Don’t Let the Independent Accountant Decide if the M&A Buyer Committed Fraud

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M&A Stories

February 16, 2026

A $12.6 Million Lesson in Post-Closing Price Adjustments

ArchKey Intermediate Holdings Inc. v. Mona (Delaware Court of Chancery, 2023)

Vincent “Cap” Mona spent his career building Mona Electric Group from one used truck in 1966 into a major electrical contractor. He’d never sold a company before.

In 2019, a buyer backed by Oaktree Capital offered to buy his company as part of a rollup strategy. After negotiations, they agreed on a $21 million price. But during due diligence, the buyer found a $4 million error in how Mona’s team estimated profits on a hospital construction contract. The buyer threatened to walk.

To save the deal, the buyer proposed closing at $21 million but then preparing updated financial statements one year later to adjust the final price up or down based on actual numbers. The buyer’s CFO showed Mona examples of how this would work. The examples depicted small adjustments ranging from $25,000 to $300,000.

Mona agreed. They closed in February 2020.

The Shock

Right after closing, the buyer fired Mona’s CFO, pushed aside six top managers, and fired 30 office employees. The buyer cut the CEO out of operations and ignored Mona’s requests for updates.

In December 2020, the buyer delivered the adjusted financial statement claiming the real purchase price should be $8.375 million. Mona now owed the buyer $12.6 million, representing nearly two-thirds of what they’d paid him.

The Evidence

Mona wasn’t just upset about the money. He had evidence suggesting manipulation. The buyer had quietly settled the troubled hospital contract without telling Mona and without including the settlement in price adjustments. When Oaktree sold the buyer to another private equity firm during this same period, they reported Mona’s company had an enterprise value of $31 million and EBITDA of $6.7 million. Yet they told Mona it was worth only $8 million.

The buyer had also fired the CFO and 30 finance employees who knew the company’s historical accounting practices and could verify whether the buyer’s numbers were accurate. The buyer controlled all financial records and ignored Mona’s requests for documentation.

Mona believed the buyer had manufactured numbers to justify slashing the price.

The Legal Fight That Should Never Have Happened

The contract said disputes over the price adjustment would be decided by an Independent Accountant who shall act as an arbitrator.

The buyer filed suit asking the court to compel arbitration, meaning send everything to the accounting firm. Mona fought back, arguing this wasn’t arbitration but rather an expert determination. The distinction mattered enormously.

If the court ruled this was arbitration, then under arbitration law all disputes go to the arbitrator, including sophisticated legal claims. A CPA firm, not the Delaware Court of Chancery, would decide whether the buyer breached the implied covenant of good faith and fair dealing. There would be no full discovery of emails and internal documents. No expert witnesses on valuation. Limited review with the accountant’s decision nearly impossible to appeal. An accounting firm would be applying Delaware contract law doctrines they’re not trained in.

The seller’s strongest claims about fraud and bad faith would be decided by people with accounting expertise, not legal expertise.

The Outcome

Mona won the labeling fight. The court agreed it was expert determination, not arbitration. But even after winning, the court still sent the good faith issue to the accounting firm, reasoning that accountants can determine if accounting choices were so extreme as to show lack of good faith.

The court did preserve Mona’s implied covenant claim for itself to decide later, but only after the accountant makes its determinations first.

Mona got lucky. The court could easily have ruled the other way and sent everything to the accountant.

The Pre-Closing Mistake

Why did this fight happen at all? Because the contract used one word: arbitrator.

This created ambiguity about whether this was arbitration or expert determination, months of expensive litigation, risk that fraud and bad faith claims would be decided by accountants instead of judges, and a fight Mona never should have had to fight.

What Should Have Been Done

The contract should have clearly stated the Independent Accountant acts as an expert determination, not as an arbitrator or arbitration. It should have specified the accountant determines only whether the accounting methodologies comply with GAAP and past practices. It should have explicitly stated that claims for breach of contract, breach of implied covenant, fraud, or other legal claims get resolved exclusively by a court.

No ambiguity. No fight. Legal claims automatically stay in court where they belong.

Why This Matters

This was a $21 million deal for an established electrical contractor. The seller was ethical, had good business judgment, built a successful company over decades, and was represented by counsel. But he got trapped because he’d never sold a company before, didn’t understand how post-closing adjustments could be weaponized, and his contract used ambiguous language.

The Critical Questions

When reviewing post-closing price adjustment provisions, focus on these issues. Does the contract label the process as expert determination rather than arbitration? Does it clearly define what the accountant decides versus what the court decides? Does it explicitly preserve legal claims for court? Are there protections against manipulation like requiring the seller to retain access to financial records, requiring key finance personnel to be retained through the adjustment period, capping how much the price can be adjusted, and requiring the buyer to provide documentation?

The Bigger Picture

Post-closing adjustments aren’t inherently bad. They’re useful when there’s genuine uncertainty, both sides want to close quickly, and the mechanism is clearly defined and fairly structured.

They become dangerous when the buyer controls all information after closing, the contract is ambiguous about who decides what, the seller can’t verify numbers, legal claims might be decided by accounting experts instead of courts, and there are no caps or limits.

