Explore the case of an Israeli pharma company’s fraud claim against a Mexican pharmaceutical seller and its dismissal. Learn about the importance of due diligence in M&A deals.
M&A Stories
December 19, 2018
In 2015, an Israeli pharma company (Buyer) acquired a Mexican pharmaceutical company (Target) from the sellers, along with its intellectual property, for $2.3 billion. After the deal, Buyer alleged that the sellers had concealed legal violations that hindered Target’s ability to sell its products post-closing, thereby undermining its value.
Specifically, Buyer discovered that Target had engaged in a long-term scheme to sell defective and illegal products while concealing these facts from Mexican regulators. Target bypassed Mexican FDA regulations by creating a fraudulent fast track program, submitting falsified applications for untested formulations, and selling products that didn’t match the approved formulations. They maintained two sets of records, one showing compliance and another reflecting their true activities. Target also misled the Mexican FDA about suppliers and product shelf life.
The sellers, who were senior officers at Target, were aware of these actions but provided false documents to Buyer during the acquisition. Buyer filed a lawsuit, claiming fraud related to the misrepresentations in the acquisition documents and fraudulent due diligence materials.
However, the court sided with the sellers. The court pointed out that Buyer, a sophisticated business buyer, had ample opportunity to verify the accuracy of the Mexican FDA compliance material during due diligence. Buyer had not negotiated for a representation and warranty regarding this material in the acquisition documents.
Buyer argued that it couldn’t have reasonably suspected the sellers were lying, but the court disagreed. It found that Buyer had the means to confirm the accuracy of the material and had not shown any reason why it couldn’t have discovered the truth.
As a result, Buyer’s fraud claim was dismissed. Buyer’s remaining claim for breach of acquisition agreement representations and warranties was limited by a cap of $45 million. This case highlights the importance of thorough due diligence and the principle of “trust but verify” in M&A deals.
Case Reference:
Representaciones E Investigaciones Medicas, SA De CV v. Abdala, Docket No. 655112/2016, Mot. Seq. Nos. 006, 007 and 009, Supreme Court, New York County, (Filed August 2, 2017). https://scholar.google.com/scholar_case?case=1061886467576930045&q=%22stock+purchase+agreement%22&hl=en&scisbd=2&as_sdt=2006&as_ylo=2017
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