Navigating M&A Earnout Disputes: A Lesson from Nomar Enterprises, LLC v. Rugged Solutions America, LLC

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Explore the intricate world of M&A transactions through our latest blog post, ‘Navigating M&A Earnout Disputes: A Lesson from Nomar Enterprises, LLC v. Rugged Solutions America, LLC.’ Uncover the strategic use of earnouts, the risks they pose for both buyers and sellers, and the critical role of EBITDA metrics. Gain valuable insights from a real case, Nomar Enterprises, LLC v. Rugged Solutions America, LLC, as we delve into the dispute resolution process and the court’s approach to financial metric disputes. Stay informed and navigate the complexities of M&A with our M&A Stories.

M&A Stories

February 25, 2024

In the intricate realm of M&A transactions, earnouts stand as a strategic bridge between a seller’s ambitious asking price and a buyer’s more conservative bid. This mechanism hinges on the post-closing success of the acquired business, commonly gauged by metrics like EBITDA.

Earnouts, however, pose inherent risks for both parties involved. Buyers may find themselves entangled in legal disputes if the earnout isn’t met, while sellers rely on the buyer’s adept management to ensure the business performs optimally.

A recurring source of contention revolves around the calculation of earnout metrics, notably EBITDA. Many M&A agreements wisely designate an independent accountant to arbitrate such disputes.

Take, for instance, the September 30, 2020, acquisition of a rugged computer business for $13 million in cash at closing, accompanied by a $4.5 million EBITDA earnout. When the earnout wasn’t realized, the seller challenged the buyer’s EBITDA calculation and alleged fraud and breach of the asset purchase agreement.

The dispute found its way to a Houston federal district court. The seller insisted on the court settling fraud and breach of contract claims before submitting the EBITDA calculation to the designated independent accountant. The court, however, took a pragmatic stance, directing the parties to first resolve the EBITDA calculation dispute.

It’s a valuable lesson from Nomar Enterprises, LLC v. Rugged Solutions America, LLC, where the court prioritized the financial metric dispute before delving into broader claims. This approach ensures a methodical and step-by-step resolution, streamlining the legal process.

Notably, the accounting firm designated for dispute resolution underwent an acquisition by a larger entity. The seller contended that this change rendered the independent accountant dispute resolution procedure unenforceable, but the court dismissed this argument.

In essence, while the seller may obtain its earnout through fraud and breach of contract damages, the court underscored the importance of adhering to the independent accountant’s role in settling the EBITDA calculation first.

Case Reference:

Nomar Enterprises, LLC v. Rugged Solutions America, LLC, Civil Action No. H-23-1794, United States District Court, S.D. Texas, Houston Division (January 5, 2024).

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.

By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.

Email: jmccauley@mk-law.com

Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

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Navigating the Pitfalls: Whiskey Supplier’s Consent in M&A Sale of Distributorship

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Dive into the intricate world of mergers and acquisitions with our latest blog post, ‘Navigating the Pitfalls: Whiskey Supplier’s Consent in M&A Sale of Distributorship.’ Explore the challenges faced in a recent Nashville-based distributorship asset sale, where securing the supplier’s consent became a critical juncture. Uncover the legal twists and turns, learn from a real-life case (Det Beverages, LLC v. Kentucky Bourbon Distillers, LTD.), and discover the crucial importance of adhering to state franchise laws during the consent process. Gain valuable insights for your M&A endeavors and stay informed on industry-specific legal nuances.

M&A Stories

January 18, 2024

In the dynamic realm of mergers and acquisitions, the transfer of a whiskey distributorship is not without its intricacies. A pivotal aspect often overlooked is securing the supplier’s consent, a process intricately entwined with state law.

A recent case in point involves the asset sale of a Nashville-based distributorship, encompassing an exclusive right to distribute whiskey within specific Tennessee counties. Here’s the crux: the buyer sought the supplier’s blessing for the transfer of the seller’s franchise agreement, only to be met with a resounding refusal. The supplier, citing the selection of a more seasoned distributor for the seller’s market area, stood firm.

Undeterred, the buyer and seller contested the supplier’s stance, yet their efforts proved futile. Despite this setback, the deal proceeded, only for a post-closure twist – the supplier reneged on the supply agreement. In response, the buyer took legal action in a Nashville federal district court, seeking both the enforcement of the supply agreement and damages.

