A New Hampshire federal district court permitted the distributor to pursue a claim against the buyer based upon its assurances made to the distributor before closing. The buyer did not tell the distributor that its responsibility to fix printers sold by seller before closing was capped in the purchase agreement at $200,000.
M&A Stories
December 8, 2022
Introduction
When acquiring a manufacturer’s assets, buyers should exercise caution when communicating with the seller’s distributors. Statements made during negotiations and due diligence can have significant legal implications. A recent case in a New Hampshire federal district court highlights the importance of transparent communication in such situations.
The Deal
In this particular case, a New Hampshire-based manufacturer specialized in digital printers. These printers were distributed by a distributor under a distribution agreement established in 2015. Prior to the manufacturer’s negotiations with a prominent screen printing equipment maker in 2017, the printers had a history of warranty problems.
During the negotiations, the buyer assured the seller’s distributor that it would address the warranty issues. This assurance prompted the distributor to provide written consent for the seller’s assignment of the distribution agreement to the buyer. However, crucially, the buyer failed to disclose to the distributor that its responsibility to fix the printer problems was capped at $200,000 as per the purchase agreement.
The Lawsuit
Following the acquisition, disputes arose between the distributor and the buyer when the latter refused to continue addressing printer problems beyond the $200,000 cap. As a result, the distributor filed a lawsuit against the buyer in a New Hampshire federal district court, seeking compensation for damages incurred due to the printer issues.
The buyer argued that it fulfilled its obligation to the seller by spending $200,000 on addressing the printer problems. However, the court allowed the distributor to proceed with the litigation, emphasizing that the buyer may be liable for spending more than $200,000 if it had failed to inform the distributor about the cap before the acquisition. Had the buyer disclosed this information, the distributor might have reconsidered granting consent for the distribution agreement assignment.
See Fujifilm North America Corporation v. M&R Printing Equipment, Inc, Civil No. 20-cv-492-LM, United States District Court, D. New Hampshire, (October 24, 2022).
Conclusion
Buyers involved in asset acquisitions must understand that legal consequences can arise not only from explicit contractual obligations but also from statements made during due diligence and negotiations. This case underscores the significance of transparent communication, highlighting the potential liabilities that can arise when important information is withheld.
By John McCauley: I write about recent legal problems of buyer 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
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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