Explore the riveting legal saga of an M&A deal gone awry, resembling a Shakespearean drama, where a son’s deceit leads to a court ruling allowing the sellers to reclaim business assets. Delve into the intricacies of fiduciary duty, transparency, and the consequences of fraudulent actions in business acquisitions. Gain insights into the legal implications of undisclosed liabilities and the pivotal role of courts in upholding fairness in M&A transactions.
M&A Stories
May 24, 2018
In a recent legal case, a family drama unfolded in the realm of business acquisitions, resembling a Shakespearean tragedy. Roger and Shirley, founders of the enterprise dubbed “Seller,” retired and entrusted management to their son Jeffrey. Operating as an officer of Seller, Jeffrey sought to purchase the business himself, forming a new entity called “Buyer.”
Under the guise of acquisition, Jeffrey’s Buyer acquired Seller’s assets, initially valued at $12 million, for a mere $4 million, facilitated by an asset purchase agreement. Post-closing, Roger and Shirley were shocked to uncover $1 million in outstanding payroll taxes, a liability accrued during Jeffrey’s tenure managing the company.
While the asset purchase agreement obligated Seller to settle the outstanding taxes, Jeffrey, cognizant of the debt prior to the purchase, failed to disclose this critical information to his parents. Seeking accountability, Roger and Shirley petitioned for Jeffrey to assume responsibility for the taxes, but the court declined. However, the court did find Jeffrey guilty of fraud, granting Roger and Shirley the right to rescind the deal and reclaim ownership of the business.
The court elucidated on Jeffrey’s fraudulent actions, stating that his failure to disclose crucial information constituted a breach of duty. Despite Jeffrey’s argument against a duty to disclose the tax liability pre-agreement, the court emphasized his fiduciary obligation as an officer of Seller, which warranted full transparency.
Although Roger and Shirley are left to settle the outstanding taxes, the court’s ruling enables them to regain possession of a company valued significantly higher than the sale price. It is anticipated that a subsequent sale would yield a more lucrative outcome.
Jeffrey’s downfall stemmed from his failure to maintain transparency with his parents, exacerbated by his dual role as both their son and an officer of their company. This dynamic necessitated open communication, particularly regarding financial matters. Jeffrey’s silence amounted to fraudulent behavior, ultimately leading to the unraveling of the acquisition deal.
Case Reference:
Bailey v. Bailey, No. 17-20014, United States Court of Appeals, Fifth Circuit (April 23, 2018).
By John McCauley: I help people start, grow, buy and sell their businesses.
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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