Mona thought he was agreeing to minor adjustments based on examples showing $25,000 to $300,000. He faced a $12.6 million reduction. And because the contract said arbitrator instead of expert determination, he spent months fighting about whether a CPA firm or the Delaware Court of Chancery would decide if the buyer committed fraud.

The Bottom Line

Don’t let buyers slip arbitrator language into your accountant true-up provision. You’re potentially deciding whether a CPA or a judge interprets your contract, whether you get full discovery or just written presentations, whether you can prove fraud or just argue about accounting standards, and whether legal claims get decided by accounting experts or courts with specialized expertise.

The fix is simple. Insist on expert determination language and explicitly reserve legal claims for court. The time to fix it is before you sign, not after you discover the buyer slashed your price by $12 million.

Before closing, you can negotiate these terms. After closing, you’re fighting from weakness. The sophisticated buyers and their PE backers already know these games. Sellers and their advisors need to know them too.

Case: ArchKey Intermediate Holdings Inc. v. Mona, 302 A.3d 975 (Del. Ch. 2023)

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 in lower middle market private target deals.

By John McCauley: I write about recent problems of buyers and sellers in lower middle market private target deals.

Email: jmccauley@mk-law.com

Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Check out my books: Buying Established Business Assets: A Guide for Owners, https://www.amazon.com/dp/B09TJQ5CL5

and Advisors and Selling Established Business Assets: A Guide for Owners and Advisors, https://www.amazon.com/dp/B0BPTLZNRM

Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in arbitration vs expert determination, dispute resolution provision, implied covenant of good faith and fair dealing, purchase price adjustment Tagged with: , , , , , , , , , ,

M&A Stories – The Escrow Timing Trap: Restricting Tax Claims to Actual Assessments

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M&A Stories

February 10, 2026

In lower middle market acquisitions, escrow provisions often create an unintended vulnerability for sellers. Purchase agreements typically impose different time limits depending on how the buyer seeks recovery for pre-closing tax liabilities. The buyer generally has unlimited time to pursue the sellers personally under the general indemnity provisions. By contrast, the buyer faces a much shorter deadline—commonly between 12 and 18 months—to make claims against the escrow fund itself. This time disparity becomes problematic when the purchase agreement fails to specify what type of tax claim can block the escrow release.

A recent Delaware case illustrates the problem. A father and son sold their technology company, which provided global web hosting and cloud services, in a transaction that placed $11 million in escrow. As the escrow release date approached, the buyer engaged a large accounting firm to examine potential tax exposure across the company’s multi-jurisdictional operations. One day before the scheduled release, the buyer filed a claim for millions of dollars in sales and value-added taxes allegedly owed in various international jurisdictions. No tax authority had audited the company or issued any assessment. The buyer simply asserted that such taxes might be owed based on its internal investigation.

The sellers ultimately prevailed in blocking the buyer’s attempt to withhold the escrow for these unassessed taxes, but only after pursuing summary judgment in the Delaware Court of Chancery. The court issued its decision three years after the escrow was originally scheduled for release. The delay and expense stemmed directly from ambiguous contractual language.

The Mistake

The sellers’ error occurred during deal negotiations. They agreed to escrow language that permitted the buyer to block distribution based merely on an alleged breach of the tax representations. This broad phrasing allowed the buyer to rely on its own internal assessment of potential tax liability rather than requiring proof of an actual government demand. The buyer could effectively halt the escrow release by claiming a breach existed, even without any third-party verification.

This created a significant imbalance. Because the purchase agreement gave the buyer unlimited time to seek indemnification from the sellers personally, the buyer faced no time pressure to resolve actual tax disputes. The buyer could afford to wait years for tax authorities to complete audits or issue assessments, then pursue the sellers directly. There was no legitimate reason to also permit the buyer to freeze escrow funds based on speculative amounts that might never materialize. The sellers failed to distinguish between the substantive standard for proving a tax breach and the procedural requirement for accessing escrow security.

The Fix

When the purchase agreement permits indefinite pursuit of tax indemnity but limits escrow claims to a defined period, sellers should require that only assessed taxes may support an escrow holdback. The agreement should state explicitly that a tax claim is valid for purposes of withholding escrow funds only if the buyer provides, before the escrow termination date, either a formal notice of assessment or a final demand for payment issued by a government tax authority.

This approach preserves the buyer’s substantive rights while eliminating the ability to warehouse escrow funds indefinitely. The sellers remain liable for any taxes that a government authority later assesses, even after the escrow terminates. The buyer retains full recourse under the general indemnity provisions. However, the buyer cannot prevent escrow distribution by filing a placeholder claim based on taxes that have not yet been demanded by any governmental body. The escrow release date becomes a firm deadline by which the buyer must produce actual evidence of a governmental assessment or allow the funds to distribute.

Case Reference: Hill v. LW Buyer, LLC., C.A. No. 2017-0591-MTZ, Court of Chancery of Delaware (July 31, 2019).

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 in lower middle market private target deals.

