M&A Legal Blog: Trademark Dispute After Acquisition

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Explore the complex world of M&A and trademark disputes in our latest blog post. Learn from the case of “Della Terra” and “Terra” trademarks and the legal actions that followed.

M&A Stories

November 6, 2023

Introduction:

In the world of M&A, trademarks are a valuable asset. However, even thorough due diligence might miss potential post-closing issues.

Background:

In 2017, a company started using the name “Della Terra” for a mountain-themed prototype trailer. After the buyer acquired the company’s assets in 2018, including the Della Terra trademark, they continued to use this branding.

The Controversy:

In November 2020, a competitor launched a Terra trailer with a similar mountain design. The buyer, in December 2020, asserted ownership of the Della Terra trademark and demanded the competitor stop using the Terra name.

Legal Actions:

The buyer registered the Della Terra mark in Indiana in August 2021 and applied for USPTO registration. This led to a lawsuit in a South Bend, Indiana federal district court. The court decided that the dispute should be resolved by a jury trial.

Key Findings:

The court determined that the jury must decide who has the right to use the brand names and designs, including “Della Terra” and “Terra,” and whether they can be legally protected. Many unresolved issues include who used the names first, the similarity of trademarks, potential consumer confusion, and the strength of the buyer’s trademark.

Implications:

This legal battle will be costly for the buyer, and it highlights the limitations of due diligence in uncovering trademark conflicts.

Case Reference:

Forest River, Inc. v. Intech Trailers, Inc. Cause No. 3:21-CV-645 DRL United States District Court, N.D. Indiana, South Bend Division (October 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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Navigating M&A Legal Complexities: A Close Look at Trade Secrets

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Explore the legal intricacies of M&A trade secrets in this in-depth analysis of a recent case. Discover key findings, implications, and the importance of due diligence.

M&A Stories

November 5, 2023

Introduction:

In a recent legal case, an M&A buyer took on the seller, and an owner, in a lawsuit with implications for the protection of trade secrets. The case, filed in an Omaha federal district court, in 2023, involves allegations of misappropriation of trade secrets. In this blog post, we will dissect the case to understand the legal intricacies and implications for M&A transactions.

Background:

The buyer is a property management company operating in Nebraska. On November 28, 2022, the buyer and the seller executed an Asset Purchase Agreement, which involved the buyer’s purchase of the seller’s property management service, including lease agreements and property management contracts.

The Controversy:

The dispute arose after the completion of the purchase on January 2, 2023. The buyer alleged that after the closing, a seller client and former seller investor, Gary, asked a seller owner, Wendy, for access to electronic files related to the seller’s Rent Manager database, which the buyer claimed to have exclusive rights to after the purchase. These electronic files contained information related to owner contracts, lease agreements, its managed properties, contact information for the property owners, and fee structures. Gary used this data, enabling him to reach out to the buyer’s clients, causing harm to the buyer’s business. The seller had kept an electronic copy of this data, despite telling the buyer that the seller group would have no access to this data post-closing.

Legal Claims:

The buyer filed a lawsuit against the seller and Wendy, alleging misappropriation of trade secrets under Nebraska state law and the federal Defend Trade Secrets Act. The seller and Wendy asked the court to dismiss the trade secret ground arguing that the buyer’s factual allegations were insufficient to support its claim. The court denied the seller group’s motion to dismiss.

Key Findings:

The court’s decision included several key findings:

Plausible Trade-Secrets Misappropriation: The court found the buyer’s allegations of misappropriation of trade secrets plausible, as they alleged that the transfer of electronic files to Gary constituted misappropriation under Nebraska and federal law.

Adequate Precautions to Maintain Secrecy: the buyer’s allegations of reasonable precautions to maintain the secrecy of the electronic files were deemed sufficient. The buyer said that the seller group was required to transfer all its electronic files to the buyer at closing, and that Wendy confirmed to the buyer that the seller group would no longer have access to those files after the closing. Furthermore, the buyer kept this information confidential and stored it on a separate, internal server to which others— including Gary and the seller group—lacked access.

Wendy’s Involvement in Disclosure: the buyer’s complaint adequately alleged that Wendy disclosed the Rent Manager information to Gary despite being aware of its secrecy and its exclusive ownership by the buyer.

Implications:

This case serves as a reminder for buyers to review the seller’s trade secrets during due diligence to see whether the seller has taken reasonable steps to maintain their secrecy. And after the closing, the buyer must take reasonable measures to maintain the secrecy of this information.

