think most courts would have read the personal guaranty to only apply to the buyer’s stock purchase agreement obligations.

The much better course here for the seller would have been to have expressly stated in the personal guaranty that the buyer owner guaranteed the target’s airplane lease obligations.

By John McCauley: I help people manage M&A risks involving privately held companies.

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 guaranty of related acquisition agreements Tagged with: ,

APA’s Pennsylvania Choice of Law Provision Didn’t Apply to State’s Product Line Exception

Share

M&A Stories

December 02, 2020

Introduction

A buyer of the assets of a manufacturing business is not responsible for claims arising from the use of products made by the seller, unless the buyer assumed the risk in the asset purchase agreement. But there is a products line exception to the general rule of no buyer successor liability for unassumed risks that is recognized in several states.

The deal

This deal involved the 1985 acquisition of the maker of asbestos based products. The buyer in the asset purchase agreement did not assume any seller product liability risk: “… (The buyer) … does not hereby … assume any debts, liabilities or obligations of … (the seller) …, contingent or absolute, direct or indirect, known or unknown, matured or unmatured, including, without limitation, mortgages, lines of credit, notes, bonds, contract claims or obligations, accounts payable, taxes of any kind to any governmental body, bank or other loans and expenses (including accrued vacations), all of which shall remain the debts, liabilities, or obligations of … (the seller) …”

The lawsuit

The decedent was in the navy from 1964 to 1972, and worked on the seller’s asbestos based products. His surviving spouse sued the buyer claiming that her husband “contracted malignant mesothelioma as a result of working with asbestos-containing products while serving in the Navy.” The surviving spouse’s claim ended up in a Louisiana federal district court.

The buyer filed a motion in the court for summary judgment arguing that it was not responsible for the claim because it did not assume the seller’s product liabilities in the asset purchase agreement.

The surviving spouse agreed that the buyer did not assume seller’s product liabilities, but argued that the buyer was responsible to the surviving spouse under Pennsylvania’s product line exception. The court said that the Pennsylvania product line exception “functions as a means for … (the surviving spouse) … to seek redress from … (the buyer) …, in a means consistent with the social policies underlying strict products liability, when … (her husband) … has been injured by a defective product from … (the seller) …” The Pennsylvania products line exception applies; ”Where the buyer “acquires all or substantially all of the manufacturing assets of … (the seller) …, even for cash, and undertakes essentially the same manufacturing operation as the selling corporation, … (the buyer) … is strictly liable for … (injuries) … caused by defects in units of the same product line, even if previously manufactured and distributed by the selling corporation …”

The buyer did not disagree with the description of Pennsylvania’s product line exception, instead arguing that it did not apply to this lawsuit. Specifically, the buyer argued that the APA’s Pennsylvania choice of law provision only applied to the interpretation of the APA provision and not to other matters.

The court agreed and ruled in the buyer’s favor: “The Court is persuaded that the choice of law provision in the Purchase Agreement does not extend to this third-party tort claim. The Court concludes that § 32 of the Purchase Agreement does not mandate the application of Pennsylvania successor liability law to this case …”

This case is referred to as McAllister v. Mcdermott, INC., Civil Action No. 18-361-SDD-RLB, United States District Court, M.D. Louisiana, (August 14, 2020) 

Comment

The lesson here for a buyer when buying a maker of a product is to not assume the seller’s product liabilities in the asset purchase agreement and to recognize that there is a risk for unassumed seller product liability in states that recognize the product line exception such as Pennsylvania and California. That risk is best served through other tools such as insurance.

By John McCauley: I help people manage M&A risks involving privately held companies.

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 sale of product line, successor liability Tagged with: ,

Buyer of Treadmill Maker Did Not Assume Implied Merchantability Warranty

Share

M&A Stories

November 18, 2020

Introduction

A buyer of a manufacturer often prefers an acquisition of assets as opposed to equity of the seller in order to minimize the risk of post-closing product liability claims.