By John McCauley: I write about recent problems of buyers and sellers in lower middle market private target deals.

Email: jmccauley@mk-law.com

Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Check out my books: Buying Established Business Assets: A Guide for Owners, https://www.amazon.com/dp/B09TJQ5CL5

and Advisors and Selling Established Business Assets: A Guide for Owners and Advisors, https://www.amazon.com/dp/B0BPTLZNRM

Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in escrow, only assessed taxes, sales tax Tagged with: , , , , , , , , , , , , , , , , , , ,

M&A Stories – The “No Obligation” Illusion: A Delaware Reality Check

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M&A Stories

February 6, 2026

A “no obligation” clause in your letter of intent seems like clear protection – you’re not bound until you sign the definitive purchase agreement. But for sellers whose deals are governed by Delaware law, adding a promise to negotiate in good faith can turn that protection into a trap.

Under Delaware law, a “no obligation” clause by itself works as intended – it prevents a court from enforcing the preliminary agreement as a final contract. But if you also promise to negotiate in good faith, you’ve created a different binding commitment. A Delaware court won’t force you to sign the final contract, but it can hold you liable for damages if you breach your duty to negotiate that contract in good faith.

One Question Summary

If your letter of intent includes both a “no obligation” clause and a promise to negotiate in good faith, can you walk away or change the price without a Delaware court finding you breached a binding commitment?

The Leading Case: SIGA Technologies

The Delaware Supreme Court’s 2013 decision in SIGA Technologies demonstrates exactly how this happens.

The parties signed a bridge loan agreement that included a term sheet for a future license deal. The term sheet was labeled “non-binding,” but the agreement separately required both sides to negotiate that license in good faith consistent with the term sheet’s terms.

When the seller’s asset suddenly became far more valuable, the seller tried to negotiate a much higher price, essentially abandoning the non-binding term sheet. The seller believed the “no obligation” language protected their right to change direction.

The Delaware court agreed the term sheet itself wasn’t binding. But the court ruled that the promise to negotiate in good faith created a separate, enforceable obligation to try to finalize a deal on those specific terms. Because the court found a deal would have been reached if the seller had negotiated in good faith, it awarded the buyer damages for “lost profits.” The seller faced a judgment exceeding $100 million for a contract that was never formally signed.

Without the good faith provision, the seller likely could have refused to negotiate a license on the original term sheet economics.

The Practical Reality: Buyers Will Insist on Good Faith

Buyers will insist on a good faith negotiation clause in the letter of intent. No sophisticated buyer will invest substantial time and money in due diligence without some assurance of fair dealing. In Delaware, this means you need to understand what you’re actually agreeing to when you accept that clause.

The “no obligation” clause protects you from being forced to sign the final agreement. The good faith promise creates a duty to negotiate toward that agreement on the stated terms. Delaware law treats these as two separate commitments. If you sign a letter of intent with both provisions—even one that includes price and payment terms subject to due diligence—you’ve lost much of your ability to walk away simply because a better offer appears or your circumstances change.

How to Manage This Risk

Since buyers will insist on the good faith requirement, you need to manage this risk by being extremely careful with your letter of intent.

Treat the price and payment terms in your letter of intent as if they were final. From the seller’s perspective, once you’ve agreed to a price in the letter of intent, that’s typically the highest number you’ll see. Buyers usually include “subject to due diligence” language to preserve their ability to reduce the price or convert cash to an earnout based on what they find during diligence.

The danger under Delaware law is that if you try to walk away or increase the price after signing the letter of intent, a court may find you breached your duty to negotiate in good faith—even if the buyer’s “subject to due diligence” language gave them flexibility to move in the opposite direction.

The “no obligation” clause doesn’t prevent you from being bound to negotiate in good faith toward the deal terms in your letter of intent. If you’re not willing to be held to those terms, don’t sign it. And understand that while you can’t realistically eliminate the good faith provision, you can negotiate for language that gives you clearer termination rights within that framework.

Case Reference

SIGA Technologies, Inc. v. PharmAthene, Inc., 67 A.3d 330 (Del. 2013)

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 in lower middle market private target deals.

By John McCauley: I write about recent problems of buyers and sellers in lower middle market private target deals.

Email: jmccauley@mk-law.com

Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Check out my books: Buying Established Business Assets: A Guide for Owners, https://www.amazon.com/dp/B09TJQ5CL5

and Advisors and Selling Established Business Assets: A Guide for Owners and Advisors, https://www.amazon.com/dp/B0BPTLZNRM

Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in express duty to negotiate in good faith, letter of intent Tagged with: , , , , , , , , , , , , , , ,

M&A Stories: The Large Strategic Buyer and the Illusory Earnout

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M&A Stories

February 4, 2026

One Question: When a large strategic buyer demands total control over your business operations, have you secured objective requirements that prevent them from dismantling the sales engine required to pay your earnout?

The controlling owner of a firearm silencer company sold his business to a large strategic buyer for ten million dollars in cash and a seventeen million dollar earnout. This earnout was based on the business reaching specific sales targets over three years. During negotiations, the large buyer praised the owner and his management team, calling them the essential component of the company’s future success.

