Explore the intricacies of federal securities fraud claims in M&A through the lens of O’Connor v. Cory. This blog delves into a notable case, emphasizing the importance of clarity in purchase agreements and offering key takeaways for sellers in similar situations.
M&A Stories
November 2, 2018
In October of 2018, a notable M&A case shed light on the complexities surrounding federal securities fraud claims. In this instance, sellers of a technology consulting company found their pursuit against the buyer’s owners challenged, emphasizing the importance of clarity in purchase agreements.
The timeline unfolded as follows:
In the summer of 2012, the sellers initiated the sale of their company.
After eleven months of negotiations, the deal closed in June 2013, involving a purchase price of $3.15 million in cash, buyer’s stock, and additional compensation.
A pivotal development occurred when the buyer’s CFO resigned before the deal closed, triggering over $1 million in severance benefits, and impacting the value of the buyer’s stock received by the sellers.
Legal proceedings commenced in June 2016, with the sellers filing a lawsuit in a Dallas federal district court, encompassing federal securities fraud claims.
The defense mounted by the buyer’s owners centered on a disclaimer of reliance clause within the purchase agreement, aiming to restrict the sellers’ ability to assert federal securities fraud claims based on pre-closing statements.
The court rendered its decision, considering:
The disclaimer of reliance clause, which, according to the court, precluded the sellers from pursuing federal securities fraud claims for statements made or omitted during negotiations.
The court’s evaluation of reasonableness, factoring in the complexity of the deal, the parties’ sophistication, and the contents of the purchase documents.
The court concluded that it was unreasonable for the sellers, given their business experience and engagement of consultants, to rely on statements made outside the purchase agreement.
Key takeaways from the case include:
Sellers, particularly those receiving equity as part of the purchase price, must conduct thorough due diligence on the buyer’s business.
Requesting representations and warranties in the purchase agreement regarding the condition of the buyer’s business is crucial.
Consideration of including a full disclosure representation in the purchase agreement, compelling the buyer’s owners to disclose any material facts adversely affecting the buyer.
Exploration of a “fraud carve out” in the disclaimer of reliance clause, allowing fraud claims for statements not supported by a representation and warranty.
Case Reference:
O’Connor v. Cory, Civil Action No. 3:16-CV-1731-B, United States District Court, N.D. Texas, Dallas Division (October 19, 2018).
By John McCauley: I help people start, grow, buy and sell their 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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