Explore a legal case involving an airline acquisition where buyer owners’ personal guarantee becomes a point of contention. Learn about the complexities of M&A transactions and the implications of personal guarantees in such deals.
M&A Stories
December 03, 2020
Introduction:
When selling a business, the main concern for the seller is ensuring that they receive the full purchase price in situations where significant payments are due after the closing. One way to mitigate this risk is by requiring the buyer’s owners to personally guarantee the buyer’s payment obligations after the deal is completed.
The Acquisition:
In a notable deal from 2008, an Alaskan family and a partner sold an Alaskan commuter airline to a real estate developer in Portland. The developer established a company that acquired the stocks of the airline company, which held all necessary certificates for operating an airline, except for the aircraft and hangars. These aircraft and hangars were owned by an affiliated company.
As part of the transaction, a buyer-affiliated entity purchased the hangars from the seller’s affiliated company, while the airline (now owned by the buyer’s owners) leased the planes from the seller’s affiliated company.
Legal Dispute:
However, the financial strain caused by the Great Recession placed the buyer’s group in financial jeopardy, leading to legal action in Alaskan state courts. A key point of contention was whether the buyer owners’ guarantee, which was given in relation to the stock purchase agreement, extended to the aircraft lease from the seller’s affiliate.
While the buyer owners’ guarantee unequivocally covered the stock purchase agreement for the airline company, the language within the acquisition documents could be interpreted as potentially extending to the plane lease agreement as well. The trial court ruled in favor of the buyer owners, stating that the guarantee did not apply to the aircraft lease. This decision was made through a summary judgment, avoiding a full trial and relieving the buyer owners from airplane lease payment responsibilities.
Appeal and Outcome:
The seller appealed the decision, leading to the Alaska Supreme Court’s involvement. The Supreme Court reversed the lower court’s ruling, reasoning that the references to the lease agreement in the guarantee were ambiguous enough to warrant a closer examination. As a result, the case was sent back to the trial court for a jury to determine whether the buyer owners had indeed guaranteed the airplane lease obligations.
This case is referred to as Beardsley v. Jacobsen, No. 7481, Supreme Court of Alaska, (September 18, 2020) https://law.justia.com/cases/alaska/supreme-court/2020/s-17190.html
Comment:
Dealing with transactions involving multiple buyer and seller entities, each with numerous agreements, can be considerably more complex. It would have been prudent for the seller to explicitly state in the personal guarantee that the buyer’s owners were responsible for the airline’s lease obligations as well.
By John McCauley: I help people manage M&A risks involving privately held companies.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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