The owner of the acquisition subsidiary did not guarantee the obligations of the bankrupt acquisition subsidiary. The court rejected the seller’s attempt to pierce the corporate veil of the acquisition subsidiary to collect from its owner.
M&A Stories
August 01, 2022
Introduction
In this blog, we discuss a case where a seller was unable to collect the deferred purchase price from the owner of a bankrupt acquisition subsidiary. The court rejected the seller’s attempt to hold the parent company responsible for the subsidiary’s obligations by piercing the corporate veil.
The Deal
The deal involved the sale of a Boston-based security camera company to an Arkansas-based company that sells cameras to the U.S. military. The buyer formed an acquisition subsidiary to purchase the assets of the Boston-based company, aiming to protect itself from the acquired business’s liabilities.
The Purchase Agreement
The acquisition subsidiary and the seller signed an asset purchase agreement for $750K plus an earnout. Only $50K was paid at closing, and the rest was due within two months. However, the agreement was not signed by the owner of the acquisition subsidiary.
Issues Arise
After the closing, the buyer did not pay anything to the seller, claiming the seller’s products were mediocre and that some key components were no longer manufactured. The buyer also failed to attract investors to inject capital into the company.
The Lawsuit
The acquisition subsidiary eventually went bankrupt, leading the seller to sue the buyer’s parent company, seeking to hold it responsible for the subsidiary’s deferred purchase price. The seller argued that the buyer’s parent company had significant control over the subsidiary and that it was undercapitalized. However, the trial court ruled in favor of the buyer’s parent company, stating that there was no explicit promise to pay the purchase price and that holding the parent company responsible should only happen under extreme circumstances and reasons of equity.
See Scallop Imaging, LLC v. Vision Technologies, Inc., Civil Action No. 17-cv-10092-ADB United States District Court, D. Massachusetts, (August 12, 2021).
Key Takeaways
The case highlights the risks of agreeing to defer part of the purchase price, especially when dealing with a newly formed acquisition subsidiary. Sellers should seek security for such risks, including obtaining a guarantee from the owner of the subsidiary. Adequate collateral to secure the guarantee would be even better.
By John McCauley: I write about recent legal problems of buyer and sellers of small businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
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