Uncover the intricacies of M&A transactions in our latest blog post, “Navigating M&A Pitfalls: The Costly Lesson of Overlooking Tax Benefit Sharing and Liquidated Damages” by John McCauley. Delve into the cautionary tale of a buyer entangled in legal complexities over tax benefit sharing and liquidated damages. Gain insights into the importance of aligning penalty clauses with breach severity and learn from real-world cases like NewCSI, Inc. v. Staffing 360 Solutions, Inc. Navigate the complexities of business acquisition and legal battles with our M&A Stories. #MandA #LegalPitfalls #TaxBenefits #LiquidatedDamages #BusinessAcquisition #LegalDisputes #MAStories
M&A Stories
July 26, 2018
In the intricate landscape of M&A transactions, one misstep can lead to costly consequences. A cautionary tale unfolds in the case of the buyer who acquired the global internal audit and consulting subsidiary in August 2013, only to find themselves entangled in a legal web over tax benefit sharing and liquidated damages.
The stock purchase agreement mandated the buyer to pay the seller 50% of specific tax benefits resulting from the deal. Failure to meet this obligation would trigger a hefty $1.4 million payment in liquidated damages, less any post-closing earn-out received by the seller.
Post-closing, disagreements arose over the calculation of the tax benefits owed to the seller, leading the dispute to spill into the courtroom. Expert testimonies were presented, with the buyer claiming no tax benefit and the seller asserting a substantial entitlement.
The jury ruled damages at approximately $150,000, a fraction of the $1.3 million awarded to the seller in liquidated damages. Herein lies a crucial lesson: the simplicity of a liquidated damages provision, designed to preclude disputes over breach damages, can turn complex when the penalty surpasses the offense.
In essence, the buyer sought a significant tax benefit to lower the business acquisition cost, a motive well understood by the sellers. However, the challenge lay in translating this concept into a clear and fair contractual provision. The intricacies of such agreements, when substantial sums are at stake, can escalate into expensive, stressful, and protracted legal battles.
This case underscores the importance of aligning penalty clauses with the severity of the breach. Hindsight reveals that agreeing upon a specific amount in the purchase agreement for the tax benefit payment could have spared the buyer from the disproportionate $1.4 million penalty.
Case Reference:
NewCSI, Inc. v. Staffing 360 Solutions, Inc., No. 16-50009, United States Court of Appeals, Fifth Circuit, (July 25, 2017)
By John McCauley: By John McCauley: By John McCauley: I help people manage their tax risk when buying or selling a business.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
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Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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