Explore the crucial role of the APA Integration Provision and Exclusive Remedy Clause in a recent M&A case involving a Denver-based seller and a Houston-based buyer. Discover key allegations, the seller’s claim, the court’s decision, and the legal obstacles faced in negligent misrepresentation claims in M&A cases.
June 15, 2019
M&A Stories
Introduction:
In a recent case involving the sale of a mortgage service business, a crucial legal provision, the APA Integration Provision, and an Exclusive Remedy Clause played a significant role in determining the outcome. Let’s delve into the details.
The Parties:
The seller, a Denver-based company, specialized in assessing and verifying loan data for financial institutions. The buyer, part of a 120-year-old corporate group in Houston, purchased most of the seller’s assets in 2013 for $15 million in cash, with additional earnout payments based on post-closing performance.
The Lawsuit:
Before and after the sale, the seller faced challenges, including a lawsuit from a large bank customer and a declining mortgage securitization business. The earnout targets were unmet, leading to a business closure. Subsequently, the seller filed for bankruptcy protection and sued the buyer, claiming negligent misrepresentation.
Key Allegations:
1. The seller alleged that the buyer misrepresented its commitment to invest in the business post-closing and maintain the existing operations.
2. The buyer’s purported resources in Costa Rica, promised for the business’s benefit, were not available as stated.
3. The seller’s founder, initially promised a continued role, was marginalized and terminated early.
4. The buyer failed to retain key employees despite promises of retention bonuses.
The Seller’s Claim:
The seller claimed that if the buyer had provided accurate information, they would not have entered the Asset Purchase Agreement (APA), retaining assets worth $42 million. The negligent misrepresentation claim sought damages of $27 million, the difference between the business’s value and the consideration paid.
The Court’s Decision:
The court ruled against the seller for several reasons: A. The APA’s Colorado choice of law provision and integration clause preempted any tort liability, including negligent misrepresentation claims. B. The APA’s indemnity provision designated it as the “sole and exclusive remedy” for representation breaches, except for intentional fraud. C. Negligent misrepresentation claims must be based on past or present facts, not promises for the future. D. The economic loss rule restricted the seller’s claim as it lacked an independent duty of care under tort law.
Comment:
Suing for negligent misrepresentation in M&A cases can arise when contractual remedies are insufficient or when material misrepresentations occur outside the contract. However, such claims face legal obstacles, as seen in this case.
Case Reference:
In Re Allonhill, LLC., Case No. 14-10663 (KG), Adv. Pro. No. 16-50419 (KG), United States Bankruptcy Court, D. Delaware, (Filed April 25, 2019)
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
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Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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