For ambitious companies eager to expand into overseas markets, often the
conventional route of organic business development is simply not fast enough. The other option to invest in or buy a business outright is far quicker but often fraught with unforeseen dangers. And even the biggest, most experienced players can get it badly wrong if they go into an M&A with their eyes wide shut.
If you search for good and bad M&As online the Daimler-Benz merger/acquisition with Chrysler back in 1998 is generally at the top of most search engines on how NOT to undertake a big international merger. Despite carrying out all the necessary financial and legal measures to ensure a relatively smooth deal, the merger quickly unravelled because of cultural and organisational differences. Something that neither side had foreseen when both parties had first sat down at the negotiating table.
These days the failed merger of the two car manufacturers is held up as a classic example of the failure of two distinctly different corporate cultures. Daimler-Benz was typically German; reliably conservative, efficient, and safe, while Chrysler was typically American; known to be daring, diverse and creative. Daimler-Benz was hierarchical and authoritarian with a distinct chain of command, while Chrysler was egalitarian and advocated a dynamic team approach. One company put its value in tradition and quality, while the other with innovative designs and competitive pricing.
Jim E. Bullock and Robert W. Gifford discussed The Art of Deal Making: Using External Expertise Effectively as part of the Disputes chapter.
What are the most common post-closing disputes in your jurisdiction? (e.g. breaches of representations and warranties, price adjustment issues, tax covenants or fraud.) Do you have any relevant case law to highlight this?
Post-closing battles often arise from a “purchase price adjustment,” a typical provision adjusting the total purchase price based on various post-closing factors. For example, in Nelson Shirley v. FMC Technologies, Inc., A-20-CV-261-RP, 2020 WL 5995695 (W.D. Tex. Oct. 9, 2020), the buyer reduced the purchase price after closing, by nearly $500,000, claiming a working capital adjustment, because it disagreed with the seller’s accounting practice. In another example, Rebellion Energy II LLC v. Liberty Resources Powder River Operating, LLC, 01-19- 00413-CV, 2019 WL 5699742, (Tex. App.—Houston [1st Dist.] Nov. 5, 2019, no pet.), the buyer sought a $750,000 purchase price reduction claiming this reflected expenses the seller should have paid prior to closing. Unsurprisingly, both examples resulted in protracted litigation.
Disputes over valuing minority ownership interests may also arise post-closing. Texas does not recognize a common-law minority shareholder oppression claim (Ritchie v. Rupe, 443 S.W.3d 856 (Tex. 2014)), but minority shareholders do have statutory dissenters’ rights to demand an appraisal of their interests even after closing (Texas Business Organizations Code §§ 10.351-10.368). In Fenenbock v. W. Silver Recycling, Inc., 601 S.W.3d 32 (Tex. App.—El Paso 2020, no pet.), the minority shareholders would have received $68 per share under the company’s merger agreement; after exercising their dissenters’ rights, the trial court valued their interests at $90 per share. These rights, however, do not extend to publicly traded companies, companies with 2,000 or more owners, or to partnerships or limited liability companies (unless the partnership or LLC company agreement provides otherwise).
Fraud or failure to disclose constitutes another issue arising post-closing. For example, Colonial Oaks Assisted Living Lafayette, L.L.C. v. Hannie Development, Inc., 972 F.3d 684 (5th Cir. 2020), involved the buyer’s claim that the sellers’ representing the company was compliant with applicable law was fraudulent based on information discovered after closing.
How would you help in-house counsel shape an M&A agreement to minimise any of the potential disputes mentioned above or aid enforcement proceedings?
Benjamin Franklin admonished that “an ounce of prevention is worth a pound of cure.” Subsequent confusion or disagreement over purchase price adjustments can be defused by carefully defining the rules to be applied. Consider how simply referring to GAAP (generally accepted accounting principles) creates confusion – rather than fixed calculations, GAAP are standards with multiple, acceptable alternatives: two companies may determine the value of assets differently but still comply with GAAP. Specifying one party’s application of GAAP as controlling (e.g., “GAAP as consistently applied by Seller”) avoids subsequent confusion caused by differing accounting practices. As experienced M&A counsel, we also recommend using formulae and examples customized to the transaction, to avoid post-closing disputes.
Ensuring minority ownership receives fair value for their interests (and avoiding a dissenters’ rights battle) is, likewise, enhanced by external guidance. As noted in Singleton v. Elephant Insurance Co., 953 F.3d 334 (5th Cir. 2020), Texas law defines “fair market value” as the price property will bring when offered for sale by one who desires, but is not obliged, to sell and bought by one who desires, but is under no necessity, to buy; hence, arm’s length negotiation of the sale price between the seller and the buyer generally is the definition of fair market value. Where majority ownership has an interest (or will have an interest) in the buyer or surviving entity, engaging an experienced, reputable business valuation service can be the difference between a smooth closing and a surprise judgment years later.
In business, stuff happens. Generous use of a disclosure schedule benefits both sellers and buyers. Sellers avoid breaching their contractual representations and warranties through ample disclosures, and buyers enter closing with full knowledge of their acquisition. As Dale Carnegie said, “the only way to get the best of an argument is to avoid it.”
If a post-closing dispute does occur, what best practices should in-house counsel follow to minimise cost/reputational damage?
It’s lucrative for investors who have had substantial capital gains subject to US capital gains taxes from the sale of assets such as stocks, a business or real estate. Investors can defer tax on any prior gains until the real estate asset is sold or exchanged if the gain is reinvested in an Opportunity Fund.
Top Tips – Top Ways To Fully Utilise A Disputes Lawyer During The Deal Process
- Engage M&A counsel early in the process to help identify potential areas of post-closing confusion and dispute; M&A counsel can be most effective when enlisted before the company signs a letter of intent or similar term sheet.
- Actively collaborate with M&A counsel in crafting the disclosure schedule – a thorough disclosure schedule can resolve many burgeoning disputes.
- Engage litigation counsel if a dispute begins to develop, so they can assist with negotiating a resolution and begin preparing for litigation.