Explore the complexities of setoff in asset purchase agreements for indemnification claims. Learn how post-closing payments can be impacted by unresolved issues between buyers and sellers. Case analysis included.
March 19, 2020
Introduction:
After acquiring a business, buyers sometimes uncover issues that the seller should address. This is where seller indemnification comes into play, managing risks. The scenario becomes complex when part of the purchase price is paid after closing. Can the buyer delay post-closing payments until indemnification matters are resolved? Let’s explore this based on the agreement’s wording.
The Deal:
In this case, an online business’s assets were purchased through a detailed asset purchase agreement (APA), which included seller assurances about the business. A substantial portion of the payment happened post-closing.
The Lawsuit:
The buyer found problems post-closing and halted payments, asserting that the seller was liable for indemnification due to these issues. The dispute reached a Louisiana state trial court. The core matter was whether the buyer could withhold payments. The buyer referenced an APA provision allowing it to “set off or recoup any indemnification payments owed to it by Seller.”
Seller’s Argument:
The seller contended that the buyer’s claims were not yet quantified and thus not “owed.” Consequently, the buyer couldn’t set off “unliquidated” claims against post-closing payments. The trial court and later an appellate court supported the seller’s stance.
Comment:
The outcome isn’t surprising. A more favorable situation could have emerged if the setoff phrasing granted the buyer the right to offset indemnification claims against post-closing payments. This could be determined by the buyer’s good-faith assessment, using reasonable judgment. Nevertheless, negotiating this setoff wording might lead to seller resistance, seeking the ability to challenge the assessment and resolve disputes through arbitration.
Case Reference:
This case is referred to as Admin-Media, LLC v. AC OF Lafayette, LLC,, No. 19-691, Court of Appeal of Louisiana, Third Circuit (March 11, 2020).
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
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