Explore a complex M&A case study involving shareholders, personal guarantees, and debt owed to Wells Fargo. Learn from the legal battle and verdict in this insightful analysis of M&A disputes.
M&A Stories
January 23, 2019
In this case study, we delve into a complex M&A transaction involving shareholders, personal guarantees, and debt owed to Wells Fargo. To make it easier to understand, we’ve simplified the scenario: there are two equal shareholders, the buyer, and the seller, both personally guaranteeing a $900K debt to Wells Fargo from 2005 and 2006. The buyer later acquires the seller’s company shares in September 2007.
The Debt Default:
In the stock purchase agreement, the buyer committed to making every effort to ensure the company repaid its debt to Wells Fargo. However, the company failed to make any principal payments after the deal closed. Consequently, Wells Fargo filed a lawsuit in October 2008 to collect the defaulted amount.
Forbearance Agreement:
In June 2009, a forbearance agreement was reached with Wells Fargo. As collateral, the buyer used a New York condo as security. The company agreed to make quarterly payments until the debt was cleared.
Family Assistance:
The buyer, believing the company couldn’t meet the June 2010 payment, received financial support from their parents, with no formal agreement for repayment. The same happened for the September 2010 payment. The buyer ultimately used the money to clear the entire debt early.
The Legal Battle:
In January 2011, the buyer sued the seller for equitable contribution, seeking repayment for the funds paid to Wells Fargo. The trial court denied the claim, stating that the buyer was merely a conduit for the parent’s money, and the Iowa Court of Appeals upheld this decision.
The Verdict:
The court dismissed the loan argument because no repayment occurred over five years. The gift argument also failed because the money was provided for a specific purpose – paying off the debt.
In Retrospect:
Hindsight suggests that the seller should have requested the buyer to waive any right to seek contribution and indemnify the seller for any losses from Wells Fargo pursuing them under their personal guaranty.
Case Reference:
Shcharansky v. Komm, No. 16-1265, Court of Appeals of Iowa, Filed July 6, 2017).
By John McCauley: I help people start, grow, buy and sell their businesses.
Email: jmccauley@mk-law.com
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Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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