Discover the critical lessons from a real M&A legal dispute where a seller’s failure to adhere to post-closing dispute procedures led to significant financial consequences. This blog delves into the importance of indemnification provisions, the role of representations and warranties, and the impact of environmental and operational breaches on M&A transactions. Learn how meticulous attention to M&A agreement procedures can safeguard against costly disputes and ensure smoother business transitions.
M&A Stories
July 22, 2024
When buying a business, the buyer seeks assurance that there are no hidden problems. This is typically achieved through the seller making representations and warranties about the business’s condition, subject to any disclosures in the M&A documents. Additionally, the seller often agrees to settle pre-closing vendor invoices.
Written M&A agreements provide the buyer with recourse if undisclosed issues arise post-closing. The buyer can recover losses from the seller through the agreement’s indemnification provisions. Often, the buyer also has the right to offset losses against amounts owed to the seller after closing.
In this case, a seller supplied brake plates to its sole South Korean customer. The customer agreed to purchase the assets of the seller’s Alabama-based brake-plate facility after the seller faced financial difficulties. The buyer paid the seller $7 million at closing and a $4 million note, payable in ten annual installments.
The parties signed an asset purchase agreement, which included comprehensive seller representations and warranties about the facility and a promise from the seller to pay outstanding vendor invoices. The buyer was entitled to recover losses resulting from breaches of these representations, warranties, and covenants. The agreement also allowed the buyer to set off losses against the $4 million note payments.
After closing, the buyer discovered inoperable assets and environmental issues that breached the seller’s representations and warranties, along with unpaid vendor invoices, breaching the seller’s covenant to pay them. The buyer followed the purchase agreement’s procedures for indemnification and setoff, giving the seller timely notice of its indemnification claim and intention to set off losses against the note, claiming indemnification for losses exceeding $500,000.
The seller had the right to dispute these actions by making timely objections with detailed reasoning but failed to follow the procedures. Consequently, the buyer set off the claimed losses against the note.
The seller then sued the buyer in an Alabama trial court. The case ultimately reached the Alabama Supreme Court, which ruled in favor of the buyer. The court held that the seller could not dispute the merits of the buyer’s claims or the setoff against the note because it did not contest these actions according to the procedures outlined in the purchase agreement. Additionally, the court determined that the seller had to pay the buyer’s reasonable attorney fees.
The lesson here is clear: post-closing dispute procedures in M&A agreements must be followed meticulously. In this case, the seller’s failure to adhere to these procedures not only barred it from disputing the buyer’s actions but also resulted in paying the buyer’s legal fees.
Case Reference: Alabama Plating Technology, LLC v. Georgia Plating Technology, LLC, Nos. SC-2023-0250, SC-2023-0271, Supreme Court of Alabama, (June 21, 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 connectingwith business owners management, as well as professionals who share an interest in the complexities of M&A law.
By John McCauley: I write about recent legal 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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