However, the court swiftly dismissed the case, revealing a critical misstep by the buyer and seller. Their failure to adhere to Tennessee’s statutory requirement during the consent request proved fatal. State law mandates a detailed disclosure of the deal’s terms to the supplier, triggering a 60-day window for consent or matching the offer. Failure to comply leaves the deal open to closure.

In essence, the court ruled that the buyer had no grounds to compel the supplier to fulfill the supply agreement due to the seller’s oversight in notifying the supplier of the deal’s specifics.

The takeaway from this episode resonates beyond the specifics of this case. For franchise deals, strict adherence to state franchise laws in securing franchisor consent is paramount. This episode underscores the importance of providing comprehensive details to the supplier during the consent process, ensuring compliance with statutory requirements.

Case Reference:

Det Beverages, LLC v. Kentucky Bourbon Distillers, LTD., Case No. 3:23-cv-00363, United States District Court, M.D. Tennessee, Nashville Division January 4, 2024).

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.

By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.

Email: jmccauley@mk-law.com

Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

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Sale of Vet Practice and Noncompetition Agreements

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Unlock the secrets of M&A legal strategies in our latest blog post as we delve into the fascinating world of professional service business acquisitions. Explore the intricate dance between buyers and sellers, focusing on a compelling case involving the sale of a veterinarian practice and the critical role of noncompetition agreements. Dive into real M&A stories, dissecting the nuances of safeguarding goodwill and navigating legal challenges. Join us on this journey through the courts and discover the California-specific insights that could shape your M&A endeavors. #MandA #LegalStrategies #BusinessAcquisitions #NoncompetitionAgreements #CaliforniaLaw

M&A Stories

January 18, 2024

Acquiring a professional service business, such as a veterinarian practice, often involves gaining valuable goodwill. The buyer’s objective is to safeguard this goodwill by securing a written commitment from the selling professional not to compete with the sold business.

In a noteworthy 2014 acquisition, a veterinarian and her husband sold their El Cajon practice in the greater San Diego area for $5.3 million. As part of the deal, the vet signed a noncompetition agreement, pledging not to compete with the buyer for the later of the following: 5 years from the closing or 5 years from the vet’s termination of employment with the buyer.

Fast forward eight years, the vet left the buyer’s employment and promptly opened a competing clinic next door. This led to the buyer filing a lawsuit in San Diego Superior Court, resulting in the court granting a preliminary injunction prohibiting the vet from practicing next door pending the lawsuit’s outcome.

The vet appealed to the Court of Appeals, arguing the existence of two noncompetition agreements. The first, expiring in 2019, prohibited competition for five years following the closing and was permissible under California law. The second, preventing competition for five years following termination of employment, was the basis for the preliminary injunction and, according to the vet, unenforceable under California law.

The appellate court disagreed, emphasizing that the value of goodwill persisted beyond the sale’s conclusion. The court recognized that the vet continued building goodwill during her employment, with client relationships and goodwill acquired by the buyer extending as she worked. Consequently, the noncompetition agreement’s termination periods acknowledged that the goodwill from the pre-sale period would remain protected after the vet terminated her employment.

In summary, the court ruled that the noncompetition agreement safeguarded the goodwill acquired by the buyer, even after the vet’s separation.

California will generally not enforce a noncompetition covenant given by an employee. But it will enforce a noncompetition covenant given in connection with the sale of the business to protect the good will of the sold business.

Case Reference: VCA Animal Hospitals, Inc. v. Hampel, No. D081424, Court of Appeals of California, Fourth District, Division One (Filed December 22, 2023).

By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.

Email: jmccauley@mk-law.com

Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

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Verifying Dates in Documents for Seamless Closings

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Dive into the intricate world of M&A transactions with our latest blog post, “Verifying Dates in Documents for Seamless Closings.” Uncover the challenges faced in a real-life acquisition case and learn how precise document coordination is paramount for successful closures. Explore the legal nuances surrounding date adjustments, potential pitfalls, and the crucial lessons from the Delaware Court of Chancery. Stay ahead in the dynamic realm of mergers and acquisitions by gaining insights into this compelling M&A story.

M&A Stories

January 11, 2024

In the dynamic world of M&A transactions, precise document coordination is crucial. A typical situation arises when a closing date is delayed, necessitating adjustments in document dates. Neglecting any dates can result in unforeseen consequences.

Consider a recent case involving the acquisition of a Chicago-based social media marketing company for the hospitality sector (the target) by a publicly traded Indian software-as-a-service firm specializing in hospitality and travel. The process faced complications.

