Dive into the intricate world of mergers and acquisitions with our latest blog post, ‘Delaware Court Ruling: Buyer’s Owner Held Liable for Fraudulent Statements Outside Asset Purchase Agreement.’ Explore the fallout of a significant legal decision in Flowshare, LLC v. Georesults, Inc, highlighting the accountability of a buyer’s owner beyond the formal agreement. Uncover the nuances of personal commitments, transparency, and integrity in M&A transactions. A must-read for entrepreneurs, business owners, CFOs, and legal professionals navigating the complex landscape of acquisitions. Stay informed on the latest legal insights shaping the M&A realm.
M&A Stories
July 30, 2018
In the dynamic world of mergers and acquisitions, a recent Delaware court decision sheds light on the accountability of a buyer’s owner in a transaction. This case, Flowshare, LLC v. Georesults, Inc, decided on July 25, 2018, unravels a situation where a buyer’s owner couldn’t evade responsibility for statements made outside the asset purchase agreement.
The narrative unfolded as the buyer aimed to acquire the seller’s business, with the seller expressing concerns about financing the substantial purchase price, especially post-closing. The buyer’s owner, acting as the lead negotiator, assured the seller’s owner that he would personally fund any shortfall in the purchase price, beyond what the buyer could finance under the asset purchase agreement. This commitment, supported by a side agreement personally signed by the buyer’s owner, became a pivotal element in the deal.
Notably, the side agreement, executed before the asset purchase agreement was signed on November 6, 2015, and post-dated November 9, 2015, explicitly stated its independence from and addition to the main agreement. It also emphasized that the obligations outlined were joint and several for both the buyer and the buyer’s owner.
Post-closing, a setback occurred when one of the seller’s major customers terminated its contract just 3 ½ weeks later. Consequently, the seller turned to the buyer’s owner to cover the additional purchase price amounts, as promised in the side agreement. However, the buyer’s owner failed to fulfill this commitment, prompting legal action from the seller.
The crux of the legal dispute revolved around an integration clause within the asset purchase agreement, stating that it constituted the entire agreement between the buyer and the seller regarding the sale. The buyer’s owner sought dismissal, arguing that the side agreement was not valid due to this clause. However, the seller countered, asserting that under Delaware law, the buyer’s owner’s fraudulent claims about financial capability rendered the integration clause irrelevant.
In a significant decision, the court sided with the seller, permitting them to pursue legal action against the buyer’s owner. The court highlighted that, under Delaware law, the outcome would have favored the buyer’s owner had the asset purchase agreement explicitly disclaimed reliance on statements outside its scope (an anti-reliance clause).
This ruling serves as a cautionary tale, emphasizing the importance of transparency and integrity in M&A transactions, particularly when personal commitments are involved outside the formal agreement. Entrepreneurs, business owners, CFOs, and legal professionals navigating the intricate landscape of acquisitions should take note of this case’s implications for contractual obligations and accountability in the M&A realm.
Case Reference:
Flowshare, LLC v. Georesults, Inc, C.A. No. N17C-07-227 EMD CCLD, Superior Court of Delaware, (Decided: July 25, 2018).
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