To protect the earnout, the owner negotiated a provision requiring the buyer to consult with him before making any decisions that would negatively impact the payout. However, the buyer maintained sole discretion over all business operations and insisted that the owner and his staff remain at-will employees. Internal records later revealed that while the buyer was being complimentary during meetings, they were internally projecting that the sales targets would not be met and were planning to remove the owner shortly after the deal closed.

Forty-one days after the closing, the buyer terminated the owner. Because the owner was the person designated for the consultation right, his termination effectively removed the only check on the buyer’s decision-making. The buyer then proceeded to fire the sales team and shutter the company’s primary facility. The business eventually produced only a fraction of the revenue required to trigger the earnout.

The owner sued for fraud and breach of contract. The court dismissed the fraud claim, ruling that the buyer’s expressions of optimism were not statements of fact and that the written contract gave the buyer the right to run the business as it saw fit. The court allowed the breach of contract claim to proceed only because the buyer dismantled the business so quickly that it created a factual question about whether they acted with the specific purpose of avoiding the payment.

An important procedural note for sellers is that this case was heard in an Idaho court despite a Delaware forum selection clause. The Idaho Supreme Court previously ruled that Idaho public policy prevents a buyer from forcing an Idaho-based business to litigate in Delaware. This home court advantage was critical for the owner, as it kept the case in a forum that could scrutinize the buyer’s rapid dismantling of the local business.

This case demonstrates the risk of agreeing to an earnout with a large strategic buyer without including objective buyer covenants. A consultation right is insufficient if the buyer has the power to fire the consultant at any time. When a large buyer refuses to commit to specific headcount levels or resource allocations, the earnout becomes illusory.

To manage this risk, a seller must replace soft consultation rights with hard contractual requirements. These should include a provision that the owner and key sales employees can only be terminated for cause during the earnout period. Crucially, the definition of cause should be limited to objective misconduct—such as theft or felony convictions—and must explicitly exclude performance-based metrics. By removing the buyer’s ability to fire staff for poor performance, you prevent them from thinning the sales ranks to avoid the earnout. If a large strategic buyer refuses to accept these objective hurdles, the seller should assume the earnout will not be paid.

Case Reference: Case No. 1:18-cv-00035-REP., United States District Court, D. Idaho (January 23, 2026)

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 in lower middle market private target deals.

By John McCauley: I write about recent problems of buyers and sellers in lower middle market private target deals.

Email: jmccauley@mk-law.com

Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Check out my books: Buying Established Business Assets: A Guide for Owners, https://www.amazon.com/dp/B09TJQ5CL5

and Advisors and Selling Established Business Assets: A Guide for Owners and Advisors, https://www.amazon.com/dp/B0BPTLZNRM

Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in problems with earnouts, robust objective buyer earnout covenants Tagged with: , , , , , , , , , , , ,

M&A Stories: Stop Pre-Closing Fraud Claims in the NDA

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M&A Stories

February 3, 2026

One Question

Does your Nondisclosure Agreement (NDA) include a “non-reliance” clause that explicitly states the potential buyer is not relying on any information provided during due diligence and waives all claims if a final deal is not signed?

In the fall of 2010, the owner of a privately held rifle manufacturer—one of the largest in the United States—opened up its books to a private investment firm. To move the deal forward, the parties signed a standard Nondisclosure Agreement (NDA). The buyer was sophisticated, managing over $1 billion in capital, and the seller was a successful sports equipment company.

The buyer eventually walked away from the $170 million deal, but the story didn’t end there. They sued the seller for $1.2 million, claiming they were defrauded into wasting time and money on due diligence.

The Alleged Concealment

The buyer claimed that the seller’s representatives explicitly told them there were “no significant unrecorded liabilities” at the start of the process. During the deep dive of due diligence, however, three specific issues came to light.

First, there was an ongoing investigation by a state environmental agency regarding a “Superfund” site. Second, the buyer discovered efforts to unionize employees at a key manufacturing plant in Oregon. Finally, a $40 million lawsuit involving patent and contract claims had been filed shortly before the deal fell apart.

The buyer argued that if the seller had been honest about these issues from day one, the buyer never would have spent a dime on the investigation. They characterized the seller’s silence as intentional fraud.

The Shield: The Non-Reliance Clause

The seller moved to dismiss the case, pointing to two paragraphs in the NDA. These clauses stated that the seller was making “no representation or warranty” as to the accuracy or completeness of the diligence materials. Furthermore, the buyer had agreed that the seller would have no liability for the buyer’s use of that information.

The Delaware Supreme Court agreed with the seller. The court held that because the buyer had contractually promised it was not relying on the accuracy of the due diligence information, it could not later claim it was defrauded by it. The only promises that matter in M&A are the ones that actually make it into the final, signed Sale Agreement.

The Lesson for the Seller

In the lower middle market, sellers often view the NDA as a one-way street to protect their trade secrets. But as this story shows, it is also a vital shield against “walk-away” lawsuits.