In this deal, the target’s founder was expected to join the acquiring company, with a one-year termination clause (originally June 1, 2020) if specific EBITDA targets weren’t met. Additionally, the founder was granted an option for 1,000 buyer shares, vesting a year after the initially planned June 1, 2019, closing.

However, the closing was delayed to June 11, 2019, leading to an oversight—the employment agreement didn’t reflect this change. Consequently, the target could terminate the founder by June 1, 2020, based on the original terms.

EBITDA targets were not achieved, resulting in the founder’s termination on June 1, 2020. Unfortunately, the stock option only vested on June 11, 2011, causing the founder to lose the options due to employment termination before the vesting date.

In response, the founder sued in the Delaware Court of Chancery, seeking a revision of the termination date from June 1, 2020, to June 11, 2020.

The magistrate, upon review, sided with the founder. She recommended that the court amend (reform) the employment agreement to ensure the founder received the buyer’s stock options.

The court underscored that the founder’s claim of a prior understanding, not reflected in the agreement due to the delayed closing, indicated a mutual mistake. The lesson is clear: thorough pre-closing reviews of documents by all parties and advisors are essential to avoid inadvertent errors with potential far-reaching consequences.

Case Reference: Greenberg v. BCV Social, LLC., C.A. No. 2023-0388-BWD, Court of Chancery of Delaware (Submitted: November 7, 2023. November 20, 2023).

By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.

Email: jmccauley@mk-law.com

Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

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M&A Funds in Escrow: A Lesson from NSI-MI HOLDINGS, LLC v. Ametek, Inc.

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Explore the intricacies of M&A escrow with insights from the NSI-MI HOLDINGS case, a $230 million acquisition involving a 15-month escrow period. Learn key takeaways and court rulings on indemnification obligations, providing valuable lessons for crafting effective escrow agreements in M&A transactions.

M&A Stories

January 4, 2024

Introduction:

In the intricate world of M&A transactions, the duration for holding funds in escrow plays a crucial role in mitigating post-closing challenges. A noteworthy example from the spring of 2021 involves the $230 million acquisition of an Atlanta-based company specializing in radio frequency and microwave test solutions.

Escrow Details:

A substantial $23 million of the purchase price was earmarked for a fifteen-month escrow, securing the seller’s indemnification obligations. One trigger for potential indemnification identified in the purchase agreement was a contractual hiccup with a defense contractor regarding the construction of an echo-free chamber for electronic equipment testing.

Escrow Dispute:

Within the stipulated 15-month period, a buyer’s indemnity claim emerged due to the target’s failure to meet contract specifications. Despite objections from the seller, the dispute found its way to the Delaware Superior Court.

Court Ruling:

The court, ultimately, ordered the release of the escrow, emphasizing that no damages claim had been made by the customer against the company. However, it reiterated the seller’s ongoing indemnification obligation, which extends until the sixth anniversary of the closing, irrespective of escrowed funds.

Key Takeaways:

The NSI-MI HOLDINGS case underscores the importance of aligning the escrow period with the resolution of specific matters. In hindsight, extending the escrow until the customer dispute was settled could have preemptively addressed the buyer’s predicament.

Conclusion:

For stakeholders in M&A, this case serves as a valuable lesson in crafting escrow agreements that not only safeguard interests but also anticipate and address potential post-closing challenges.

Case Reference: NSI-MI HOLDINGS, LLC v. Ametek, Inc., C.A. No. N22C-08-489 PRW CCLD, Superior Court of Delaware, (Submitted: August 14, 2023. Decided: November 13, 2023).

By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.

Email: jmccauley@mk-law.com

Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

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Unveiling Post-Merger Changes: Navigating Customer Disclosures in M&A Deals

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Explore the intricacies of customer disclosures in M&A transactions through a case study of a 2013 acquisition in Maryland’s cellular phone market. Learn from the pitfalls of insufficient transparency and the legal consequences that followed. Gain insights into FCC approval processes and the importance of communicating post-closing alterations to customers.

M&A Stories

December 29, 2023

In the realm of mergers and acquisitions, it is essential to recognize the obligation to inform customers about planned post-closing alterations that might impact them. A case in point revolves around a 2013 acquisition involving a target and buyer in Maryland’s cellular phone market.

Both entities, specializing in cellular phones and services, operated on distinct networks—the target on CDMA and the buyer on GSM and LTE. The buyer’s acquisition plan, announced on July 12, 2013, entailed continuing the operation of non-CDMA phones through their GSM network while decommissioning the target’s CDMA network.

