Read about a case where a $14.5 million fraud claim by siblings against a majority shareholder in a pharmaceutical company stock deal failed due to oversight in reviewing legal documents. Learn the importance of thorough legal document examination before finalizing business transactions.
May 22, 2020
Introduction:
This case serves as a stark reminder that anyone selling a business should carefully review the legal documents, preferably with a skilled attorney, before finalizing the deal. Ignoring this step led to a costly $14.5 million loss in this instance.
The Background:
In this scenario, two siblings—one a medical student and the other a college freshman—owned a minority stake in a pharmaceutical company through their company. Their father, a medical doctor, managed their investment firm.
The company’s majority shareholders agreed to sell their shares, valued at $500 million, to another pharmaceutical company. However, prior to the transaction’s completion, the majority shareholder informed the siblings that $100 million of the sale’s value needed to be paid to an unrelated entity for previous services rendered to the pharmaceutical company. Consequently, the actual purchase price for the target pharmaceutical company was reduced from $500 million to $400 million, resulting in a significant $14.5 million loss for the siblings.
The Legal Dispute:
Regrettably, the siblings signed the stock purchase agreement without examining it. Had they reviewed it, they would have realized that their investment company was the only shareholder whose share allocation was adjusted downward (from 9% to 6.874%). Furthermore, the money from this adjustment didn’t go directly to the unrelated entity but was distributed among the other three shareholders. The siblings also alleged that they hadn’t received complete copies of the transaction documents; they had only signed the signature pages.
Consequently, the siblings’ investment company pursued legal action in a New York state trial court to reclaim the lost $14.5 million from the other shareholders. Unfortunately, their claim was unsuccessful.
The court ruled that the siblings should have read the transaction documents carefully. These documents clearly disclosed that the purchase price wasn’t diminished by $100 million and explicitly indicated that the flawed allocation of $14.5 million from the siblings’ investment company to the other shareholders was present.
Moreover, the court highlighted that the transaction documents contained a provision releasing the other shareholders from any claims related to the deal, whether they were known or not.
Key Takeaway:
This situation underscores the crucial lesson that legal documents carry significant consequences. Therefore, it’s vital to follow these steps BEFORE signing transaction documents: carefully read the documents, seek guidance from a capable lawyer, and then review the documents in collaboration with your attorney.
Case Reference:
This case is referred to as Shilpa Saketh Realty Inc. v. Vidiyala, Docket No. 157087/2019, Motion Nos. 001 & 002, Supreme Court, New York County, (April 16, 2020).
By John McCauley: I help companies and their lawyers minimize legal risk associated with private business acquisitions.
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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