Explore crucial insights into liability releases in M&A transactions through the analysis of a legal dispute arising from the stock acquisition of a New Jersey-based environmental services and waste management company. Learn about insurance details, release clauses, and the implications of a well-drafted agreement.
M&A Stories
October 5, 2018
In a recent legal dispute stemming from the stock acquisition of a New Jersey-based environmental services and waste management company, important insights into liability releases have emerged.
Background: The transaction involved the sale of the target company from its parent to a private investor group. The seller’s owner had previously procured insurance policies covering automobile/general liability and workers’ compensation for itself and its subsidiaries, including the target.
Insurance Details: Claims arising during the target’s operations as the seller’s indirect subsidiary were handled by the seller’s owner. Before the closing, the seller’s owner paid the target’s claims not covered by insurance (claim amounts below the deductible or above the limits). The target then reimbursed the seller’s owner for the uncovered portion of the claims.
Release in Stock Purchase Agreement: The stock purchase agreement, executed on August 4, 2015, included a crucial release clause. It absolved the buyer and the target from liabilities related to the target or the seller’s ownership, accrued prior to or after the closing date, stemming from events before the closing.
Post-Closing Dispute: Following the November 1, 2015 closing, a disagreement arose. The buyer and the target refused reimbursement to the seller’s owner for non-covered payments related to the target’s pre-closing business operations. The seller’s owner alleged reimbursement for over fifty claims, totaling around $800K initially, with projections reaching $1.5 million.
Legal Proceedings: On June 8, 2017, the seller’s owner and the seller filed a suit in the Delaware Court of Chancery, alleging breach of the purchase agreement and unjust enrichment by the target.
Court Decision: The court dismissed the claims, noting the absence of an obligation in the purchase agreement for the buyer to reimburse non-covered payments made post-closing. Additionally, the release explicitly absolved the target and the buyer from claims arising post-closing due to pre-closing events.
Implications: Buyers must carefully assess pre-closing liabilities to avoid overpayment. While a potential contractual obligation between the target and the seller’s owner could have led to a $1.5 million payment, the release in the stock purchase agreement protected the buyer from such claims.
Conclusion: This case underscores the importance of clear contractual language and comprehensive releases in M&A transactions. The buyer’s protection from post-closing liabilities demonstrates the significance of a well-drafted agreement, and careful review of a draft release.
Case Reference:
US Ecology, Inc. v. Allstate Power Vac, Inc., C.A. No. 2017-0437-AGB, Court of Chancery of Delaware (Decided: June 18, 2018).
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