Explore the complexities of hidden liabilities in mergers and acquisitions. Learn from a real case where unforeseen complications arose and discover key takeaways to protect your M&A transactions.
M&A Stories
February 26, 2019
Introduction:
In the world of mergers and acquisitions, unforeseen complications can be a nightmare for buyers. This article explores a real case that highlights this issue.
The Deal:
A buyer acquired all the shares of a company from its sellers. The stock purchase agreement included a promise from the sellers that the company had not guaranteed the debt of any other entity.
The Hidden Liability:
However, just before the closing, it was revealed that the company had indeed guaranteed the debt of another entity. This information was unknown to the buyer at the time of purchase.
The Lawsuit:
After the closing, the other entity defaulted on its debt, leading the creditor to sue both the company purchased by the buyer and the buyer as the guarantor of the debt. An Alabama federal court ruled in favor of the creditor, allowing them to go after funds received by the buyer from the purchased company.
The buyer now faces the possibility of losing these funds, with hopes of recovering the loss by pursuing a claim against the sellers for their broken promise of no company guarantees.
Key Takeaways:
1. Due Diligence is Crucial: Before purchasing a company, thorough due diligence is essential. However, as this case shows, sellers may attempt to hide crucial information.
2. Secure Seller and Buyer Guarantees: In your written agreement, seek assurances from the seller and the buyer to cover losses arising from unforeseen liabilities post-closing.
3. Consider Asset Purchase: Opting for an asset purchase, rather than acquiring the entire company, can limit your exposure to unknown liabilities.
In the world of M&A, hidden liabilities can be the proverbial “fleas” that come with the “dog” you’re buying. Mitigating this risk requires a combination of diligence, solid agreements, and strategic decisions.
Case Reference:
Hiring Automation, LLC v. Simple Onboard, LLC, Case No. 4:18-CV-773-KOB, United States District Court, N.D. Alabama, Middle Division, (January 30, 2019).
By John McCauley: I help businesses minimize risk when buying or selling a company.
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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