Explore a significant M&A legal case where a Delaware court permitted a buyer to pursue claims against a seller for breach and fraud in a business acquisition. Get insights into the buyer’s legal battle and the implications of acquisition agreement terms.
April 24, 2020
Introduction:
Buying a business involves risks, and buyers often realize post-closure that the business’s reality didn’t match its representations. The buyer’s ability to recover losses hinges on the acquisition agreement terms.
The Situation:
In this case, a Swiss fragrance and flavor company wanted to expand its organic product manufacturing through acquiring a New Jersey-based seller. The seller, specializing in high-quality organic flavors, needed to meet strict industry standards to be considered natural. The U.S. National Organic Program verified the seller’s organic compliance.
The buyer needed the seller’s portfolio of industry-compliant organic flavors. Assured by the seller’s claims and organic certificates, they closed a $115 million deal on February 1, 2018.
The Problem:
After the deal, the buyer found that the flavor ingredients differed from the certified formulas. The seller also kept two sets of records and used suspicious tactics to hide non-compliance.
Legal Action:
The buyer sued the seller in Delaware Superior Court for breaching the acquisition agreement and committing fraud. The seller argued that only breach claims were allowed, but the court disagreed, permitting the fraud claim.
Key Point:
The buyer and seller engaged in an 8-month legal battle to determine if the buyer could pursue a fraud claim. This dispute arose because the acquisition agreement capped damages for breach at $11 million, but the fraud claim had no such cap. The agreement’s “exclusive remedy” section limited damages to $11 million but explicitly excluded fraud claims, creating a fraud “carve-out.”
Case Details:
This case is referred to as Firmenich Incorporated v. Natural Flavors, Inc., C.A. No. N19C-01-320 MMJ [CCLD], Superior Court of Delaware (Submitted: February 10, 2020. Decided: April 7, 2020).
Email: jmccauley@mk-law.com
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Telephone: 714 273-6291 Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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