Explore the complexities of business acquisitions in the recreational vehicle (RV) industry. Learn from a case study involving a Dallas-Fort Worth RV window shade manufacturer, the intricacies of earnout mechanisms, and the legal challenges faced post-acquisition. Gain valuable insights for M&A transactions.
M&A Stories
September 12, 2018
On September 12, 2018, a case in the recreational vehicle (RV) industry highlighted the complexities of business acquisitions. The buyer, based in Wichita, Kansas, sought to acquire a Dallas-Fort Worth RV window shade manufacturer, leading to a stock purchase agreement dated September 1, 2016.
Key Points:
Purchase Price Dispute. Initial disparities in valuation led to a compromise. The target sought $20 million; the buyer proposed $16 million. To bridge the gap, an earnout mechanism was established, allowing a potential additional payment of up to $5.6 million based on adjusted EBITDA targets.
No Guarantees. Notably, the stock purchase agreement didn’t bind the buyer to specific operational commitments for the target, creating a pivotal aspect.
Post-Acquisition Development. Shortly after the acquisition, the buyer announced another purchase, including a competitor to the target. The absence of restrictions on such transactions in the agreement became crucial.
Legal Dispute. Subsequent challenges arose when the target’s revenues fell below expectations, leading to the seller’s legal action in a Manhattan federal district court on February 16, 2018.
Legal Claims:
Fraud Allegation. The seller claimed fraudulent inducement, asserting that the buyer failed to fulfill post-closing commitments made during negotiations.
Operational Breach. Accusations of the buyer not maximizing opportunities for the target to meet earnout triggers were allowed to proceed by the court.
Court Decision:
The court dismissed the fraud claim, emphasizing that only promises within the stock purchase agreement were enforceable.
The operational breach claim is ongoing, contingent on the seller proving bad faith and the actual deprivation of an earnout payment.
Lesson Learned:
Document Promises. Including post-closing commitments in the stock purchase agreement could enhance seller protection.
Competitor Acquisition Clause. Hindsight suggests specifying restrictions on competitor acquisitions during the earnout period for added security.
Case Reference:
Townsley v. Airxcel, Inc., No. 18-cv-1439 (KBF), United States District Court, S.D. New York (August 15, 2018).
By John McCauley: I help people start, grow, buy and sell their businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying 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.
Recent Comments