Explore the importance of accurate financial statement representation in M&A agreements. Learn from a real case involving disputed financial statements and the court’s decision. Case reference: Hill v. LW Buyer, LLC.
December 4, 2019
Introduction:
In M&A agreements, sellers usually assure buyers that the financial statements of the target company for its latest fiscal year and interim period are accurate, complete, align with its operations, and follow generally accepted accounting principles (GAAP). Furthermore, sellers provide a separate assurance about the completeness and accuracy of the target’s books and records.
The Case:
This instance involves a stock acquisition worth $224 million of an information services company from a father-son seller duo.
The Dispute:
After the deal’s closure, the buyer alleged that the target had exaggerated its monthly revenue in financial statements shared by the sellers. The buyer had reviewed these statements before making the purchase. However, these monthly financial statements were not covered under the financial statement representation and warranty offered by the sellers to the buyer.
Nonetheless, the buyer, through a lawsuit in Delaware, argued that the sellers’ representation and warranty regarding the accuracy of the target’s books and records also extended to these monthly financial statements. The sellers refuted this, contending that the monthly financial statements weren’t considered “books and records” as per the definition in the warranty. They asserted that their representation and warranty about financial statements only applied to specific ones listed and not to the monthly financial statements.
Court’s Decision:
The Delaware Court of Chancery dismissed the sellers’ argument, stating that the books and records representation and warranty includes the monthly financial statements, but only in cases where they aren’t covered by the more specific financial statement representation and warranty. The court emphasized that interpreting the warranties together ensures both provisions are meaningful and valid, removing the need to favor one over the other.
Comment:
This ruling isn’t surprising. Both the financial statement representation and warranty, as well as the books and records representation and warranty, ensure accuracy and completeness. However, the financial statement representation and warranty goes a step further, assuring that certain financial statements also adhere to GAAP consistently.
Case Reference:
This case is referred to as Hill v. LW Buyer, LLC., C.A. No. 2017-0591-MTZ, Court of Chancery of Delaware (Decided: July 31, 2019)
By John McCauley: I help companies and their lawyers minimize legal risk associated with small U.S. business mergers and acquisitions (transaction value less than $50 million
Email: jmccauley@mk-law.com
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Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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