ALG: Settlement Announcement

Result: Settled via attorney to attorney negotiation

Area of Law: Business Litigation - M & A

ALG Represented: Plaintiff / Claimant

Claims: (1) Breach of Written Agreement; (2) Breach of Implied Covenant of Good Faith and Fair Dealing, (3) Intentional Misrepresentation; (4) Negligent Misrepresentation; (5) Intentional Misrepresentation [different defendants]; (6) Negligent Misrepresentation [different defendants]

Complaint Filed? Yes
Court? American Arbitration Association (AAA), per contract
Time to Resolution? 14 months
Year? 2016
Commentary: Our client, the Plaintiff/Claimant, is a private equity backed company. The client had acquired the business of another company via an asset purchase agreement, which contained fairly standard representations and warranties as well as an arbitration clause requiring use of AAA (American Arbitration Association). Defendants were represented by a firm ranked as one of the 100 largest firms in the United States.

Reps and Warranties (the "Reps" or "R&W"): Here the central issue was an allegation that defendants breached its R&W. Specifically, the Complaint alleged that defendants' R & W that Seller possessed all licenses, etc. etc. as required by applicable laws, etc. etc. to conduct the business. This is a fairly standard, non-negotiable rep.  After the acquisition was closed, and our client started operating the business, they realized that the Seller in fact did not have all licenses, and were required to incur a significant cost to come into compliance. When there is a breach of a R&W that sets up a claim by the non-breaching party. Therefore, it is very important to language and review your reps and warranties very carefully, as both the Seller and the Buyer. A LOT of attorney time on M&A deals is spent negotiating reps and warranties.

Indemnification. To save time, support the reps and warranties, promote trust and efficiency, the Seller usually agrees to indemnify the Buyer for any breach of a rep or warranty. Simply put, it has the appearance, of "Trust me, I'll pay you if I'm wrong, or lying." See our prior emails re: what is the value of an indemnification?

What's this about Baskets and Caps?: The creditworthiness of the party providing the Rep and Warranty is critically important. Another way that Sellers attempt to limit the risk of having a claim is by negotiating a "basket and cap". A basket and cap is essentially a floor and a ceiling. With a basket and cap, the parties agree that the breaching party will not bring any claim that is less than the basket, AND on the other side, the Seller will never pay more than the cap. If there is a breach, in excess of the basket, then the Seller's liability exposure is the amount of the claim less the basket amount.

Why Settlements Matter To You? The overwhelming majority of legal disputes -- even in highly contentious, high stakes matters -- are resolved via settlement. Many of these are settled out of public view either between Attorneys prior to litigation, or during Court litigation prior to a public trial or during litigation via private Arbitration. The settlement of a dispute is great, but the downside is that public at large loses visibility into the legal system. We are publishing these Settlement Announcements as a benefit to our clients and friends of the firm to provide some real-life context in terms of legal claims and dollars that we believe will be useful to you, your family and your network.

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