The deal

This deal involved the acquisition of the assets of a treadmill manufacturer. In the asset purchase agreement the buyer assumed only the seller’s written repair or replace warranty and expressly stated that the buyer was not assuming any other seller product liability.

The lawsuit

Before the closing the seller had sold a treadmill to a gym. One day while using the treadmill, a woman fell, striking her head. She later died due to her injuries from the fall.

The family sued the buyer in a Texas state court, claiming that the buyer had assumed the Texas version of the Uniform Commercial Code’s implied warranty of merchantability. The trial court ruled in favor the buyer and the family appealed to a Texas intermediate appellate court. The appellate court reversed finding that the buyer assumed seller’s implied warranty of merchantability under a rationale not clear to this writer.

The buyer appealed to the Texas Supreme Court which reversed, ruling in the buyer’s favor. The Texas high court held that the buyer, as an asset buyer, only had assumed seller’s duty to the deceased woman’s estate under an implied warranty of merchantability if the buyer expressly assumed the seller’s implied warranty of merchantability in the asset purchase agreement.

And the buyer did not, only promising to assume the written repair and replace warranty: “Based on the asset-purchase agreement’s plain and unambiguous language, the Buyer’s express assumption of the written warranty for repair or replacement of defective treadmill parts was not an assumption of a warranty of merchantability implied by law. Accordingly, the Buyer was entitled to summary judgment. We reverse the court of appeals’ judgment to the contrary and render judgment that the Koubas take nothing on their implied warranty of merchantability claim.”

This case is referred to as Northland Industries, Inc. v. Kouba, No. 19-0835, Supreme Court of Texas, (Argued October 7, 2020, Opinion Delivered: October 23, 2020) 

Comment

This was the right decision. The buyer had clearly only assumed the repair or replace warranty. The ruling for the deceased woman’s estate in the Texas intermediate appellate level included a strong dissent from the chief justice of this Court of Appeals of Texas, First District, Houston.

By John McCauley: I help people manage M&A risks involving privately held companies.

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 assumption of a contract, implied warranty of merchantability, seller's warranty claims, successor liability Tagged with: ,

Stalking Horse Loses Acquisition Bid Over Value of Proposed PPP Loan Assumption

Share

M&A Stories

November 17, 2020

Introduction

A financially distressed company often ends up selling its business in bankruptcy. The sale is conducted in an auction based upon a negotiated asset purchase agreement with a stalking horse.

The deal

The bankrupt company in this deal operated a lamb processing plant facility in Wyoming. It was distressed and had filed for bankruptcy in Wyoming.

The company owed a bank $3.95 million that it took out under the Payroll Protection Program. An insider to the company had formed a company to serve as the stalking horse for a bankruptcy auction of the company. The company and the stalking horse negotiated a $10 million cash asset purchase agreement where the stalking horse would also assume certain liabilities, including the PPP loan.

The PPP loan had a forgiveness feature and the selling company valued the $3.95 million PPP loan at $1.25 million for purposes of evaluating auction bids. The winning bid at the auction for the company was for $14.25 million cash.

The lawsuit

The stalking horse bidder challenged the seller’s determination of the value of its proposed assumption of the PPP loan, arguing that its value should be its face value of $3.95 million. The court rejected the challenge finding that the seller’s valuation of the loan value was within the realm of good business judgment: “In determining whether to approve a proposed sale under section 363, courts generally apply standards that, although stated various ways, represent essentially a business judgment test. … Under the business judgment standard, the court examines the sale’s process and procedure and gives deference to Debtor’s choice of the winning bid.”

This case is referred to as In Re Mountain States Rosen, Case No. 20-20111, United States Bankruptcy Court, D. Wyoming, (July 21, 2020) 

Comment

PPP loans were a new feature in section 363 bankruptcy sales in the summer of 2020. Nevertheless, in 20/20 hindsight the stalking horse should have tied down the value of the PPP loan in the acquisition documents so as to given it a baseline to judge overbids.

