Explore the intricacies of seller responsibilities for buyer’s pre-closing claim costs in M&A deals. Learn how indemnification provisions can play a crucial role in protecting buyers from unexpected legal challenges. Case reference: ALLERGAN FIN., LLC v. PFIZER INC.
April 30, 2020
Introduction:
When a buyer acquires a business, they might face lawsuits due to actions taken by the seller before the deal. Even if the buyer didn’t agree to take on these liabilities, the seller might have agreed to cover them. To manage this risk, sellers can promise to compensate the buyer for losses, including legal expenses, related to these claims.
The Deal:
In a December 2008 acquisition of a prescription opioid line, the seller promised to cover any claims arising from their previous use of marketing materials and the operation of the opioid business. They also agreed to reimburse the buyer for reasonable legal costs incurred while dealing with these claims, with the possibility of a refund if the seller’s obligation to cover the costs changed.
The Lawsuit:
The buyer faced more than a thousand lawsuits related to opioid marketing and its alleged role in a national addiction crisis. The buyer sought compensation from the seller for legal defense costs. However, the seller denied any responsibility.
Legal Proceedings:
The buyer sued the seller in a New York state court. The seller tried to dismiss the case, arguing it was premature since the buyer hadn’t been proven liable yet. The court disagreed, highlighting that the lawsuits focused on the seller’s conduct before the acquisition. The court clarified that the seller was responsible for such pre-closing actions, as stated in the asset purchase agreement.
Indemnification Provision:
The court noted that the indemnification provision didn’t require a final determination against the buyer for compensation. It allowed the buyer to receive reimbursement quarterly while the dispute was ongoing, with the chance of a refund later.
Comment:
This deal closed in 2008 before the opioid crisis emerged. The indemnification provision functioned as intended, helping the buyer deal with unforeseen legal challenges.
Case Reference:
This case is referred to as ALLERGAN FIN., LLC v. PFIZER INC.., Index No. 651237/2019, Supreme Court, New York County (Decided April 13, 2020).
By John McCauley: I help companies and their lawyers minimize legal risk associated with private business acquisitions.
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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