Explore the pitfalls of unclear purchase money note adjustment provisions in M&A agreements through the Bloom Master Inc. v. Bloom Master LLC. case. Learn how to avoid disputes with these M&A agreement recommendations.
June 9, 2019
M&A Stories
Introduction:
In a recent post-closing asset deal dispute, the ambiguity of a purchase money note adjustment provision led to protracted litigation. This case highlights the importance of clarity in M&A agreements.
The Deal:
The seller, a Utah-based manufacturer of garden planter products, decided to sell its manufacturing molds to a local garden seed and supply company in August 2011. The buyer paid $100,000 at the closing and provided a $400,000 note payable in 8 annual installments, starting from August 15, 2012, with the remaining balance due on August 15, 2019. Notably, the annual payment amount was unspecified.
The note included a provision for reduced payments if the planter product failed to meet expected sales numbers in any given year, with the agreement stating that “the terms of this Note shall be modified in proportion to the reduced sales numbers.” However, it did not define “expected sales numbers.” Additionally, the specific amount of each annual note payment remained unspecified.
The buyer made 4 annual note payments after the closing. The buyer calculated these payments based on a presumed base amount of $50,000 (one-eighth of the $400,000 principal) and used the 2010 product sales figures as the benchmark for “expected sales numbers.” As actual sales fell significantly below the 2010 levels in the first 4 years, the buyer’s payments were substantially lower than $50,000.
The Lawsuit:
After four years, the seller claimed a default, demanding the full balance under the note’s acceleration provision, alleging that the buyer failed to pay the “total amount due each year.” The buyer countered that its payments aligned with the “expected sales numbers” adjustment provision of the note. This dispute led to a lawsuit in a Utah state court.
The Outcome:
The trial court sided with the buyer and dismissed the seller’s lawsuit. On appeal, the intermediate appellate court ruled that the buyer and seller had agreed to modify note amounts if sales expectations were not met. However, their failure to define the mechanism for this adjustment rendered the note payment amount provision indefinite and unenforceable. The case was remanded to the trial court to determine if the seller could collect on the note, and the litigation is ongoing.
Comment:
This case underscores the importance of clear M&A agreement terms. To avoid such disputes, consider the following recommendations:
1. Specify the annual interest rate.
2. Define the total amount of each annual note payment before adjustment.
3. Clearly define “expected sales numbers.”
4. Provide a formula for adjustment.
5. Include an example for clarity.
Case Reference:
Bloom Master Inc. v. Bloom Master LLC., No. 20170226-CA, Court of Appeals of Utah, (Filed April 25, 2019)
By John McCauley: I help companies and their lawyers minimize legal risk associated with small U.S. business mergers and acquisitions (transaction value less than $50 million).
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
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Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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