Case Reference:

Aksarben Property Management, LLC v. Vertical Focus LLC No. 7:23CV5000 United States District Court, D. Nebraska (September 19, 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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Auto Dealership Purchase: A Cautionary Tale of Deposits and Legal Clarity

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Explore the legal intricacies of an $11 million Chrysler Jeep Dodge dealership purchase in upstate New York, emphasizing the importance of due diligence and clear contract terms in M&A transactions.

M&A Stories

November 2, 2023

Introduction:

Buying an auto dealership involves intricate transactions, often entailing financing and franchise agreements with automakers. In this M&A story, we delve into a case of an $11 million Chrysler Jeep Dodge dealership purchase in upstate New York, illustrating the importance of due diligence and clear contract terms.

Case Overview:

In the spotlight is a Florida buyer’s ambitious endeavor to acquire the assets of a Chrysler Jeep Dodge dealership in Albany, New York. The buyer committed to the purchase with the condition of securing financing and satisfactory terms from the auto maker. As a show of intent, the buyer placed $1 million in escrow as earnest money, refundable in case the deal fell through without the buyer’s fault.

Regrettably, the deal missed the closing deadline because the buyer couldn’t secure favorable financing or an agreeable franchise arrangement with the automaker. Subsequently, the buyer demanded the return of the $1 million deposit, which the seller disputed.

Legal Hurdle:

To resolve the dispute, the buyer initiated a lawsuit in an Albany federal district court to recover the deposit. The seller’s counterargument rested on a technicality, claiming the buyer breached the agreement.

Verdict:

The court sided with the buyer, dismissing the seller’s technicality. It ordered the return of the $1 million deposit and granted the buyer the right to recover legal costs and reasonable legal fees, as stipulated in the purchase agreement.

Key Lesson:

This case underscores the importance of clear contract terms and a robust legal position. The buyer’s insistence on securing favorable financing and franchise terms was legally sound and prevailed in court.

Case Reference:

LMP Clifton 001 Holdings, LLC v. Zappone, No. 1:22-CV-00565 (MAD/DJS) United States District Court, N.D. New York (September 14, 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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Legal Troubles in M&A: Supplier’s Lawsuit Against Seller for Fraud

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Explore a case study on M&A legal issues as a supplier sues a seller for alleged fraud. Learn about the legal challenges and key takeaways.

M&A Stories

October 30, 2023

Introduction:

Selling your company’s assets can pose a significant risk to the owner, particularly when there’s an attempt to commit fraud to evade payment to creditors.

Case Background:

A business relationship commenced in July 2012 between a supplier and the company, involving the supply of corrugated paper pizza boxes with printed logos. By October 2016, discussions led to a Master Supply and Purchase Agreement. Under this agreement, the supplier offered discounts, rebates, and a one-time payment in exchange for the company’s commitment to buy products and grow the business.

However, issues arose within a few months, with the supplier alleging breaches, including the company signing a letter of intent to sell assets to a competitor of the supplier. The alleged fraudulent activities continued, with false statements by the company’s owner.

On March 13, 2017, the asset sale to the competitor was completed, and the supplier claimed that the sale proceeds were transferred to the company’s owner. The supplier also argued that rebate payments were assigned to the competitor without the corresponding obligations, leading to the cessation of business operations and non-notification of the asset sale.

Legal Challenge:

The supplier seeks damages, asserting that the sale of assets to the owner was to defraud them under the Ohio Uniform Fraudulent Transfer Act, resulting in a federal court case in Tampa.

Outcome:

The court denied a motion to dismiss, highlighting the supplier’s grounds to claim creditor status and the fraud committed by the company. This underscores the legal risks that sellers and their owners face when attempting to avoid payments to creditors through fraudulent means.

Key Takeaway:

When considering selling a business, it is crucial to conduct negotiations with suppliers, vendors, employees, and customers in good faith. Failing to do so can result in severe legal consequences, particularly when fraudulent actions are involved.

Case Reference:

Pratt Corrugated Holdings, Inc. V. Porter Pizza Box of Ohio, LLC, Case No. 8:23-cv-1825-WFJ-AEP United States District Court, M.D. Florida, Tampa Division (September 12, 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 and Union Employees: A Risky Proposition for Asset Buyers

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Explore the complexities of M&A deals involving union employees in our latest blog post. Learn from the case of International Painters And Allied Trades Industry Pension Fund v. Hess Glass Company and the potential risks for asset buyers.

M&A Stories

October 26, 2023

Introduction:

In the world of M&A, an asset buyer taking over a business with union employees must tread carefully. This case, International Painters And Allied Trades Industry Pension Fund v. Hess Glass Company, sheds light on the challenges and potential pitfalls of such acquisitions.

