This blog post explores the critical role of due diligence in mergers and acquisitions, illustrating how it can empower buyers to withdraw from disadvantageous deals. It recounts a cautionary case involving the purchase of a nutritional supplement company, emphasizing the importance of verifying seller claims and conducting independent assessments. The outcome highlights how thorough due diligence can reveal issues early, allowing buyers to make informed decisions and safeguard their interests in M&A transactions.
M&A Stories
November 1, 2024
In March 2020, a buyer acquired the assets of a business selling protein powder and other nutritional supplements for $1.6 million, paying a portion of the price—a $354,000 note—toward inventory. The seller had previously presented a certificate of analysis, which stated that the products delivered at least 25 grams of protein per 33.5-gram serving.
After the sale, however, the buyer found discrepancies in the protein levels and hired an independent lab to test the inventory. Results indicated significantly lower protein content than what was claimed on the certificate and product labels. When the buyer tried to undo the deal, the seller refused, and the buyer withheld payment on the $354,000 note.
The seller then sued the buyer in New York for nonpayment, seeking summary judgment since the buyer admitted to withholding payment. Although initially granted, the buyer’s fraud defense led an appellate court to overturn this decision. The court ruled that fraud allegations could be a legitimate defense to nonpayment if the buyer could prove reasonable reliance on the seller’s claims about protein concentration. The case was sent back for trial to determine whether the buyer’s reliance on the seller’s certificate of analysis was reasonable.
The seller will certainly argue at trial that the buyer should have tested the inventory independently before completing the purchase. This highlights a valuable lesson for buyers: thorough due diligence, including independent verification of critical claims, can reveal issues early, allowing buyers the option to walk away from a flawed transaction.
See: Panessa v. Lederfeind, CV-22-2307 , Appellate Division of the Supreme Court of New York, Third Department, (October 24, 2024).
Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.
Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners, management, as well as professionals who share an interest in the complexities of M&A law.
By John McCauley: I write about recenegal problems of buyers and sellers of small businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Podcasts https://www.buzzsprout.com/2142689/12339043
Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles
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