Learn from the legal battle of a Pennsylvania-based Gold’s Gym and how poorly drafted contracts led to post-sale litigation. Discover key takeaways for selling your business without facing similar issues.
M&A Stories
June 5, 2019
Introduction:
Selling your company can be a stressful endeavor, especially when it involves leaving employees and contractors without continued income. In this case, we delve into the story of a Pennsylvania-based Gold’s Gym, which sold its assets in 2014, leaving two long-time personal trainers in a legal battle.
The Background:
The company, operating as a corporation, sold its assets, but the two personal trainers, who had been independent contractors for a decade, were not retained by the buyer. They subsequently filed claims against the company, seeking $414,000 for breach of their contracts. The core of their argument was that the company had promised to assign their personal trainer contracts to the buyer.
The Legal Dispute:
The dispute found its way to a Pennsylvania bankruptcy court, where the contractual provisions in question were identical. They stated that the contracts would remain in effect as long as the company “remains in business” and shall be assigned to any new owner or operator in the event of a sale, transfer, or change in control.
However, the court ruled that the company was only obligated to assign the contracts in the case of a stock sale, not an asset sale, which was the situation at hand.
Analysis:
The language concerning the assignment of contracts in the event of a change of control proved to be meaningless in this context. In a stock sale, the contracts would have remained in effect without the need for assignment. It’s evident that the contract language was poorly drafted, and thus, invited a lawsuit.
However, one undeniable fact remains – these personal trainers lost their livelihood after a decade of service to the club. It’s not surprising that they fought to salvage something from the sale.
In hindsight, it’s clear that the company should have reviewed these contracts to assess the potential post-closing liability to these trainers resulting from contract termination. Such a review might have alerted the seller to the risks associated with the contract language if the trainers were not retained by the buyer.
Key Takeaways:
This case highlights the importance of carefully drafting and reviewing contracts when selling a business. Business owners should proactively assess potential post-closing liabilities and explore solutions to mitigate them, such as negotiations with affected parties before the deal’s conclusion.
Case Reference:
In Re Mechanicsburg Fitness, Inc., Bankruptcy No. 1:16-bk-01897-HWV, United States Bankruptcy Court, M.D. Pennsylvania, (May 10, 2019)
By John McCauley: I help companies and their lawyers minimize legal risk associated with small U.S. business mergers and acquisitions (transaction value less than $50 million).
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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