Boilerplate representation and warranty supported damage award for seller’s pre-closing failure to tell the buyer about his manufacturing company’s supply problems
M&A Stories
September 5, 2021
Introduction:
In a private acquisition agreement, seller representations and warranties are often seen as standard legal language, negotiated between lawyers. However, a recent case highlights the importance of a “full disclosure” representation and warranty for buyers, as it helped resolve a legal battle arising from undisclosed supply problems.
The Deal:
The buyer acquired a manufacturing business that produced chemical calibration devices, including specialized instruments for various chemicals. The seller had assured the buyer that all necessary information had been disclosed, but post-closing, supply problems surfaced that were not previously revealed.
The Lawsuit:
The buyer filed a lawsuit against the seller in a Texas state court, seeking compensation for consultant fees, higher unit costs, and expenses related to addressing the supply issues. The jury awarded the buyer $42,000 in damages.
This case is referred to as McKinley v. Kin-Tek Analytical, Inc., No. 01-19-00642-CV, Court of Appeals of Texas, First District, Houston, (Opinion issued August 5, 2021).
Importance of Full Disclosure Representation:
Buyer’s lawyers often include a “full disclosure” representation and warranty in the initial draft of the acquisition agreement. Sellers might resist this, suggesting that the buyer’s experienced lawyer should address specific risks through tailored representations. Nonetheless, having a full disclosure representation in the agreement helps uncover issues that the buyer might not have considered before closing but were known to the seller.
Comment:
In summary, this case underscores the importance of a clear and comprehensive disclosure of information by sellers in acquisition agreements to prevent post-closing surprises and potential legal battles.
By John McCauley: I help people manage M&A legal risks.
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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