Explore a recent M&A legal case where a buyer sued the seller for misrepresenting compliance with Chinese law, resulting in significant financial implications. Learn about the importance of representations and warranties in purchase agreements.
M&A Stories
December 13, 2018
In a recent legal case, a Kentucky-based hydraulic motor manufacturer faced post-acquisition issues. The buyer had acquired the company’s stock for about $87 million, with representations in the purchase agreement that the company’s benefit plans for Chinese employees complied with the law and that its financial statements from January 2014 to April 2016 were accurate.
After the deal closed, the buyer discovered that the company’s Chinese facility had not made proper pension and insurance contributions for its employees, resulting in a shortfall of $563,000 in payments to the Chinese government. This discrepancy caused the buyer to overpay by $7.7 million. The buyer also had to allocate resources to address this issue in compliance with Chinese law.
The buyer sued the seller in a New York federal district court, alleging that the seller breached the stock purchase agreement by misrepresenting compliance with Chinese law and not disclosing the additional costs involved. The court allowed the breach of contract claim to proceed.
This case highlights the importance of representations and warranties in purchase agreements, as they can have significant implications when undisclosed pre-closing liabilities emerge.
Case Reference:
Danfoss Power Solutions (US) Company v. Maddux, No. 18cv6237 (DLC), United States District Court, S.D. New York, (December 6, 2018).
By John McCauley: I help people start, grow, buy and sell their businesses.
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