By John McCauley: I help people manage M&A risks involving privately held companies.

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 bankruptcy sale, distressed business acquisitions, PPP loan assumption, Section 363 sale Tagged with: ,

Franchise Asset Buyer Didn’t Inherit Seller’s Unemployment Tax Experience Rating

Share

M&A Stories

November 2, 2020

Introduction

A company’s unemployment insurance liability depends upon its experience rating; the employee turnover history of the business. A buyer of the assets of a business usually starts with a lower unemployment liability than the seller. However, there is a risk that the state may seek to impose a seller’s higher experience rating upon the buyer.

The deal

The deal involved the purchase of the assets of several Krispy Kreme stores in the Dallas area. The seller was a limited partnership and the general partner was the franchisor. The buyer entered into a franchise agreement with the franchisor as part of the deal.

Texas law states that the buyer of a business inherits the seller’s experience rating if the seller had substantial management or control over the three stores purchased by the buyer after they were sold.  After the closing Texas claimed that the franchisor as general partner of the seller had substantial management or control of buyer’s operations as a result of the franchise agreement. It transferred the unemployment compensation experience rating of the seller to the buyer.

The lawsuit 

The transfer resulted in additional unemployment taxes for the buyer. The buyer paid the taxes and made a refund claim in the approximate amount of $300K.

The Texas state trial court denied the refund claim and the buyer appealed to an intermediate appellate court.  That court held that the franchisor’s rights and obligations under the franchise agreement did not amount to the required substantial management or control of buyer’s store operations:

The court:The evidence submitted by … (the buyer) … established that after it purchased the three stores from … (the seller) …, it had no further relationship or dealings with … (the seller) … that would show “substantially common management or control” by … (the seller) … to justify transferring its unemployment compensation experience rating to … (the buyer) …. Even though … (the franchisor) … was listed as a “Seller” on the Assert Purchase Agreement, the summary judgment evidence showed that … (the franchisor) … was merely a franchisor and did not have “substantially common management or control” over … (the buyer’s) … day-to-day operations of the seller stores beyond those set forth in the franchise agreements.”

This case is referred to as Dulce Restaurants, LLC v. Texas Workforce Commission, No. 07-19-00213-CV, Court of Appeals of Texas, Seventh District, Amarillo, (September 25, 2020) 

Comment

This result is not surprising. The deal was no different than any deal involving the acquisition of the assets of a franchised business, other than the fact that the general partner of the limited partnership seller in this case happened to be the franchisor.

Laws giving a state the right to transfer the seller’s unemployment tax experience rating to the buyer are designed primarily to prevent fraud where a business with a high experience rating sells the assets to a buyer which the seller owns or controls.

By John McCauley: I help people manage M&A risks involving privately held companies.

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 franchise sale, seller's unemployment experience rating Tagged with:

Buyer of Manufacturer’s Assets Has No Liability for Product Sold Before Closing

Share

M&A Stories

October 28, 2020

Introduction

Management of product liability risk when buying a company is always an issue, even in an asset acquisition. Especially, if there is a history of seller products liability claims.

The deal

This deal involved the November 2017 acquisition of the assets of a business which made and sold an intrauterine device. It was a copper-wound, T-shaped contraceptive that is placed in the uterus to prevent pregnancy.

The seller had a history of products liability claims. However, the buyer did not assume liability for injuries the seller’s device caused before the date of the asset purchase agreement.

The lawsuit 

A claimant had seller’s device implanted in 2010. She had it removed in 2016. During its removal, part of the device broke and became embedded in the lining of the claimant’s uterus. She later opted for surgery to remove the embedded part, but it was unsuccessful. Claimant’s doctor advised her to leave the broken part in her uterus.

