Explore the intricacies of a healthcare tech acquisition with a $17 million earnout dispute. Gain insights into the importance of due diligence, clear terms, and transparency in M&A transactions. Learn from the legal actions, key findings, and implications for both buyers and sellers. Case reference: Rheault v. Halma Holdings Inc.
M&A Stories
December 3, 2023
Introduction:
Selling your company with a substantial earnout can be a gamble. This case underscores the need for meticulous due diligence and clear terms when entering into such agreements.
Background:
In 2021, a healthcare tech company, offering a range of solutions, underwent a stock acquisition. The buyer, a global consortium of life-saving tech firms, valued the target at $30 million, with a potential $17 million earnout based on specific sales benchmarks within two years.
Controversy:
Issues emerged during the earnout period. The buyer failed to disclose prior obligations from a competing acquisition, impacting the target’s post-sale performance. Allegations include a breach of contract regarding sales representatives and delayed product launches.
Legal Actions:
The seller filed a lawsuit, citing fraud for non-disclosure and breach of contract for failing to promote post-sale products. The buyer countered with a motion to dismiss, arguing no duty to disclose and insufficient allegations.
Key Findings:
The court found the fraud allegations valid, emphasizing the buyer’s duty to disclose conflicting agreements. The absence of an anti-reliance clause allowed the seller’s fraud claim to proceed. The breach of contract claim stood, supported by specific instances of unfulfilled promises.
Implications:
Transparency is crucial for buyers proposing earnout provisions. Sellers should be wary of anti-reliance clauses, enhancing their ability to address buyer commitments based on fraud during negotiations.
Case Reference:
Rheault v. Halma Holdings Inc., Civil Action No. 23-700-WCB United States District Court, D. Delaware (November 7, 2023).
By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.
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