Non-reliance clauses are not just for the final Purchase Agreement; they are standard in the ABA model NDA agreements for both Asset Purchases and Stock Purchases. These clauses are designed to ensure that the “dating” phase of a deal does not create legal liability before a final commitment is made.

A well-drafted NDA should include two critical concepts. The first is an explicit statement that the seller makes no warranty regarding the accuracy or completeness of materials provided during the due diligence phase. The second is a clear waiver where the buyer agrees they have no legal claim against the seller unless and until a definitive Sale Agreement is executed and delivered.

By including these terms, you ensure that if the deal fails, the buyer cannot turn their “sunken costs” into your legal liability.

Case Reference: RAA Management, LLC v. Savage Sports Holdings, Inc. 45 A3d 107 (Del. 2012), No. 577, 2011

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 in lower middle market private target deals.

By John McCauley: I write about recent problems of buyers and sellers in lower middle market private target deals.

Email: jmccauley@mk-law.com

Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Check out my books: Buying Established Business Assets: A Guide for Owners, https://www.amazon.com/dp/B09TJQ5CL5

and Advisors and Selling Established Business Assets: A Guide for Owners and Advisors, https://www.amazon.com/dp/B0BPTLZNRM

Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in importance of nonreliance clause in nondisclosure agreements, nondisclosure agreements Tagged with: , , , , , , , , , , , , , ,

M&A Stories: How Choice of Law is Critical to a Seller in Post-Closing Disputes

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M&A Stories

January 23, 2026

One Question

Does your merger agreement default to Delaware law, or does it utilize New York law to ensure a buyer must meet the more rigorous “clear and convincing” evidence standard before successfully asserting a fraud claim?

Facts In a high-profile merger dispute, a poultry processor attempted to terminate an agreement to acquire a beef processor. The buyer alleged that the seller had provided fraudulent financial information, citing accounting irregularities at a subsidiary and a pending regulatory inquiry. Although the litigation was heard in the Delaware Court of Chancery, the underlying merger agreement specified that it was governed by New York law.

Issues The court had to determine which state’s legal standard governed the burden of proof for the buyer’s fraud allegations. Under Delaware law, fraud is typically proven by a “preponderance of the evidence,” meaning it is more likely than not that the fraud occurred. New York law, however, requires “clear and convincing evidence,” which is a significantly higher evidentiary threshold.

Decisions The court held that New York law governed the dispute, because of the agreement’s New York choice of law provision. Because the buyer was unable to meet New York’s “clear and convincing” standard to prove that the seller had intentionally deceived them, the fraud claim failed. The court denied the buyer’s attempt to terminate the agreement and instead ordered specific performance, requiring the buyer to complete the acquisition.

Reasons The court reasoned that a choice of law provision is a substantive tool for risk allocation. New York’s “clear and convincing” standard is designed to protect the finality of written contracts between sophisticated parties by requiring a high degree of probability before a court will find fraud. The court noted that because the buyer had been informed of the subsidiary’s accounting issues prior to signing, the evidence did not reach the level of certainty required under New York law to justify a rescission of the contract.

The Lesson

The choice of law clause is a critical defensive tool that determines the difficulty a buyer will face when attempting to litigate their way out of a transaction or circumvent negotiated liability limits. For a seller, the distinction between Delaware’s “preponderance of the evidence” and New York’s “clear and convincing evidence” is significant.

Furthermore, New York law makes it notably difficult for a buyer to bring post-closing fraud claims for the purpose of bypassing an indemnification cap. While M&A agreements often include a “fraud exception” to these caps, New York’s strict evidentiary requirements ensure that a buyer cannot easily recharacterize a standard breach of warranty as a fraud claim simply to access damages beyond the agreed-upon limit. By selecting New York law, a seller creates a higher evidentiary barrier that protects against claims of fraud based on known risks or minor financial discrepancies, preserving the integrity of the negotiated economic terms.

IBP, Inc. v. Tyson Foods, Inc. and Lasso Acquisition Corporation, 789 A.2d 14 (Del. Ch. 2001), https://caselaw.findlaw.com/court/de-court-of-chancery/1060714.html

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 in lower middle market private target deals.

By John McCauley: I write about recent problems of buyers and sellers in lower middle market private target deals.

Email: jmccauley@mk-law.com

Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Check out my books: Buying Established Business Assets: A Guide for Owners, https://www.amazon.com/dp/B09TJQ5CL5

and Advisors and Selling Established Business Assets: A Guide for Owners and Advisors, https://www.amazon.com/dp/B0BPTLZNRM

Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in choice of law provision Tagged with: , , , , , , , , , , , , ,

Making Your M&A Forum Selection Clause Mandatory and Broad in Scope

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January 22, 2026

One Question: is your current forum selection clause mandatory and apply to lawsuits for fraud and other relationship-based claims?

A recent New Jersey court decision involving a business sale and a property lease shows why precise wording is necessary when choosing where a legal dispute will be heard. In that case, the parties litigated in the New Jersey for two years because their agreement used the word “may” alongside the phrase “exclusive New York jurisdiction.” While the court eventually ruled the clause was mandatory, the ambiguity alone led to significant delays and high legal costs.