The Backstory:

Hess Glass Company, a business specializing in glasswork and glazing, employed union workers and was bound by a collective bargaining agreement (CBA). It also had pension fund obligations. However, in 2010, Hess Glass Company ceased operations and stopped contributing to the pension fund. A buyer stepped in to acquire their assets. Importantly, this new buyer did not employ union workers.

The Pension Predicament:

A decade later, the pension fund came knocking, demanding a hefty $338,000 from the buyer. The reason? The pension fund argued that the buyer was the successor to Hess Glass Company. A legal battle ensued.

Legal Limbo:

The court’s decision was pivotal. It denied both parties’ summary judgment motions. In essence, the court held that the buyer could be on the hook for the seller’s pension liability if certain conditions were met. These conditions included purchasing most of the seller’s assets, maintaining similar operations, and having prior knowledge of the pension liability.

Crucial Considerations:

The case’s facts were not crystal clear. On one hand, the buyer utilized the seller’s tangible assets and operated from the same location. On the other hand, the seller’s owner had no equity in the business. The extent of similarities in logos, management, workforce, and business services was also disputed. The key takeaway here is that the buyer’s owners were former employees of the seller, and they were aware of the union worker pension benefits. This highlights the importance of seeking legal counsel well-versed in pension liabilities during such deals.

Mitigating the Risk:

In hindsight, this risk could have been managed if the seller had sold the business to the buyer through bankruptcy. A bankruptcy sale can often be executed free from existing pension liabilities. Unfortunately, the case doesn’t provide clarity on whether the seller could have qualified for bankruptcy.

In the intricate world of M&A, the involvement of union employees adds an extra layer of complexity. This case serves as a stark reminder that such acquisitions require meticulous planning and legal expertise to avoid unexpected pension liabilities down the road.

Case Reference:

International Painters And Allied Trades Industry Pension Fund v. Hess Glass Company, Civil Action No. RDB-21-2162 United States District Court, D. Maryland (September 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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Protecting M&A Asset Buyers from Product Liability: A Case Study

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Explore a real-life case study in M&A law where asset buyers face product liability challenges. Learn about strategies to mitigate risk and protect your investments.

M&A Stories

October 24, 2023

Introduction:

In the world of M&A, asset buyers often face concerns about product liability lawsuits stemming from products sold long before a deal’s closing.

Case Background:

In this particular case, we examine the sale of the Powermatic table saw business. The original company manufactured these saws, but in 1986, they sold the business to the seller. Fast forward to 1999, the seller filed for bankruptcy and sold Powermatic Division assets to the buyer. The transaction closed on September 27, 1999, with no buyer stock involved. The purchase agreement made it clear that the buyer assumed liability for products sold after the closing, along with certain other liabilities. The seller retained responsibility for its remaining liabilities. Importantly, the bankruptcy court’s order confirmed that the buyer acquired Powermatic assets free and clear of all liabilities, except those expressly assumed as per the asset purchase agreement.

Legal Challenge:

The case arose on October 16, 2013, when a cabinet and furniture maker suffered severe injuries while using a 1979 Powermatic table saw made by the original company. The buyer had to defend a product liability lawsuit, contending that they assumed liability for this product and were responsible under successor liability.

Outcome:

The court ruled against the successor liability argument, mainly because no buyer equity was part of the deal. Moreover, the buyer did not assume responsibility for products sold before their closing, and the bankruptcy court explicitly stated that the buyer purchased the assets free of all other liabilities.

Key Takeaway:

It’s not uncommon for consumers to sue for injuries caused by products sold many years before an M&A deal. To mitigate this risk, buyers should strongly consider purchasing “tail coverage,” also known as “extended reporting period coverage” or “run-off coverage.” This coverage addresses past product liability risks associated with products sold long before the M&A transaction.

Case Reference:

Mastellos v. JPW Industries, InC., No. 17-CV-415 (MKB) United States District Court, E.D. New York (September 9, 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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How Unemployment Insurance Can Impact M&A Deals

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Explore the legal implications of unemployment insurance on M&A transactions. Learn from a recent case involving a buyer and seller’s dispute over elevated insurance costs.

M&A Stories

October 23, 2023

Introduction:

In the world of Mergers and Acquisitions, understanding the implications of unemployment insurance ratings can be crucial. This factor can significantly affect the sale of a business. Let’s delve into a recent case that highlights this issue.

