Explore the nuances of buyer offset rights in M&A deals and their application in a real-world case. Learn how a Delaware court ruled on a seller’s challenge to offset legal costs in a post-closing environmental litigation.
September 9, 2019
M&A Stories
Introduction:
Buyers in mergers and acquisitions (M&A) deals often appreciate offset rights, which allow them to deduct losses incurred due to the seller’s responsibilities from payments they owe the seller. In this case, the buyer had a more extensive offset right than usual.
The Deal:
The buyer acquired all assets of a Los Angeles-based chrome plating business, excluding the real estate. The purchase price included a $3 million note with quarterly interest payments due over five years. Both parties were aware of environmental contamination risks associated with the chrome plating facility at the time of the asset purchase agreement (APA).
The Lawsuit:
After the closing, the seller faced a lawsuit in California related to environmental issues. The seller then sought indemnification from the buyer for any losses arising from post-closing environmental problems. The buyer engaged legal counsel and incurred attorney fees and consultant costs for the California litigation. While the buyer and seller were litigating their respective cleanup responsibilities, the buyer informed the seller of its intent to offset these attorney fees against the next quarterly interest payment due on the note.
Legal Challenge:
The seller disputed the buyer’s right to offset in the Delaware Superior Court. The seller’s argument was based on the APA offset provision, claiming that the buyer could only offset fees related to pre-closing environmental contamination. At this stage of the California litigation, it had not been established whether these legal fees were incurred due to pre-closing or post-closing contamination.
The buyer’s stance was that it didn’t matter whether the legal costs ultimately related to post-closing contamination; what mattered was that they were connected to environmental contamination on the seller’s property.
Court Decision:
The court sided with the buyer, affirming that the agreement granted the buyer the right to offset its legal costs associated with the California environmental litigation, regardless of whether the buyer would ultimately be responsible for those costs as post-closing contamination.
Comment:
In hindsight, a clearer drafting of the agreement could have resolved the seller’s issue. The first sentence of the offset provision allowed the buyer to offset all losses except those related to environmental claims “subject to indemnification.” The second sentence expanded the buyer’s offset rights to include losses related to environmental claims, but it didn’t limit them to indemnifiable environmental claims, such as pre-closing contamination claims. The fix for the seller would have been to apply the “subject to indemnification” limitation in the second sentence to environmental claims, as it did in the first sentence.
Case Reference:
V&M Aerospace LLC v. V&M Company, C.A. No. N18C-09-189 AML CCLD, Superior Court of Delaware (Decided: July 18, 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
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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.
Recent Comments