Explore the potential risks faced by asset buyers when dealing with unassumed seller contracts in the world of mergers and acquisitions. Learn from a cautionary tale involving a buyer, a seller, and a critical contract dispute.
M&A Stories
May 28, 2019
Introduction:
In the world of mergers and acquisitions, the details matter. When a buyer and seller agree on a deal, one critical consideration is whether the transaction involves purchasing the assets or the entire target company. This seemingly technical choice can have significant implications, particularly concerning existing contracts with customers, suppliers, employees, lenders, and investors. In this article, we explore the potential risks faced by asset buyers when dealing with unassumed seller contracts and share a cautionary tale.
The Deal:
In 2011, our buyer acquired the assets of an oil and gas drilling machinery company based in North Dakota. Among these assets was a 2010 contract the seller had with its largest customer. Notably, this contract stipulated that the seller couldn’t assign it to a new buyer without the customer’s explicit consent.
However, the seller had committed to collaborating with the buyer post-closing to ensure the buyer could retain the customer’s business, even if it meant subcontracting through the seller. In practice, the buyer didn’t secure the customer’s consent but continued servicing the customer independently, albeit under the seller’s trade name, acquired in the deal.
The Lawsuit:
In 2012, one of the buyer’s employees was injured while working for the customer. North Dakota’s worker’s compensation laws limited the employee’s right to compensation from the buyer. Consequently, the injured employee sued the customer for negligence. The customer, in turn, sued the buyer for indemnification, arguing that the seller had committed to indemnify them under the 2010 contract, and the buyer had assumed this obligation.
The buyer contended that it bore no responsibility because it hadn’t assumed the 2010 contract, especially given the absence of consent from the customer.
The customer claimed it had granted consent after the lawsuit, citing the buyer’s continued service under the seller’s trade name.
The Court’s Decision:
The court ruled that the dispute couldn’t be resolved at this preliminary stage of the litigation, leaving open the possibility that the buyer might have to indemnify the customer.
Comment:
This case underscores a critical lesson for asset buyers: Even when consent is required from the other party to a contract and isn’t initially granted, post-closing actions, like continued service under the seller’s trade name, might establish a legal assignment of the contract. To avoid such disputes, buyers should consider negotiating new contracts with more favorable indemnification terms when necessary.
Case Reference:
Peterson v. Murex Petroleum Corporation, Case No. 1:17-cv-165, United States District Court, D. North Dakota, (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
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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