Background:

In this case, the seller was a business involved in computer system sales, service, and hardware, with two store locations in Connecticut. The buyer, formed in 2007, specialized in supporting information technology systems for law firms and Connecticut businesses.

In 2015, as the seller’s owner was planning for retirement, an asset purchase agreement was initiated. The buyer acquired the seller’s client list, goodwill, and physical store locations. The agreement stipulated that for five years, ending in November 2020, the buyer would make monthly payments to the seller’s owner, calculated at 65% of the monthly account profits from the seller’s former clients.

However, the seller’s business didn’t perform as expected. Furthermore, the state imposed the seller’s high unemployment insurance rating on the buyer, leading to increased insurance costs.

Legal Proceedings:

This situation led to a legal dispute in a Connecticut state court. The trial court ruled that the buyer couldn’t seek damages from the seller for its elevated unemployment insurance costs. The buyer appealed this decision.

Outcome:

The appellate court also did not hold the seller responsible for the buyer’s increased unemployment insurance expenses.

Conclusion:

This case illustrates the potential impact of a seller’s unemployment insurance rating on an M&A deal. Buyers should be vigilant about such factors when projecting a target’s post-closing performance, especially when determining the acquisition price based on earnings multiples.

Case Reference:

CCI Computerworks, LLC v. Evernet Consulting, LLC, No. AC 44975 Appellate Court of Connecticut (Argued February 2, 2023. Officially Released 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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M&A Asset Buyer’s Liability for Unpaid Invoices: A Legal Case Analysis

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Explore the complexities of asset buyer liability in M&A transactions through a legal case analysis. Delve into successor liability and its application in a recent court decision.

M&A Stories

October 19, 2023

Introduction:

In the world of mergers and acquisitions (M&A), asset buyers typically take on the seller’s liabilities as specified in the purchase agreement. However, exceptions do exist.

Background:

In this case, the seller was a Delaware limited liability company with its primary operations in Texas or Missouri. They specialized in manufacturing highly engineered oil country tubular goods for the natural gas and crude oil drilling markets in the United States and Canada. The majority owner of the seller was a Connecticut-based financial firm with $9 billion in assets under management, focusing on distressed businesses.

Between June and November 2020, the seller purchased goods worth over $7 million from a vendor. Unfortunately, due to economic challenges during the COVID-19 pandemic, the seller couldn’t pay unsecured creditors, including this vendor.

On December 24, 2020, an affiliate of the seller’s owner, acting as the administrative agent for the seller’s secured creditors, initiated a foreclosure sale under New York’s Uniform Commercial Code (UCC) Article 9. The notice stated that the seller’s assets would be auctioned on January 4. It was also mentioned that the seller owed approximately $110 million to the owner and an unnamed group of lenders. The vendor was not informed of the sale.

The winning bidder at the auction was a company owned by the seller’s owner. However, this buyer did not assume the $7 million debt owed to the vendor.

Post-acquisition, the buyer took over the seller’s manufacturing facilities, maintained the same officers, produced and sold the same products to the same creditors, used the same equipment, and employed the same staff as the seller. Both the seller’s former website and the buyer’s current website provided nearly identical company descriptions. Additionally, the buyer remained under the ownership and control of the seller’s owner and its affiliates.

Legal Proceedings:

The vendor filed a lawsuit against the buyer to collect the unpaid invoice, citing several legal theories, including Delaware’s doctrine of successor liability. The buyer challenged this claim by filing a motion to dismiss.

Outcome:

The court determined that, if the vendor’s allegations were true, the buyer could be held liable under the theory of “mere continuation” successor liability for the $7 million claim. The court clarified that this exception required the buyer to be not just a continuation of the same business but a continuation of the same legal entity as the seller. This continuity typically involves common officers, directors, or stockholders between the seller and the buyer, resulting in a single corporation after the transfer.

Although Delaware courts apply this theory narrowly, the vendor’s claims align with its application in this case. The vendor asserted that the buyer, much like the seller, remained under the ownership and control of the seller’s owner and its affiliates. The buyer effectively replaced the seller, continuing the same business, employing the same facilities, personnel, and equipment, maintaining a similar website, and selling to the same creditors. Furthermore, the vendor identified key officers and employees shared between the buyer and the seller, reinforcing the idea that the buyer was a continuation of the seller.

Comment:

Vice Chancellor Will of the Delaware Court of Chancery expressed disapproval of the “shady circumstances” surrounding this asset sale.

