Learn why a seller’s failure to conduct “reverse due diligence” on immigration compliance can lead to costly post-closing lawsuits. This blog uses a real Delaware M&A case to show how unmanaged legal risks, especially concerning undocumented employees, can unravel a deal and result in significant financial losses for the seller.
M&A Stories
August 23, 2025
In today’s heightened immigration climate, the M&A landscape has a new and significant risk for sellers. A recent Delaware case serves as a powerful reminder that an unmanaged pre-closing risk can unravel a transaction and lead to costly litigation. The core lesson is straightforward: a seller must perform its own due diligence to verify the legal promises it makes to a buyer.
The case involved the asset sale of a commercial printing business that produced signs and displays for retail stores. As is customary, the seller made representations and warranties in the purchase agreement that it was in compliance with all applicable employment and immigration laws. The deal closed without issue. However, shortly after closing, the buyer discovered a significant problem: the seller had eight undocumented employees, which constituted a breach of its representations. The buyer promptly demanded compensation for its losses, but the seller refused, leading to a lawsuit.
The seller attempted to have the lawsuit dismissed on technical grounds. The court, however, rejected this defense, noting that the seller had warranted its compliance with immigration laws and had not carved out any exceptions in the purchase agreement. The litigation now continues, with both parties facing significant legal costs and uncertainty.
The seller’s crucial mistake was failing to conduct a pre-closing review of its own business. Whether the seller was unaware of the immigration problem or simply chose not to disclose it, the outcome is the same. By making a false representation in the purchase agreement, the seller exposed itself to a post-closing lawsuit. If the seller had been proactive, it would have uncovered the problem before the deal closed.
The buyer’s damages, even if limited to remediation costs, can be substantial. The buyer must bear the expenses of terminating the undocumented employees and then recruiting and training new, legally authorized staff. These costs are likely covered by the seller’s representations and warranties. But beyond these direct expenses, the seller’s failure to act proactively introduced an unmanaged legal risk to the transaction, potentially exposing the buyer to government fines and penalties.
The best practice for any seller is to perform what is known as “reverse due diligence.” This involves proactively reviewing employee records, I-9 forms, and human resources procedures to ensure all employees are authorized to work in the United States. Had the seller taken this step, it would have either discovered the issue and negotiated a resolution with the buyer, or it would have been able to confidently represent that its business was in full compliance. The absence of this pre-closing process directly led to a costly post-closing dispute.
See: Four Cents Holdings, LLC v. M&E Printing, Inc., C.A. No. N23C-08-212-SKR CCLD, Superior Court of Delaware (August 12, 2025).
Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.
Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners, management, as well as professionals who share an interest in the complexities of M&A law in lower middle market private target deals.
By John McCauley: I write about recent problems of buyers and sellers in lower middle market private target deals.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my books: Buying Established Business Assets: A Guide for Owners, https://www.amazon.com/dp/B09TJQ5CL5
and Advisors and Selling Established Business Assets: A Guide for Owners and Advisors, https://www.amazon.com/dp/B0BPTLZNRM
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