For a seller, the primary goal of a venue clause is to ensure all disputes stay in a single, predictable location. You should avoid the word “may” when identifying the court. While “exclusive jurisdiction” carries legal weight, using “shall” or “must” removes any argument that the venue is optional. If the language is even slightly permissive, a buyer might try to file suit in their home state, forcing you to fight a preliminary battle just to move the case back to your chosen forum.

The scope of the clause is equally important. Many agreements are limited to claims “arising under” the contract. This narrow phrasing often excludes tort claims, such as allegations of fraud, misrepresentation, or interference with business. In this specific case, the appellate court vacated the initial dismissal because the trial judge failed to analyze whether the clause actually covered the various claims involved.

The dispute became complicated because it involved an asset purchase followed by a separate real estate lease. The appellate court found that because the purchase of the property was eventually separated from the sale of the business assets, it was not clear if the forum selection clause in the original agreement was intended to cover a landlord-tenant dispute or separate tort-based causes of action. Consequently, the case was sent back to the trial court for further litigation to determine if these specific claims were even subject to the New York venue requirement.

This underscores the necessity of ensuring a primary forum selection clause is broad enough to encompass every facet of the transaction, including all related documents and the broader relationship of the parties. Without this clarity, you may find yourself in a multi-year fight over where the fight should happen, rather than resolving the actual dispute.

Case Reference: Docket No. A-0723-24, Superior Court of New Jersey, Appellate Division (January 14, 2026)

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 in lower middle market private target deals.

By John McCauley: I write about recent problems of buyers and sellers in lower middle market private target deals.

Email: jmccauley@mk-law.com

Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Check out my books: Buying Established Business Assets: A Guide for Owners, https://www.amazon.com/dp/B09TJQ5CL5

and Advisors and Selling Established Business Assets: A Guide for Owners and Advisors, https://www.amazon.com/dp/B0BPTLZNRM

Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in broad or narrow scope of forum selection clause, mandatory vs. permissive, problems with forum selection clauses Tagged with: , , , , , , , , , , , , , , , , , , , , , , , ,

Closing the M&A Deal: Why Sellers Must Link Price Reductions to a Final Post-Closing Release

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M&A Stories

January 21, 2026

One Question

When you grant a price credit during a business sale to resolve a buyer’s skepticism about asset values, does your purchase agreement explicitly define that credit as a final settlement and release of all future claims regarding those assets?

The Business Context: A Rhode Island Jewelry Legacy

The seller was a long-established jewelry manufacturer in Rhode Island. Founded in 1945, the company had spent decades designing and producing finished jewelry products for a national market. Following the passing of its founders, the business transitioned to executors and trustees who sought to exit the manufacturing space and sell the company’s assets and real estate.

The buyer was an experienced businessman who operated an international trading company. His business specialized in importing costume jewelry, which he then sold to domestic wholesalers and manufacturers. This acquisition represented a strategic move to vertically integrate: by acquiring a factory, he could move from merely importing goods to manufacturing them himself.

The Post Mortem: The $250,000 Compromise

During the due diligence period, the buyer’s audit team raised concerns regarding several critical areas. First, the buyer observed tags from a major gold supplier on the precious metals in the vault, suggesting the seller did not actually own the raw material. Second, discrepancies were noted in the reported value of transportation equipment and manufacturing inventory. Third, the buyer’s financial advisors believed the reserve for uncollectible customer accounts was insufficient.

To maintain the closing schedule and secure a specific tax benefit for the buyer, the parties negotiated a $250,000 reduction in the purchase price. In exchange for this credit, the buyer waived his right to a final physical inventory count scheduled for the day before closing.

Shortly after the closing, the buyer confirmed that the gold was indeed borrowed and the customer debts were higher than projected. Despite having already secured a $250,000 discount to account for these exact risks, the buyer sued the seller for fraud and breach of contract, claiming the actual losses were far greater than the discount he received.

While the court ultimately ruled for the seller, the victory required a full federal trial to prove that a sophisticated buyer cannot claim they were misled by facts they already suspected and used to negotiate a discount.

The Recommended Fix: Explicit Risk Allocation

The mistake in this M&A transaction was relying on a simple price reduction without a corresponding legal release. A price cut, on its own, does not legally prevent a buyer from later arguing that they were still misled or that the true loss was larger than the credit provided.

To manage this risk, any price concession tied to a specific due diligence concern must be documented with precision. The agreement should state clearly that the buyer has identified a specific concern, such as inventory ownership or debt collectability. It must then quantify the exact amount of the price reduction being granted to address that concern. Most importantly, the buyer must acknowledge that the credit is a full and final settlement of the identified issue and explicitly release the seller from any future claims, whether known or unknown, arising from that specific subject matter.

By linking the discount directly to a waiver of future claims, the seller transforms a financial compromise into a binding insurance policy against post-closing litigation.

Case Reference: BS Intern. Ltd. v. Licht, 696 F. Supp. 813, Civ. A. No. 86-0025B, United States District Court, D. Rhode Island (October 12, 1988)

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 in lower middle market private target deals.