Crucially, the plan to decommission the CDMA network was not disclosed publicly. The FCC approval process, initiated in August 2013 and finalized on March 18, 2014, saw the target continuing to sell CDMA-only phones without informing consumers of the impending changes. This lack of transparency extended to at least 50,000 phones sold before approval and an additional 1,500 post-approval.

Six years later, Maryland accused the target of deceptive trade practices, asserting insufficient disclosures regarding the CDMA network’s decommissioning. The state ordered a $3.25 million penalty and customer refunds. In the subsequent legal proceedings, the appellate court sided with Maryland.

Case Reference: In the Matter of the Petition Of Cricket Wireless, LLC, and AT&T, Inc.., No. 416, September Term, 2022 Appellate Court of Maryland (September 5, 2023).

By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

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Navigating the Complexities of Selling Your Car Dealership: The Crucial Role of Car Maker Approval

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Explore the intricacies of selling a car dealership in this M&A blog post. Discover the pivotal role of securing car maker approval, illustrated through a real case involving Hyundai’s exclusive Genesis car line. Uncover the challenges, negotiations, and legal actions that ensued, highlighting the importance of good faith in dealer-carmaker relationships.

M&A Stories

December 21, 2023

In the intricate world of selling a car dealership, the buyer’s agreement is just the tip of the iceberg; securing the car maker’s approval is equally pivotal. A recent M&A story sheds light on the challenges faced by a Wisconsin seller entangled in a deal involving multiple dealerships, including a Hyundai dealership with the exclusive Genesis car line.

In April 2020, the seller agreed to sell a portfolio comprising Hyundai, Toyota, Subaru, and Honda dealerships for $50 million, along with real estate valued at $61 million. The buyer was also set to receive $2 million in Hyundai facility incentive payments rightfully earned by the seller.

Days before the closing, Hyundai presented a dilemma to the seller: either relinquish the Genesis franchise, forfeit the $2 million incentive, or commit to constructing a separate Genesis facility at an estimated cost of $10 million.

Negotiating with the buyer, the seller opted for a $2 million reduction in the purchase price, sacrificing the Genesis franchise to ensure the buyer received the incentive payments. Post-closing, the seller took legal action against Hyundai in a Madison federal district court, alleging unfair treatment and coercion, claiming violations of state and federal dealership laws.

The seller argued that Hyundai’s actions breached the incentive program agreement and its implied duty to act in good faith under Wisconsin contract law. Hyundai’s attempt to dismiss the claims via summary judgment motions was denied, setting the stage for a trial scheduled in 2024.

While many dealer-carmaker disputes resemble a David and Goliath struggle, this case underscores that, regardless of the carmaker’s size, their approval in a dealership sale necessitates adherence to principles of good faith and fairness.

Case Reference: Racine Car Dealer, LLC v. Hyundai Motor America., No. 22-cv-322-wmc United States District Court, W.D. Wisconsin (December 8, 2023).

By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

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Navigating Sharing Tax Benefits in M&A: A $1.1 Billion Case Study

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Explore the intricacies of sharing tax benefits in M&A through a detailed case study of a $1.1 billion stock acquisition. Learn how the choice between stock and asset acquisition impacts after-tax returns and the resolution of disputes in Darling Ingredients Inc. v. Smith.

M&A Stories

December 15, 2023

In the dynamic realm of M&A, sellers seek optimal after-tax returns. A common dilemma arises in choosing between selling company stock or assets, with buyers favoring the latter for tax advantages. Our focus today is a $1.1 billion stock acquisition of a Virginia-based company operating 18 rendering plants and cooking oil facilities across the U.S.

The Deal: Asset Acquisition for Tax Gains

To capitalize on tax benefits, the acquisition was structured as an asset purchase. The buyer, acknowledging these advantages, committed to a $92.6 million payment to the seller at closing, representing the estimated share of tax benefits. This figure was subject to adjustment based on final calculations—lower figures meant a partial refund, while higher amounts entailed additional payments.

A Clash of Numbers

Post-closing, the buyer’s recalculations revealed a $29 million reduction in the seller’s share of tax benefits. Promptly, the seller lodged a written protest within the 30-day window, contesting the computation.

Resolution Stalemate

Per the stock purchase agreement, the dispute was referred to an accounting firm for resolution. However, tensions arose as the seller sought to introduce additional concerns, a move rebuffed by the accounting firm. The agreement limited the review to issues raised in the seller’s initial protest.

