Explore the risks and challenges associated with post-closing royalties in M&A deals. Learn from the case of Kelly v. Waters Corporation and the potential pitfalls of relying on earnouts and royalties. Understand the importance of clear agreements in the world of mergers and acquisitions.
M&A Stories
February 22, 2019
In a case dating back to 1999, a seller developed software products for pharmaceutical and FDA-regulated industries. The buyer, a startup at the time, purchased these software products with an agreement to pay royalties.
In 2001, the buyer persuaded the seller to amend the agreement, reducing royalty payments. In 2004, the seller accused the buyer of underpayment and fraud. An internal audit in 2006 revealed unethical practices by the buyer.
In 2008, a tolling agreement was signed, and in 2016, the seller sued the buyer for fraud. The lawsuit was lost due to timing, but the post-closing misrepresentations were referred to a federal district court.
This case underscores the risks of relying on earnouts or royalties in M&A deals. Buyers may not be motivated to fulfill these obligations or might manipulate financial records to minimize payments.
Case Reference:
Kelly v. Waters Corporation, No. 18-P-58, Appeals Court of Massachusetts, (February 15, 2019).
By John McCauley: I help businesses minimize risk when buying or selling a company.
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