By John McCauley: I write about recent problems of buyers and sellers in lower middle market private target deals.

Email: jmccauley@mk-law.com

Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Check out my books: Buying Established Business Assets: A Guide for Owners, https://www.amazon.com/dp/B09TJQ5CL5

and Advisors and Selling Established Business Assets: A Guide for Owners and Advisors, https://www.amazon.com/dp/B0BPTLZNRM

Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in Negotiated Pre-closing price concessions and releases Tagged with: , , , , , , , , , , , , , , , , , , ,

The Consent Requirement: Why Your Sale Structure Can Void Key Patent Licenses

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The Consent Requirement: Why Your Sale Structure Can Void Key Patent Licenses

M&A Stories

January 19, 2026

One Question

If your company is absorbed by a buyer and ceases to exist, does your most critical patent licenses require the licensors’ written permission before the buyer can legally take it over?

In the market for businesses valued between $5 million and $50 million, owners often assume that selling the entire company means that your patent licenses automatically follow the transition. However, a foundational legal principle serves as a high-stakes warning for sellers. The core lesson is that the specific legal structure of your sale can act as a trigger that terminates your patent licenses unless you obtain permission from your licensors first.

Patent Licensor Consent Usually Required When Merging into a Buyer

When a sale is structured so that the seller’s company is merged directly into the buyer, the seller’s company effectively vanishes. Legally, the seller entity dies, and the buyer is the only one left standing. While this might seem like a simple way to combine two businesses, the law treats this as a movement of assets from a dead company to a new one.

In a landmark case involving glass technology, a seller held a patent license that explicitly required the owner’s written consent before it could be transferred to any other party. When the seller was absorbed into the buyer, the buyer assumed they had inherited the license automatically because the merger happened “by operation of law.” On appeal, a federal appellate court said that agreements granting patent licenses are personal and not assignable unless expressly made so. The court ruled against the buyer, deciding that because the original company disappeared, the license had to move to a new legal person. That movement was legally a transfer or assignment, and because the buyer failed to get the required written consent, they lost the right to use the technology.

Why Should a Seller Care?

A common misconception among sellers is that once a buyer is found, the technical details of moving patent licenses become the buyer’s headache. You might think that if a patent license is non-transferable, that is for the buyer to figure out after they take the keys. However, the legal failure to transfer a patent license may be a value-destroying event for the seller.

The most immediate reason to care about consent is that the buyer is paying for a functional business, not a collection of lawsuits and expired rights. If a buyer discovers during due diligence that your most valuable patent licenses will be voided the moment your entity is absorbed into theirs, they will use this as leverage to re-negotiate the purchase price downward. In many cases, obtaining these third-party consents is a mandatory condition to close. If a single key patent licensor refuses to sign off, the entire transaction can stall indefinitely.

Risk to Your Payout and Earnout

For many sellers in the $5 million to $50 million range, a significant portion of the sale price is tied to an earnout—a payment based on the future performance of the company. If the buyer absorbs your company and loses a critical patent license because you didn’t secure consent, the business may suffer an immediate operational or revenue hit. Since the business is now under-performing due to a legal failure, you will likely miss your earnout targets. You essentially lose money because of a drafting mistake in a contract signed years ago.

Furthermore, almost every purchase agreement includes promises where you, as the seller, guarantee that all material contracts are valid and transferable. If you sign those documents and the buyer later discovers they are being sued for patent infringement because a license didn’t actually move to them, they will come back to you for indemnification. This means they can sue you to claw back a portion of the purchase price to cover their legal losses.

Evaluating the Exit Structure

A sophisticated seller team must distinguish between a sale where the company stays alive and one where it is absorbed. If your company survives the sale as a subsidiary of the buyer, the legal entity holding the patent license doesn’t change. In those scenarios, you often avoid the transfer problems that require third-party consent.

However, if the buyer insists on absorbing your company into theirs, you must audit your patent licenses to see if assignment consent is required. Before committing to a structure where your company disappears, you should identify every patent license that requires consent for a transfer or assignment. You must then decide if you have the time and leverage to seek permission from those third parties before closing. Ignoring this requirement can lead to post-closing claims that the buyer didn’t get what they paid for, potentially impacting your final payout.

Nos. 77-3166, 77-3167, United States Court of Appeals, Sixth Circuit (May 4, 1979)

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 in lower middle market private target deals.

By John McCauley: I write about recent problems of buyers and sellers in lower middle market private target deals.

Email: jmccauley@mk-law.com

Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Check out my books: Buying Established Business Assets: A Guide for Owners, https://www.amazon.com/dp/B09TJQ5CL5

and Advisors and Selling Established Business Assets: A Guide for Owners and Advisors, https://www.amazon.com/dp/B0BPTLZNRM

Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in patent licensor consent in forward merger, patents, problems with patents Tagged with: , , , , , , , , , , , , , , , , ,

Don’t Leave Your Earnout to Chance: Get Your Strategy in Writing

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M&A Stories

January 19, 2026

One Question

When you agree to a performance-based payout, does your written agreement legally commit the buyer to the specific business strategy and resource levels required to hit your numbers?

