Buyer Cannot Sue Seller for Withholding Pending Customer Loss Information

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Explore a case study in M&A where the buyer’s inability to sue the seller is examined due to contractual limitations on claims beyond representations and warranties.

M&A Stories

December 10, 2020

Introduction:

When considering the purchase of a business, it’s crucial for the potential buyer to conduct thorough due diligence to confirm the value of the acquisition. However, there’s always a risk that the seller might not provide accurate information when questioned. In such cases, the legal language in merger, asset purchase, or stock purchase agreements becomes significant.

The Scenario:

In a strategic business deal between two companies operating in the healthcare sector, the seller offered services including a Nurse Advice Line to clients. The rights and responsibilities tied to the Nurse Advice Line contracts were vital to the transaction. One of the seller’s main customers was Humana, with several contracts linked to them.

Shortly before signing the asset purchase agreement, the seller and Humana had a conversation where the seller learned about Humana’s plan to terminate most of its nurse advice line contracts. Despite this, the seller didn’t inform the buyer about this conversation. Instead, they instructed their employees to keep Humana’s intent confidential. Consequently, the buyer was unaware of this development when the deal was finalized.

The Legal Action:

After the deal was completed, the buyer discovered Humana’s intention to terminate the contracts. In the asset purchase agreement, the seller had guaranteed that no written contract termination notices had been received, which was true at the time of closing. However, the seller had received verbal notice from Humana about their intent to terminate before the closing. Moreover, during negotiations, the seller had informed the buyer that no customer had expressed intentions to terminate service contracts.

Consequently, the buyer took legal action against the seller and its principal in a Delaware Superior Court, alleging fraud due to false information. The seller requested the court to dismiss the claim, arguing that the buyer had agreed in the asset purchase agreement to only pursue claims based on breaches of representations and warranties mentioned in the agreement. They pointed out that the seller had only guaranteed that they hadn’t received written termination notices from customers, and that Humana’s notification of intent to terminate was conveyed orally.

The court agreed with the seller and dismissed the buyer’s claim. The court’s reasoning was that the buyer couldn’t ignore the contractual limitations they had explicitly accepted. Under Delaware law, agreements among experienced parties to restrict their reliance on contractual representations are upheld.

This case is referred to as Infomedia Group, Inc. v. Orange Health Solutions, Inc., C.A. No. N19C-10-212 AML CCLD, Superior Court of Delaware, (Submitted: April 23, 2020.

Decided: July 31, 2020) 

Conclusion:

In this instance, the buyer couldn’t sue the seller for not disclosing Humana’s plan to terminate contracts, as the buyer had agreed to the terms that limited their claims to the representations and warranties detailed in the purchase agreement. This case highlights the importance of carefully considering contractual provisions and conducting thorough due diligence when engaging in business transactions.

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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Posted in contracts, due diligence, extra-contractual fraud, fraud in business sale, non-reliance clause Tagged with: , , , , , , , , , , , ,

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