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.
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