Explore this M&A legal blog post that delves into the case of a $1.4 million claim arising from a stock purchase agreement disclosure. Gain insights into the legal outcome, key takeaways, and strategies to minimize liability in M&A deals.
M&A Stories
May 6, 2019
Introduction:
When acquiring a company, minimizing the risk of overpayment is crucial. This involves thorough due diligence to uncover every detail about the target business. Additionally, the buyer expects comprehensive representations and warranties from the seller in the purchase agreement.
Deal Overview:
In this case, the buyer was acquiring a company that provided healthcare coverage in upstate New York. The stock purchase agreement valued the company at $41.3 million, with the seller representing that there were no undisclosed liabilities, except those listed in a disclosure schedule.
The Surprise Liability:
Approximately 10 months after the agreement was signed, the New York Department of Health demanded that the company repay $1.4 million in income received during the 12 months leading up to April 2016. The buyer insisted that the seller should cover this liability as is pre-closing income and it wasn’t disclosed earlier. Legal action ensued.
Legal Outcome:
The buyer’s claim was based on the breach of the stock purchase agreement’s representation and warranty. However, the court ruled in favor of the seller, stating that no one knew of the liability when the agreement was signed. The court considered the seller’s disclosure in the disclosure schedule, where it had mentioned the potential for such a liability, as sufficient.
Key Takeaways:
1. The preparation of disclosure schedules is critical for sellers to minimize potential liability.
2. Properly disclosing business problems in the schedule reduces the risk of having to refund a portion of the purchase price.
3. Buyers should pay close attention to disclosure schedules before closing a deal to address any issues disclosed.
Case Reference:
Molina Healthcare, Inc. v. Wellcare Health Plans, Inc., Docket No. 651328/2018, Motion Seq. No. 001, Supreme Court, New York County, (April 8, 2019) https://scholar.google.com/scholar_case?case=3450975109110859669&q=%22stock+purchase+agreement%22&hl=en&scisbd=2&as_sdt=2006&as_ylo=2017
The lesson for both buyer and seller is not to neglect disclosure schedules.
By John McCauley: I help businesses minimize risk when buying or selling a company.
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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