Explore a case study in M&A deals where the seller’s responsibility for permits became a legal issue. Learn about deal modifications, legal battles, and key takeaways.
M&A Stories
January 18, 2019
In a notable M&A case, a Palo Alto-based business owner selling their electroplating company faced a post-closing issue regarding permits. Here’s a concise overview:
The Background:
On June 19, 2014, the seller agreed to sell their company for around $20 million. During due diligence, it was revealed that the company lacked an occupancy and plating permit for one of its properties. The seller informed the buyer that it was possible that a plating permit could not be obtained, but the deal proceeded.
Deal Modification:
The final stock purchase agreement was changed to exempt the “occupancy permit issue” from the seller’s representations. The sale price was reduced to $9.3 million due to various issues.
Legal Battle:
After the closing, the company (now owned by the buyer) sued the seller, claiming a breach of the agreement due to the absence of a plating permit. The court ruled in favor of the seller, stating that the exemption for occupancy issues also covered plating issues, pointing to the seller/buyer telephone conversation before the closing where the seller said that the buyer decided to close, in spite of the plating issue.
Key Takeaway:
Hindsight shows the need for clear indemnity clauses in M&A agreements. Buyers should insist on indemnification for permit-related issues, and sellers should explicitly exempt these issues from their representations and warranties.
Case Reference:
Hammon Plating Corporation v. Wooten Case No. 16-CV-03951-LHK, United States District Court, N.D. California, San Jose Division, (July 13, 2017). https://scholar.google.com/scholar_case?case=1051374585555893937&q=%22stock+purchase+agreement%22&hl=en&scisbd=2&as_sdt=2006&as_ylo=2017
By John McCauley: I help people buy and sell privately held businesses.
Email: jmccauley@mk-law.com
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Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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