Explore a legal case where a business buyer’s $8 million claim was denied after losing revenue due to nonrenewed customer contracts. Gain insights into the court’s ruling and the importance of accurate representations in M&A agreements.
November 10, 2019
Introduction:
When a potential business buyer is considering an acquisition, it’s important to assess the seller’s projected outcomes. However, these projections often don’t come to fruition, and overoptimistic projections typically don’t qualify as a violation of the seller’s acquisition agreement commitments.
The Situation:
In this instance, a private equity firm purchased $80 million worth of assets from a Wichita-based aircraft parts supplier. The seller’s main customer was Boeing, and their business dealings were governed by various contracts for different parts, each with its own expiration date. Many of these expiring contracts had been renewed previously.
During the buyer’s due diligence process, the seller provided revenue projections that encompassed contracts set to expire, which the seller believed could be renewed.
The Legal Dispute:
Unbeknownst to the seller at the time of the asset purchase agreement and the closing, certain expiring parts contracts had already been awarded to other suppliers by Boeing. Consequently, after the deal was finalized, both the seller and buyer realized that they had lost revenue amounting to $8 million due to these lost contracts. The buyer alleged that the seller breached its representations and warranties related to customers, material adverse effects, and full disclosure. However, the seller refuted these claims, leading to the dispute being taken to the Delaware Court of Chancery.
Court’s Ruling:
The court determined that the seller had not violated any of the three representations and warranties.
Firstly, the seller had stated that Boeing had not terminated or significantly altered its business relationship with the seller since 2015. Since the lost contracts had been awarded to other suppliers before the end of 2015, this representation remained unbreached.
Secondly, the seller’s assurance that there hadn’t been any event or development since 2015 with a potentially significant adverse impact was also deemed unbroken. Although the $8 million loss from Boeing contracts could qualify as a material adverse effect, this event occurred before 2015.
Lastly, the court concluded that the seller hadn’t breached its commitment to full disclosure. The Asset Purchase Agreement (APA) did not explicitly state that the projections shared by the seller with the buyer before entering into the agreement were accurate. Additionally, the APA didn’t incorporate these projections or guarantee the buyer’s ability to renew expiring contracts or even bid on such contracts with Boeing.
Commentary:
Hindsight suggests that the buyer could have requested a representation from the seller affirming the business’s opportunity to bid on expiring contracts.
Case Reference:
This case is referred to as Julius v. Accurus Aerospace Corporation, C.A. No. 2017-0632-MTZ, Court of Chancery of Delaware (Decided October 31, 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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