Explore a case highlighting the critical role of transparency in Mergers and Acquisitions. Learn how the failure to disclose crucial information led to a costly legal battle and a failed merger.
M&A Stories
April 2, 2019
Introduction:
In the world of Mergers and Acquisitions, regulatory approval is often a critical step before finalizing a deal. This article delves into a case that highlights the importance of transparency in such transactions.
The Scenario:
Two banks were at the heart of this case. The buyer had agreed to acquire the target bank for $39.4 million in a merger. However, the buyer’s interest lay primarily in the target’s deposits, leading to an agreement for the target to sell its investment portfolio before the merger’s closing.
The merger agreement was signed in October 2014, with the FDIC and state regulators granting approvals by December of the same year. However, a complication arose.
The Issue:
Starting in March 2014, the buyer had engaged in a significant program of high-risk leveraged lending participations. Concerns about this practice began to surface around the time of the merger agreement signing, especially concerning its impact on the upcoming annual FDIC bank examination.
This risk was further underscored when the FDIC expressed concerns about such high-risk investments in November 2014. In February 2015, an investment banking firm informed the buyer of the FDIC’s disapproval of leveraged lending participations as an asset class.
By April 2015, when the FDIC commenced its annual examination of the buyer, it became apparent that these purchases could jeopardize the merger’s approval.
The Revelation:
Crucially, the buyer did not communicate this to the target before the target sold most of its student loan portfolio on April 28, 2015. In fact, on May 5, 2015, the buyer instructed the target to sell its remaining investment assets (mortgage-backed securities) to facilitate a closing on May 12th.
However, on May 8th, the FDIC suspended its approval of the merger, an issue the buyer failed to mention to the target on May 11th.
The Fallout:
It wasn’t until May 12th, when the target sold its mortgage-backed securities portfolio, that it learned about the FDIC’s suspension of the merger approval, and by then, it was too late.
The deal ultimately fell through, and the target sold to another purchaser at a $5 million lower price than originally agreed. Additionally, the target claimed to have lost $7 million in profits by selling its student loan and mortgage-backed securities portfolio under the impression that the deal with the buyer would proceed without complications.
Legal Action:
In response to these events, the target took legal action against the buyer, alleging fraud. The buyer had informed the target on May 5, 2015, that there was an issue with the closing but failed to disclose the FDIC’s potential withdrawal of approval.
Furthermore, the target accused the buyer of violating the merger agreement by not promptly notifying them of the FDIC’s decision to suspend approval. The buyer was aware of this suspension on May 8, 2015, but failed to inform the target, leading to the hasty sale of mortgage-backed securities on May 12th.
Court Proceedings:
The buyer attempted to have the target’s claims dismissed through a motion for summary judgment, asserting no fraud or breach of the merger agreement, even when considering the facts presented. However, the court ruled in favor of the target, allowing the claims to proceed.
Comment:
This case underscores the importance of honesty and transparency in M&A deals. The buyer’s failure to disclose critical information at the right time led to a costly legal battle and ultimately a failed merger.
Case Reference:
This case is referred to O’Donoghue v. Inland Bank and Trust, No. 15 C 11603, United States District Court, N.D. Illinois, Eastern Division, (March 19, 2019)
By John McCauley: I help businesses minimize risk when buying or selling a company.
Email: jmccauley@mk-law.com
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