This blog explores a recent Ohio federal district court ruling, which rendered an M&A agreement’s limitation on the statute of limitations unenforceable. It highlights the nuances of survival clauses in asset purchase agreements and their legal implications for sellers in M&A transactions. With a focus on indemnification claims and state law variations, the post offers valuable insights into how sellers can navigate these clauses and ensure compliance with local statutes. Understanding how different states treat survival clauses can help sellers avoid costly legal disputes and better negotiate terms.
M&A Stories
January 24, 2025
An M&A seller typically seeks closure on pre-closing liabilities of the sold business. While the statute of limitations for buyer indemnification claims varies between states, it usually spans three to six years. Sellers often shorten this period with a survival clause, but the enforceability of such clauses must align with the laws of the relevant state.
The seller in this case, a manufacturer of aluminum products based in the greater Cincinnati area, sold its assets to a tier-one auto supplier for $56.5 million in cash and debt assumption, with a $20 million deferred purchase price. However, post-closing, the buyer filed an $8 million indemnification claim and refused to pay the deferred amount. The dispute ultimately landed in an Ohio federal district court.
The seller argued that $5 million of the buyer’s claim was time-barred because the buyer had not provided notice by the deadline set forth in the asset purchase agreement’s survival clause. The buyer conceded that point but contended that under Ohio law, the survival clause did not preclude making a claim after the deadline, and since the claim was made before Ohio’s statute of limitations expired, it should be allowed.
The court sided with the buyer. It found that while the survival clause stipulated that claims made before the deadline would survive, it did not unequivocally state that claims made after the deadline would be barred. This interpretation was in line with Ohio’s restrictive stance on contractual limitations of its statute of limitations.
The lesson is clear: sellers should ensure that survival provisions in M&A agreements comply with the applicable state law. Many states, including New York, Delaware, California, and Texas, would have likely enforced the survival clause as written, upholding the limitation period. However, states like Alabama, Missouri, South Carolina, and Florida prohibit survival clauses that shorten the statute of limitations, and sellers should be mindful of these restrictions when negotiating terms.
See: The Bidwell Family Corp. v. Shape Corp., Case No. 1:19-cv-201, United States District Court, S.D. Ohio, Western Division, (December 31, 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 recenegal 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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