Stock buyer of target and stock seller in post-closing fight over target’s cash

Sellers incorporated Target in 1994 and owned all the shares of Target. Target’s assets consisted of two buildings in Old San Juan, Puerto Rico and two bank accounts at UBS. Through Target, Sellers rented the buildings—a commercial space and six apartment units. Sellers collected the rent money and deposited it into the two UBS bank accounts.

Sellers decided to sell Target, and they requested that their real estate broker set the asking price at $2 million. Following negotiations and receipt of another offer, Sellers agreed to sell Target for $1.8 million to Buyer.

On September 10, 2015, Sellers provided Buyer with Target financial information, which included a 2014 financial statement, 2014 income tax return, and Target’s 2014 annual report which it filed with the Puerto Rico Department of State. The financial information showed that Target had $219K in cash as of the end of 2014.

Two weeks later, Buyer and Sellers signed a stock purchase agreement, followed by an immediate closing. $180K was put in escrow to secure Seller’s indemnification obligations under the stock purchase agreement.

A dispute broke out after the closing after Buyer discovered that Sellers left no cash in Target. It ended up in litigation in a federal district court in Puerto Rico.

Buyer argued that it bought all the assets of Target (including its cash) when it bought all of Target’s issued and outstanding stock. Sellers argued that Buyer was only buying the real estate. The court looked at the stock purchase agreement and Target’s 2014 financial information and concluded it did not have enough evidence at this early state of the litigation to resolve the dispute. The result, the litigation will continue.

This case is referred to as Gazelle v. MR 314 Fortaleza LLC,, Civil No. 16-2500 (GAG), United States District Court, D. Puerto Rico (March 12, 2018).

Comment. In 20/20 hindsight, Buyer and Sellers could have eliminated this dispute by providing language in the stock purchase agreement that stated whether Target’s cash is part of the deal.

The issue is often resolved by using a post-closing purchase price adjustment which may be based upon a target’s net working capital, net worth, net assets, or another financial measure agreed to by seller and buyer.

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

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Posted in book value adjustment, cash and cash equivalents, Description of business assets purchased, net working capital adjustment, purchase price adjustment, stock purchase agreement

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