The claimant sued multiple defendants for her injuries, including the buyer and the seller. The lawsuit ended up in a Houston federal district court. The buyer asked the court to dismiss the claim against it on the grounds that it did not make or sell the device.

The buyer argued that because it did not manufacture or sell the device, it cannot be liable for the claimant’s injuries under applicable Texas or Pennsylvania law. The claimant agreed that the buyer did not manufacture or sell the device; she argued that buyer is liable under a successor-liability theory because the buyer purchased the device assets from the seller in an alleged fraudulent transfer.

The court dismissed the claim, with prejudice, noting that the claimant did not plead any factual basis for finding, or any legal claim for, successor liability or fraudulent transfer in her complaint:Only one factor is present: that the … (buyer) … allegedly knew of pending litigation against … (the seller) … before the asset sale. Nothing indicates that … (the seller) … sold the … assets for inadequate consideration, … (or) … that the transfer was concealed …” 

This case is referred to as Barcelo v. Teva Pharmaceuticals Usa, Inc., Civil Action No. H-20-00017, United States District Court, S.D. Texas, Houston Division, (April 2, 2020) 

Comment

The court applied Texas law.  The result might have been different if California was the applicable law. California developed a product line exception which might have imposed successor liability upon the buyer in this deal.  Few states have followed California’s lead.

By John McCauley: I help people manage M&A risks involving privately held companies.

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 sale of product line, successor liability Tagged with: ,

Expert Can Testify That GM Was Unreasonable in Disapproving Dealership Sale

Share

M&A Stories

October 20, 2020

Introduction

Selling your franchise business usually requires the consent of the franchisor, whether you own a Subway franchise or an auto dealership. However, state law generally requires the franchisor to be reasonable in this approval process.

The deal

The deal involved the sale of a Buick GMC dealership located about 50 miles outside of Pittsburgh. The asset purchase agreement provided for a purchase price of $750,000 for goodwill plus payment for various assets. In addition, the buyer planned to discontinue Buick Operations at the seller’s facility and relocate GMC operations to Buyer’s existing Chevrolet, Buick, and Cadillac dealership in a buyer facility 20 miles closer to Pittsburgh.

The seller’s Buick GMC dealer agreement with GM provided that the GM franchise could not be assigned to the buyer without the approval of GM. The seller asked GM for approval and GM refused.

GM’s stated reasons for refusal included the permanency of the investment of the five existing Buick GMC dealers in Pittsburgh, declining population in and around Pittsburgh, existing GMC dealerships providing adequate competition, and the likelihood of injury to existing network outweighing any perceived benefit from increased competition.

The lawsuit

The deal did not go through. The seller sued GM in a Pittsburgh federal district court for damages, based upon violation of sections of the Pennsylvania Board of Vehicles Act.

The seller retained an expert to conduct analysis and provide testimony regarding GM’s denial. In his report, seller’s expert stated that GM’s analysis of its factors was insufficient to justify its conclusions. The expert also stated that the conclusions GM reached in its denial contradicted the conclusions reached by GM in other cases involving network changes. Seller’s expert characterized GM’s analysis as an “outcome-driven approach” with an intent to deny the seller’ relocation request.

GM asked the court to prohibit the expert from testifying at trial, arguing in essence that the expert did not adequately disclose the facts underlying his opinion. The court disagreed, finding adequate disclosure of the facts underlying the expert’s opinion: “… (the expert’s) … report identifies each factor from the decision letter and outlines how the facts do not support the rationale or that it contradicts GM’s decisions from other cases.”

