Buyer Stock in M&A: Securities Fraud Risks

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Explore the risks of using buyer stock in M&A deals and the potential securities fraud concerns. Learn from a real case study and key takeaways for transparent M&A transactions.

M&A Stories

January 26, 2019

In this M&A case study, we’ll explore a situation where the use of buyer stock led to securities fraud concerns.

The Players:

The M&A target: A Dallas-based tech consulting LLC owned by the sellers. The Buyer: A privately held tech services company from Jacksonville, Florida.

The Story:

In 2012, the sellers put their target on the market through an investment banker and lawyer. Negotiations began with the buyer, involving the buyer’s CEO, COO, and Tom.

During the talks, it was indicated that Tom would become the buyer’s CFO. Tom signed an employment agreement late in 2012, which promised him a $1 million severance if he resigned due to a deteriorated working relationship, subject to a 30-day cure period.

Before the deal closed, Tom’s relationship with the buyer soured, mainly due to unpaid compensation. He resigned on June 5, 2013, triggering the severance clause.

The deal closed during the 30-day cure period. The buyer paid $3.15 million, partly in cash and partly in buyer stock, to the sellers. Importantly, the buyer didn’t inform the sellers about Tom’s resignation, a crucial omission.

This lack of disclosure was a material fact and not including the $1 million severance on the financial statements was deemed a securities fraud by the sellers, leading to a legal dispute.

The Outcome:

The court sided with the buyer, ruling that although the sellers could have backed out or negotiated a better deal if they had known about Tom’s resignation, they didn’t prove an economic loss due to the buyer’s non-disclosure. The court recognized the challenge in such cases when the buyer’s stock isn’t publicly traded.

Key Takeaways:

Buyers using their stock as part of the purchase price should be transparent. Sellers will seek representations and warranties from the buyer. Failure to disclose material facts can lead to securities fraud claims.

Case Reference:

O’Connor v. Cory, Civil Action No. 3:16-CV-1731-B, United States District Court, N.D. Texas, Dallas Division, (January 3, 2019).

By John McCauley: I help people start, grow, buy and sell their businesses.

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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Posted in buyer's stock as currency, federal securities fraud, financial representation and warranty, purchase price, representations and warranties, stock purchase agreement, tying fraud to economic loss Tagged with: , , , , , , , , , , , , , , , , , , ,

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