In the early stages of a merger and acquisition (M&A) transaction, owners may be willing to overlook certain differences in favor of focusing on the benefits of the deal. However, as the M&A transaction is completed, the rose-colored glasses may come off and sudden concerns may develop into serious legal disputes between owners. If these disputes are not handled correctly, it can result in long-term consequences, both financially and regarding the relations of the parties. The following are some information regarding common post-closing M&A disputes.
Deferred Payment of Purchase Price
Many M&A agreements are structured such that part of the purchase price is paid at closing and the rest is paid at some point in future. This is done with “earn-out” clauses and purchase price adjustment clauses, among others. An earn-out clause is where the amount of future money paid depends on selling company’s performance after the acquisition, i.e. the money has to be earned after the closing before it is paid out. These types of clauses are sometimes interpreted differently by buyers and sellers after the closing. For example, if the selling company’s product is upgraded after the closing, the buyer and seller may view the revenues from those sales differently under an earn-out clause. As another example, if the buyer and seller have different accounting practices that could certainly affect their interpretation of purchase price adjustment clauses. Resolving these disputes can involve complex accounting and negotiations by both parties.
Breach of Obligations
Many M&A transactions involve certain obligations of the seller after the closing, which can include:
- To not disclose confidential information regarding the company or its products
- To not solicit the employees of the company after it is sold
- To not compete with the company or solicit its customers
While non-compete provisions are generally not enforceable in some states, including California, there are exceptions and a reasonable non-compete provision entered into in connection with the sale of a business can be enforced even in California. If the buyer believes that the seller engaged in the breach of any agreed-upon obligations, it can bring a legal claim for remedies.
During negotiations, the buyer will typically want the seller to effectively offer a full warranty. Conversely, the seller will typically want the buyer to take the company as-is. The parties will typically negotiate and agree upon certain representations and warranties, with schedules of exceptions. This will allow the buyer to make indemnity claims if it turns out that the selling company was not as good as promised. Common alleged misrepresentation and warranties can involve property of the target company, accuracy of financial statements, title to assets, value of contracts, intellectual property, active litigation, environmental issues, tax and regulatory compliance, among other matters. In some situations, the parties will agree to an escrow or a hold-back of some of the purchase price which would either be (a) used to satisfy indemnity claims within a certain time frame, or (b) released to the seller after the certain time frame has elapsed, to the extent there are no pending claims against the money. In other situations, if there is any deferred payment of purchase price, those payments could get held up or reduced because of indemnity claims. Absent a hold-back or offset against deferred payments, the buyer can still make indemnity claims, though from a practical standpoint they are less likely when the buyer does not have something to offset it against.
Find Out how an Experienced Silicon Valley Mergers and Acquisitions Attorney can Help
Having the help of an experienced M&A lawyer throughout the merger and acquisition process is essential to prevent disputes whenever possible. Furthermore, if a post-closing dispute does arise, you want to be represented by a knowledgeable corporate litigation lawyer. Please call the Silicon Valley attorneys at Structure Law Group, LLP at 408-441-7500 today for more information.