Explore the complexities of M&A survival clauses in our latest blog post, ‘Wisconsin Court Examines M&A Survival Clause.’ This insightful analysis delves into a recent Wisconsin appellate court decision involving a strategic acquisition dispute. The case uncovers the critical role of representations and warranties in M&A transactions, examining issues like undisclosed business problems, state-required repairs, and the interpretation of survival clauses. Perfect for legal professionals, business owners, and anyone interested in the intricacies of M&A law. This post reminds readers that states view survival clauses differently. Stay informed on best practices and legal nuances to protect your interests in future deals.
M&A Stories
August 03, 2024
In M&A transactions, representations and warranties play a crucial role. They serve two primary functions: allowing the seller to disclose potential issues with the business and assuring the buyer of the accuracy of these disclosures.
However, it’s not uncommon for buyers to later find that the acquired business is worth less than they paid, often due to undisclosed issues. This scenario unfolded in the case of a strategic acquisition of a Wisconsin water distribution business. Eighteen months after closing, the buyer sued the seller in a Wisconsin state court, alleging breaches of representations and warranties. The buyer cited numerous undisclosed problems, including unsafe delivery vehicles suspended by the state, broken water coolers, costly state-required repairs, an overstated customer base, and sloppy bookkeeping.
The seller responded with a motion for judgment on the pleadings, arguing that the lawsuit was untimely since it was filed more than a year after the closing. The seller referenced the agreement’s survival clause, which stated that representations and warranties “shall survive the Closing for a period of one year from the Closing Date.”
The trial court denied the seller’s motion, prompting an appeal to a Wisconsin intermediate appellate court. The appellate court sided with the seller, reversing the trial court’s decision and directing dismissal of the buyer’s breach of representation and warranty claim on the grounds that it was filed too late.
The appellate court noted the absence of state precedents addressing M&A survival clauses, thus conducting an extensive review of case law from other jurisdictions, professional articles, and legal treatises, as well as a brief from a University of Wisconsin law professor.
This case highlights the inconsistency across states in interpreting M&A survival clauses. The key takeaway for both buyers and sellers is to understand the applicable laws in their jurisdiction.
It’s also worth noting that the ABA Model Asset Purchase Agreement does not require the filing of a lawsuit before the survival period expires; a notice with reasonable detail of the claim is sufficient. This case might have avoided an appeal if the survival clause had explicitly required filing a lawsuit within the one-year period.
Case Reference: Ripp Distributing Co. v. Ruby Distribution, Appeal No. 2023AP778 , Court of Appeals of Wisconsin, (March 21, 2024).
Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.
Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners, management, as well as professionals who share an interest in the complexities of M&A law.
By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.
Email: jmccauley@mk-law.com
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Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles
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