Satisfaction Clauses -- A Trap For The Unwary In Terminating M&A Transactions

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Your company might undertake a merger or acquisition for any number of reasons. It might wish to expand into new markets; to acquire valuable technology or other assets; and/or, of course, simply to grow the bottom line. No company ever wants to find itself hip-deep in litigation after taking a seat at the negotiating table. But that can and does happen – often when a company tries to “hedge its bets” in its contract with its acquisition target

Imagine: You have signed an agreement to purchase another company upon the completion of due diligence efforts. As is customary, you have negotiated a walk-away clause should you determine “in good faith that there is a reasonable basis in law and fact to conclude that” the target has material unreported liabilities. You engage qualified counsel who reports, after intensive study, that the target does indeed have material unreported liabilities, and so you kill the deal. Soon thereafter, the target sues you for breach of contract. The trial court rules that you acted in honest reliance upon the advice of your counsel. The catch: your counsel erred, and the target company had no significant unreported liabilities.

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