In addition, the court stressed how important experts are in this kind of dispute: “Without expertise in the automotive industry, as proffered by … (the seller) … through … (seller’s expert) …, a layman would not likely understand the methodologies utilized by GM or be able to assess whether those methodologies pass the scrutiny of another expert. In this case, … (seller’s expert) … is not charged with conducting an independent analysis to demonstrate that GM should have accepted the … (the deal) … Instead, the relevant inquiry into the … claim is the conduct of GM in reaching its conclusions and therefore whether it acted and decided reasonably. … Therefore, at issue are the cited GM rejection factors and the methods GM used to assess and determine those factors to reach its decision to deny … (the seller) … application for consent. Given the specialized knowledge needed to complete this analysis, the Court finds it appropriate to proffer an expert in the relevant field to offer a critique and opinion to assist the jury as it evaluates the reasonableness of GM’s actions and decision. Thus, … (seller’s expert’s) … opinions and testimony are relevant and admissible.”

This case is referred to as Brooks Automotive Group, Inc. v. General Motors LLC, No. 2:18-CV-00798-MJH, United States District Court, W.D. Pennsylvania, Pittsburgh, (May 8, 2020) https://scholar.google.com/scholar_case?case=15805139854672892254&q=%22asset+purchase+agreement%22&hl=en&as_sdt=2006&as_ylo=2020

 Comment

This case demonstrates the risk of selling a franchise. A franchisee can assume that a legal challenge of a deep pocket franchisor’s denial of consent to sell the franchise will be opposed by top flight lawyers. The fight will be expensive and time consuming.

By John McCauley: I help people manage M&A risks involving privately held companies.

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 approval of franchisor, denial of consent must be reasonable, franchise sale Tagged with: ,

Business Buyer Fails To Make Timely Purchase Payment and Loses Deal

Share

M&A Stories

October 16, 2020

Introduction

Business people often agree upon the terms of an acquisition in an atmosphere of goodwill. The details of the documentation are left to their inside and outside professional advisers. This friendly relationship is helpful to move the deal forward. However, it can lull one into thinking that terms and deadlines in the acquisition agreement are “merely guidelines.”

The deal

In this asset deal the buyer’s parent COO and the seller CEO apparently had a good relationship. They negotiated a deal that lead to an asset purchase agreement with a July 26, 2017 effective date. Apparently, there was not a physical closing.

The asset purchase agreement required that the buyer make a purchase price payment on July 26.

The lawsuit

The buyer did not make the July 26 payment. The buyer parent COO told the seller CEO on July 30 that he needed to open a bank account in the United States to enable the buyer to make the $22,000 payment, which he intended to do on August 1. The seller CEO simply responded, “Great.”

When payment still had not been received by August 9, the seller notified the buyer that they were rescinding or cancelling the agreement.

The buyer resisted and the dispute ended up in a Michigan state court. The buyer lost at trial and appealed to an intermediate appellate court.

The appellate court affirmed the trial court’s decision: “Despite the clear and unambiguous language of § 3 of the Asset Purchase Agreement, … (the buyer) … argues that the timing of the specified payment was not crucial. However, it is also undisputed that … (the buyer) … had not established a bank account in this country to enable it to wire the money to … (the seller) … before … (the seller) … rescinded the agreement. Even if … (the buyer’s) … failure to pay the specified $22,000 amount on the stated effective date is not considered a substantial breach, … (the buyer) … substantially breached the agreement by failing to make any effort to make the specified payment for at least two weeks after the agreement’s stated effective date. While … (the buyer) … indicated that it would follow through with payment days after the agreement was signed, there was no progress toward making that payment. … (The seller) … waited more than two weeks for … (the buyer) … to make the necessary arrangements to make the required payment, but no payment was made.”

This case is referred to as Trillium Cyber, Inc. v. Canbushack, Inc., No. 345494, Court of Appeals of Michigan, (April 23, 2020) 

Comment

It seems that the buyer’s failure to make the timely payment was not a cash flow issue. Instead, the buyer parent’s COO was too cavalier about making a timely payment. Unfortunately, the seller’s CEO was not so understanding and he had the language of the asset purchase agreement to back him up.

By John McCauley: I help people manage M&A risks involving privately held companies.

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 failure to make timely purchase price payment, rescission Tagged with: ,

Recent Comments

Categories