In 2017, a successful online meal kit subscription company was acquired by a national grocery giant for $175 million upfront. The deal included an additional $125 million earnout available if the company hit revenue targets over the next three years. The seller had built a thriving business using data science and direct-to-consumer digital marketing. During negotiations, the buyer’s leadership spoke enthusiastically about e-commerce being the future and promised the sellers the resources and independence needed to scale their digital platform.

The reality after the deal closed was a sharp departure from those discussions. The court later noted that despite a positive tone during negotiations, the buyer’s senior management team was actually hostile to the online subscription business from the start. Their internal plan was to immediately build an in-store product line, even if it came at the potential expense of the existing e-commerce business. Consequently, the buyer shifted focus away from the proven online model to a brick-and-mortar strategy, placing meal kits in 1,000 physical grocery stores in a single week. This shift diverted marketing budgets and engineering talent toward a retail environment the supply chain was not designed to handle. Online sales plummeted, the retail initiative struggled, and the company missed every revenue milestone. The sellers received nothing from the $125 million earnout.

While the Delaware Court of Chancery allowed the sellers to sue for breach of contract, it dismissed claims of being misled. The court’s reasoning was clear: in a deal between sophisticated parties, if a promise regarding how the business will be run is not in the signed contract, it is not enforceable. Relying on a buyer’s verbal vision is a high-risk strategy that rarely holds up in court.

Post-Mortem: What Went Wrong?

The primary failure was a gap between the seller’s expectations and the buyer’s legal obligations. The seller expected a partnership that would preserve their existing digital strategy, but they signed an agreement that gave the buyer sole and absolute discretion over all business decisions. This created a situation where the buyer could prioritize its own long-term retail goals at the direct expense of the seller’s short-term earnout targets. Because senior leadership was privately opposed to the online model, the buyer was able to execute a pre-planned pivot that the written contract did nothing to prevent. Without objective, written rules on how the business would be operated, the seller was left with almost no leverage when the buyer changed direction.

Turning Oral Promises into Objective Covenants

To avoid this outcome, a seller must convert the buyer’s verbal enthusiasm into binding, objective operating rules. These covenants ensure that the “future vision” discussed during meetings becomes a legal requirement in the closing documents, protecting the seller even if the buyer’s senior leadership is secretly skeptical of the current business model.

Enforce the Digital Future Strategy The buyer’s team likely promised to grow the e-commerce platform. To make this real, require a covenant that the buyer maintains the target’s primary online business model as the primary revenue driver for the earnout period. This prevents a buyer from verbally praising your website while internally planning to pivot exclusively to their own physical stores at your expense.

Lock in the Promised Tools and Resources When a buyer says they will provide the tools to scale, you must define those tools with non-discretionary budget levels. If the buyer verbally agreed that your digital marketing was the key to success, the contract should require a minimum monthly spend on advertising and a specific number of dedicated software engineers. This stops the buyer from starving the division to fund other corporate priorities or retail initiatives.

Protect against Economies of Scale Claims Buyers often promise that their large-scale systems will lower your costs. In reality, their internal management fees or shipping contracts might be more expensive than yours. Stipulate that earnout calculations must use your historical cost structures or industry-standard rates. This ensures that the buyer’s corporate overhead—which they claimed would help you—does not actually bury your profit margins.

Preserve the Latitude and Independence Promise If a buyer tells you that your management team is critical and will have broad latitude, put it in writing. Secure the right for the existing team to retain authority over hiring and firing within the business unit. This prevents the buyer from replacing your specialists with their own generalists who may not understand how to execute the strategy that earned you the payout in the first place.

A Note on Evolving Delaware Law

While this court dismissed the fraud claims in 2021, later Delaware decisions suggest a seller might have a stronger position today if they can prove a buyer intentionally lied about their intent during negotiations. More recent cases, such as Trifecta Multimedia Holdings LLC v. WCG Clinical Services, Inc. (2024), indicate that a standard integration clause may not be enough to block a fraud claim if a buyer misrepresents their current state of mind about future plans. However, even with these evolving legal protections, the most reliable strategy remains securing objective, written covenants. Relying on a lawsuit to prove a buyer’s “secret intent” is an expensive and uncertain path compared to enforcing a clear, written rule.

C.A. No. 2020-0710-JRS, Court of Chancery of Delaware (June 7, 2021)

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 in lower middle market private target deals.

By John McCauley: I write about recent problems of buyers and sellers in lower middle market private target deals.

Email: jmccauley@mk-law.com

Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Check out my books: Buying Established Business Assets: A Guide for Owners, https://www.amazon.com/dp/B09TJQ5CL5

and Advisors and Selling Established Business Assets: A Guide for Owners and Advisors, https://www.amazon.com/dp/B0BPTLZNRM

Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in problems with earnouts, robust objective buyer earnout covenants Tagged with: , , , , , , , , , , , , , , , , , , , , , , , ,

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