Explore the significance of boilerplate clauses in M&A agreements and how they can impact post-closing disputes. Learn from a real case example and discover the key takeaways for buyers and sellers in the world of mergers and acquisitions.
M&A Stories
February 26, 2019
Introduction:
In the world of mergers and acquisitions, boilerplate clauses in business purchase agreements may seem like a cure for insomnia. However, don’t let their dryness fool you – they can become crucial in post-closing disputes.
The Deal:
The buyer acquired all the stock of the seller’s company. The stock purchase agreement explicitly stated that the company would bear responsibility for its debts after the closing. It also included a provision for the company to indemnify the seller if any company debt became the seller’s burden.
The Lawsuit:
After the closing, a major auto finance company sued the company, the seller, and the buyer in a Pennsylvania federal court for breaching the company’s lease and loan agreements.
The seller initiated a claim against both the company and the buyer. However, the buyer pointed to the stock purchase agreement, arguing that only the company bore responsibility for this debt, meaning the seller could only sue the company and not the buyer. The court agreed with the buyer, emphasizing the importance of contractual agreements.
Key Takeaway:
For buyers, avoiding liability for a company’s debts is paramount unless they explicitly guarantee them in writing. Sellers of a company’s stock should not be left holding the bag for company debts after transferring their stock certificates to the buyer.
To safeguard their interests, sellers should insist on a written commitment from the company to reimburse them for any company debt incurred post-closing. Similarly, sellers should seek assurance from the buyer that they will be reimbursed by the company or the buyer for any such debts they pay after the closing.
In the referenced case, the seller could have pursued the buyer for reimbursement if the boilerplate clause had stated that both the company and the buyer would reimburse the seller for any post-closing company debt.
Case Reference:
Mercedes-Benz Financial Services Usa LLC v. Synergistiks, Inc., Case No. 3:18-cv-184, United States District Court, W.D. Pennsylvania, (February 12, 2019). https://scholar.google.com/scholar_case?case=14685828736300095129&q=%22stock+purchase+agreement%22&hl=en&scisbd=2&as_sdt=2006&as_ylo=2017
By John McCauley: I help businesses minimize risk when buying or selling a company.
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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