Learn from a recent M&A case about the costly consequences of a critical typo in stock purchase agreements, as a court rectifies the error and awards the seller $441,000 in pre-closing tax refunds. Explore the importance of precise language in M&A documents.
M&A Stories
March 16, 2019
Introduction:
In the world of M&A, mistakes can be costly. A recent case highlights the importance of precise language in stock purchase agreements.
Background:
When selling company stock, it’s common to prorate tax refunds. This means that the buyer agrees to pay the seller any tax refunds related to the period before the closing date.
The Deal:
In this case, a stock purchase agreement stated that the seller would receive tax refunds related to the preclosing period. However, a critical typo crept in, stating that tax refunds received by the company after the closing should go to the “buyer.”
The Legal Battle:
After the deal closed, tensions rose between the buyer and seller, resulting in a lawsuit in a Delaware federal district court.
The seller demanded $441 thousand in federal and state pre-closing tax refunds collected by the company after the closing. They argued that the agreement clearly stated these refunds belonged to the seller.
The buyer disagreed, pointing to the provision that suggested these refunds should be paid to the buyer.
Court’s Decision:
The court sided with the seller, deeming the “buyer” reference a typo. Both parties had originally intended for the seller to receive these tax refunds. The court rectified the mistake, changing “buyer” to “seller.”
Conclusion:
This case underscores the importance of meticulous proofreading before signing agreements. While the court ultimately corrected the error, it’s best to avoid such disputes by ensuring clear and precise language in your M&A documents.
Case Reference:
Heritage Handoff Holdings, LLC v. Fontanella, Civil Action No. 1:16-cv-00691-RGA, United States District Court, D. Delaware, (March 6, 2019).
By John McCauley: I help businesses minimize tax risk when buying or selling a company.
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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