Unraveling the Legal Threads: When the Buyer’s Owner Faces the Fallout

Delve into the intricacies of M&A legal challenges with our latest blog post, ‘Unraveling the Legal Threads: When the Buyer’s Owner Faces the Fallout.’ Explore the captivating case of Mohegan Lake Motors, Inc. v. Maoli, where the buyer’s owner becomes entangled in a legal dispute over a breached asset purchase agreement. Navigate through the complexities of due diligence, termination disputes, and the court’s determination on piercing the ‘corporate veil.’ Gain insights to potentially avert such legal battles. Stay informed and engaged in the dynamic world of mergers and acquisitions.

M&A Stories

June 27, 2018

Navigating the complexities of mergers and acquisitions can sometimes lead to unexpected legal challenges, as demonstrated in the intriguing case of Mohegan Lake Motors, Inc. v. Maoli. In this particular scenario, the owner of the buyer found himself entangled in a legal dispute with the seller over the breach of an asset purchase agreement.

The buyer’s owner, entrenched in the car dealership business, set his sights on acquiring an Audi dealership from the seller in June of 2015. To facilitate this transaction, he promptly established the buyer—a limited liability company—dedicated solely to the purchase of the Audi dealership. However, this buyer entity remained dormant, devoid of operations, employees, or officers, with the owner being the sole driving force.

Conducting due diligence became a pivotal phase, marked by a comprehensive request for detailed materials from the seller. Within a mere two weeks, the seller dutifully supplied the requested due diligence materials, setting the stage for further proceedings.

In November of 2015, a pivotal asset purchase agreement was inked, valuing the Audi car dealership at $8 million. Notably, the agreement granted the buyer the right to terminate the deal if dissatisfied with the due diligence inspection.

Trouble ensued when the buyer, in May of 2016, abruptly terminated the asset purchase agreement, citing dissatisfaction with the due diligence inspection. The seller retaliated with a breach of contract lawsuit, asserting that the true party at fault was not the shell LLC buyer but the buyer’s owner.

The crux of the legal battle hinged on the court’s determination of whether the seller could pierce the “corporate veil” of the buyer and hold the buyer’s owner liable for the breach. The court ruled in favor of the seller, emphasizing the buyer’s owner’s complete domination of the buyer entity. The lack of corporate formalities, the owner’s singular role as the sole member and employee, and the buyer’s dependency on the owner for funding were key factors.

Furthermore, the court underscored that the seller presented compelling evidence that the domination was employed to commit a fraud or wrong. Allegations of the buyer’s failure to provide timely financial information to Audi, a contractual violation, and the improper termination of the asset purchase agreement constituted acts of fraud or wrongdoing.

As a commentary, it’s worth noting that such legal battles could potentially be averted through a simple precaution: requiring the buyer’s owner to guarantee the company’s obligations under the asset purchase agreement. This practice is commonplace in private equity, where acquisition subsidiaries with no assets often receive guarantees from the parent fund, albeit within specified limits.

Case Reference:

This case is referred to as Mohegan Lake Motors, Inc. v. Maoli, No. 16-CV-06717 (NSR), United States District Court, S.D. New York (December 6, 2017). 

By John McCauley: I help people start, grow, buy and sell their businesses.

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Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles