Explore the intricate world of M&A with our latest blog post, “Buyer’s Challenge: Navigating Unforeseen Issues Post-M&A.” Delve into a real-life case, discovering the pitfalls and lessons learned in the M&A process. Uncover the importance of offset provisions in promissory notes to safeguard buyers in the face of unexpected challenges. Join us on a journey through legal intricacies, industry specifics, and the aftermath of M&A transactions. Don’t miss out on this insightful exploration of the Carter v. Urban Service Systems Corporation case.
M&A Stories
August 16, 2018
In 2016, the owners of a waste management company in the Washington, D.C. (the sellers) area decided to retire and proposed selling the business to a former president (the buyer). To facilitate the purchase, the sellers suggested funding it mainly from the future profits of a crucial contract with the District of Columbia Water and Sewer Authority (D.C. Water), known as the Grit Contract.
The Grit Contract involved disposing of solid materials from wastewater, with revenue dependent on the amount of grit generated each month. The sellers assured the buyer that the contract would generate sufficient profits, supported by a detailed spreadsheet projecting expenses and profit margins.
The deal was structured with the sellers selling most of their shares to their company for $1.2 million, secured by a 5-year note payable in monthly installments. The remaining shares were sold directly to the buyer for $69,000 under a similar note arrangement. Importantly, the notes did not grant the buyer any offset rights for potential claims against the sellers for breach of the purchase agreement or fraud.
After the sale, the buyer faced challenges as the projected profits from the Grit Contract fell short. Inaccurate projections of wage and equipment costs, as well as unforeseen issues with disposal facilities, resulted in the company’s inability to support the note payments. Consequently, the buyer stopped making payments, leading the sellers to declare the notes due and file legal action to reclaim their stock.
The court ruled that the buyer must surrender the shares due to default under the notes and security agreements. Despite the buyer’s claim of fraudulent inducement by the sellers, the court determined that any remedy for fraud lies in a separate action for damages.
This case underscores the importance of including offset provisions in promissory notes to protect the buyer’s ability to withhold payments in case of unforeseen issues post-closing. Without such provisions, buyers may find themselves in a challenging situation, having to continue payments to avoid default while pursuing legal action against the sellers for fraud.
Case Reference:
Carter v. Urban Service Systems Corporation, Civil Action No. 18-643 (RDM), United States District Court, District of Columbia, (August 13, 2018). https://scholar.google.com/scholar_case?case=10378620051424455582&q=%22asset+purchase+agreement%22&hl=en&scisbd=2&as_sdt=2006&as_ylo=2018
By John McCauley: I help people start, grow, buy and sell their businesses.
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