Explore a real-life M&A case where an unexpected unemployment insurance rating change led to a legal dispute. Learn about the importance of due diligence and pre-closure disclosures in asset acquisitions.
August 9, 2019
M&A Stories
Introduction:
In the world of mergers and acquisitions (M&A), unexpected hurdles can arise for asset buyers, particularly concerning unemployment or workers’ compensation insurance ratings. This article delves into a real-life case where a seemingly routine acquisition led to unforeseen complications.
The Scenario:
In this instance, a company with an ordinary New York unemployment insurance experience rating embarked on acquiring the assets of another business. The acquisition agreement was meticulously crafted to mitigate the buyer’s successor liability exposure. It encompassed identifying the seller’s risks assumed by the buyer; a commitment from the seller to address its remaining liabilities; and seller representations of compliance with all relevant laws, tax payments, and full disclosure of financial liabilities (excluding certain ordinary course liabilities).
Furthermore, the seller pledged to handle all its tax obligations and indemnify the buyer against losses stemming from breach of seller representations or warranties; seller’s failure to fulfill promises in the acquisition agreement; and, neglecting to address any non-transferred liabilities.
The Legal Dispute:
Post-closure, the buyer received notification from the state of New York of a significant increase in its unemployment insurance rating, leading to higher premiums. This change was directly tied to the seller’s prior poor rating, of which the buyer had been unaware.
This dispute ultimately landed both parties in a New York court. Both the buyer and seller attempted to resolve the matter via summary judgment, but the court rejected both motions, citing the need for additional evidence.
Crucially, the court emphasized that the buyer had no opportunity to address this issue before closing due to the seller’s non-disclosure of the problem. The court noted, “(the buyer) contends that (the seller’s) failure to disclose its negative balance with the Department of Labor constitutes a violation of its obligations under section 3.20 of the APA to disclose any debts, liabilities, or financial obligations not listed in its 2009 financial disclosure. (The seller’s) argument that (the buyer) could have addressed the consequences of the transfer of the negative account balance by negotiating a different purchase price for the asset transfers is undermined by the fact that the existence of (the seller’s) negative balance was never disclosed to the buyer.”
Commentary:
For buyers engaging in asset acquisitions, thorough due diligence should encompass inquiries into the potential impact on workers’ compensation or unemployment insurance. This case underscores the critical importance of comprehensive pre-closure disclosures and negotiations to prevent post-acquisition surprises.
Case Reference:
MRC 56 Corp. v. Weeks-Lerman Group, LLC, Docket No. 650201/2018, Motion Seq. No. 001, Supreme Court, New York County, (July 3, 2019)https://scholar.google.com/scholar_case?case=5067779680365733048&q=%22asset+purchase+agreement%22&hl=en&scisbd=2&as_sdt=2006&as_ylo=2017
By John McCauley: I help companies and their lawyers minimize legal risk associated with small U.S. business mergers and acquisitions (transaction value less than $50 million).
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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