Explore a case involving a missed payment deadline in a business acquisition agreement and the legal consequences that followed. Learn how a buyer’s failure to adhere to agreement terms can lead to significant consequences in mergers and acquisitions (M&A).
M&A Stories
October 16, 2020
Introduction:
In the realm of business mergers and acquisitions (M&A), initial agreements are often made in a positive and collaborative atmosphere. The parties involved rely on their advisors to handle the legal aspects. However, this friendly dynamic can sometimes lead to misunderstanding, where the terms and deadlines in the acquisition agreement are mistakenly considered as flexible suggestions rather than strict obligations.
The Deal:
Illustrating this point is a case involving a U.S.-based automotive cybersecurity company. The buyer and seller had a good relationship, leading to a negotiated deal. They set up an asset purchase agreement with an effective date of July 26, 2017. Instead of a traditional in-person closing, they chose a remote digital closing. The agreement specified that the buyer must make a payment on July 26 as part of the purchase price.
Payment Problem:
Regrettably, the buyer did not meet this payment deadline. On July 30, the Chief Operating Officer (COO) of the buyer’s parent company, located overseas, informed the seller’s CEO that they needed a U.S. bank account to process the $22,000 payment. They now aimed for a payment date of August 1. The seller’s CEO responded with a simple “Great.” However, by August 9, the payment had still not been received. Consequently, the seller informed the buyer that they were canceling the agreement.
The Lawsuit:
The buyer disputed the cancellation, leading to a legal conflict in a Michigan state court. The buyer ultimately lost the case and appealed to an intermediate appellate court. The appellate court upheld the lower court’s decision, noting that the buyer’s payment was two weeks overdue when the seller chose to cancel. The court viewed the buyer’s failure to make the payment as a significant breach, justifying the seller’s actions.
This case is referred to as Trillium Cyber, Inc. v. Canbushack, Inc., No. 345494, Court of Appeals of Michigan, (April 23, 2020)
Comment:
In hindsight, the buyer’s delay in payment wasn’t due to financial constraints but rather a lack of seriousness and promptness. Unfortunately, the seller couldn’t overlook this breach. This situation serves as a crucial reminder to all parties engaged in business deals that failing to uphold agreement terms can lead to substantial consequences.
By John McCauley: I help people manage M&A risks involving privately held companies.
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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