Legal Intervention

The impasse found resolution in the Delaware Court of Chancery, which aligned with the accounting firm and the buyer. The case, Darling Ingredients Inc. v. Smith, now heads back to the accounting firm for review based solely on the seller’s initial protest.

This case underscores the intricacies and potential pitfalls in sharing tax benefits during an M&A transaction, emphasizing the importance of meticulous agreements and adherence to procedural confines.

Case Reference: Darling Ingredients Inc. v. Smith., C.A. No. 2023-0614-LWW Court of Chancery of Delaware (Submitted: September 6, 2023. Decided: December 11, 2023).

By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

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Safeguarding Goodwill in M&A: Navigating Georgia’s Restrictive Covenant Act

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Explore the legal intricacies of safeguarding goodwill in M&A transactions through a real-life tale of a key employee facing restrictive covenants in the acquisition of 29 franchised auto service stores. Delve into the legal battle, court decisions, and the implications for M&A practitioners.

M&A Stories

December 11, 2023

In the realm of M&A, buyers often compensate key employees with substantial sums in exchange for restrictive covenants, a practice subject to the scrutiny of reasonableness.

Here’s a tale involving a crucial figure in the acquisition of 29 franchised auto service stores. This seasoned employee, with a 20-year tenure, climbed from managing one Atlanta store to overseeing 18 stores across Georgia.

In 2021, the buyer sought to convert these franchised stores into corporate-owned entities through an asset acquisition. The key employee received $2 million, agreeing not to compete within a five-mile radius of any of the buyer’s 1,100 nationwide stores for four years.

Post-sale, negotiations for the employee’s role in the merged business faltered. The buyer’s offer, with reduced compensation and increased travel demands, led to the employee’s resignation.

Despite the ongoing covenant, in August 2021, the employee explored opportunities, considering an independent repair shop within the restricted radius. Requesting permission from the buyer, he faced denial, triggering legal action.

The legal battle unfolded in an Atlanta federal district court. Seeking a preliminary injunction, the employee argued the unreasonableness of the four-year term and nationwide restriction, resulting in a modification. The court reduced the term to two years and confined the noncompetition area to a 5-mile radius around the 18 supervised stores.

An appeal followed, with the appellate court deeming the four-year term justified due to the employee’s key role and the $2 million compensation paid as part of the acquisition. It upheld the district court’s adjustment of the noncompetition area.

Case Reference: Baldwin v. Express Oil Change, LLC., No. 22-10611 United States Court of Appeals, Eleventh Circuit (December 6, 2023).

By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

 Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

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Mitigating M&A Risks: Insights on Navigating Buyer Stock, Foreign Exchanges, and Legal Pitfalls

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Explore the complexities of M&A transactions with a focus on mitigating risks related to buyer stock, foreign exchanges, and legal pitfalls. Gain insights from a real-life case involving a Canadian corporation acquiring a business in Mesa and Scottsdale, and learn valuable lessons for navigating the intricacies of dealing with publicly traded shares.

M&A Stories

December 10, 2023

In the complex world of M&A, the choice to accept buyer stock adds a layer of risk, especially when dealing with publicly traded shares on foreign exchanges. A recent case sheds light on the importance of understanding the intricacies involved.

In this particular scenario, a Canadian corporation, publicly listed on the Canadian Securities Exchange, acquired a business operating in Mesa and Scottsdale. The deal involved a combination of cash and buyer stock, with the latter distributed among the sellers.

However, complications arose post-closure. The buyer stock, subject to U.S. securities laws, had restrictions hindering its transfer. The buyer assured sellers they could sell under a specific federal securities law exemption on the Canadian Securities Exchange.

Following the deal’s completion, one seller owner faced a declining buyer stock price and unforeseen federal securities law restrictions. This prompted legal action in an Arizona state trial court, alleging fraud against the buyer.

Despite the seller’s claims, the trial court, and subsequently the appellate court, found no evidence of fraud. The buyer’s explanation of the federal securities law exemption held up.

The lesson here is clear: when buyer stock forms a substantial part of the purchase price (in this case, 80%), engaging a securities lawyer becomes crucial. A legal professional can guide sellers through the complexities of selling buyer stock under federal securities law exemptions, preventing post-closure surprises.

Case Reference: Whitestar Solutions, LLC v. Medmen Enterprises, Inc., No. 1 CA-CV 22-0738 Court of Appeals of Arizona, Division One (Filed December 5, 2023).

By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Podcasts https://www.buzzsprout.com/2142689/12339043

Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles

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