Case Reference:

Cleveland-Cliffs Burns Harbor LLC v. Boomerang Tube, LLC, C.A. No. 2022-0378-LWW Court of Chancery of Delaware (Date Submitted: May 2, 2023. Date Decided: 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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M&A Negotiations: David vs. Goliath in Earnout Deals

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Explore the legal battle in the Value Health Sols., Inc. v. Pharm. Rsch. Assocs., Inc. case and the implications of earnout agreements in M&A deals.

M&A Stories

October 16, 2019

Introduction:

In the world of mergers and acquisitions, the acquisition of clinical development software can be a tricky endeavor. The software’s success is often uncertain, making buyers hesitant to pay a hefty upfront price. To mitigate this risk, earnout agreements with milestones come into play.

Background:

In this particular case, we have a large, global contract research organization with 15,000 employees worldwide as the buyer. They provide clinical trial services to pharmaceutical and biotech companies. On the other side, we have a small clinical development software company. These companies create software tools that simplify the management and analysis of data from medical studies. They make the process of developing new medical treatments more efficient and organized.

The software developed by the seller was compatible with Salesforce, a widely used platform in clinical trials. This caught the buyer’s interest.

Both parties agreed to an Asset Purchase Agreement (APA). It included a $2.5 million cash payment at closing, with additional earnouts of $1 million in buyer stock upon reaching specific development milestones and substantial cash earnouts based on software licensing sales.

The buyer argued that none of the earnout milestones were met.

Legal Proceedings:

In response, the seller sued the buyer in North Carolina Business Court, a specialized court for complex business disputes. Unfortunately, the seller lost the earnout claim when the trial court ruled in favor of the buyer. The seller then appealed to the North Carolina Supreme Court.

Outcome:

The North Carolina Supreme Court sent the case back to the trial court. It ordered the trial court to evaluate the seller’s claims that the buyer breached the APA by refusing to pay the earnout. The court also rejected the buyer’s argument that achieving later milestones hinged on achieving earlier ones. Furthermore, it held that the seller could make a claim that $500 million in revenue from a software-as-a-service contract counted as a license sale of the seller’s software.

In Conclusion:

This high-stakes legal battle could potentially result in multimillion-dollar earnout recovery.

Case Reference:

Value Health Sols., Inc. v. Pharm. Rsch. Assocs., Inc., No. 100A22, Supreme Court of North Carolina (Filed September 1, 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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Avoiding M&A Pitfalls: Buyer Beware in Bankruptcy

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Explore the legal intricacies of M&A transactions and learn from a real case – In Re Sanders. Discover how due diligence and reliance on seller representations can impact the dischargeability of seller debts in bankruptcy.

M&A Stories

October 5, 2023

Introduction:

Selling your company carries risks, including potential legal troubles if the business falters post-sale. This could lead to lawsuits from the buyer and even bankruptcy filings by the seller, raising questions about the dischargeability of seller debts in bankruptcy.

Background:

In this case, the seller operated an auto recovery and repossession business since 2004. The buyer, an experienced entrepreneur with a degree from the Wharton School of Business, purchased the company in 2015. Post-acquisition, the buyer uncovered the seller’s deceptive claims about profitability and encountered significant issues with critical bonds, lot leases, and customer contracts.

Legal Proceedings:

The buyer sought to return the business to the seller and reclaim the $1.3 million purchase price. The seller resisted and filed for bankruptcy, aiming to discharge the buyer’s $1.3 million claim. The buyer objected, arguing that the debt shouldn’t be dischargeable due to the seller’s fraud.

Initially, the bankruptcy court ruled in favor of the seller, stating that the buyer could have discovered the business’s problems with due diligence and thus couldn’t reasonably rely on the seller’s fraudulent representations. The buyer appealed and won at the federal district court level, leading to a retrial.

Outcome:

In the retrial, a different bankruptcy court concluded that the buyer had justifiably relied on the seller’s fraud. Consequently, the court ruled in favor of the buyer, declaring the seller’s debt nondischargeable in bankruptcy.

Comment:

Notably, the seller withheld access to the company’s records, and the buyer failed to examine key documents such as bond agreements, leases, and customer contracts, which would have revealed the seller’s inability to transfer them without consent.

Despite these oversights, the court determined that the buyer hadn’t seen warning signs necessitating further due diligence. In hindsight, conducting more thorough due diligence would have saved the buyer time, money, and stress, as all these issues would have surfaced during a comprehensive review of leases, bond documents, customer contracts, and financial records.

Case Reference:

In Re Sanders, Case No. 19-03665-5-JNC, Adv. Pro. No. 20-00018-5-JNC, United States Bankruptcy Court, E.D. North Carolina, Raleigh Division (August 31, 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

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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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