Page 63 - M & A Disputes

Often, a buyer will claim that there was a significant and material event or change to the target opera-
tions that either happened or was known to be imminent prior to the acquisition and that the event or
change was not disclosed to the buyer. The buyer will claim that, had the event been disclosed to it prior
to the acquisition, it would have resulted in a decrease of the purchase price. Some of the most common
significant and material events are as follows:

 Loss of key customer

 Loss of key vendor or supplier

 Loss of key management personnel (CEO, CFO, vice president of marketing or sales, vice presi-
dent of product development, and so on)

For example, if the buyer claimed damages based on the loss of a key customer, the practitioner should
consider the following:

 Did the seller know that the customer would be lost? Is the customer replaceable?

 After the loss of the customer, was the target business, in fact, negatively impacted? How is the
target currently performing compared with the buyer’s and seller’s projections?

If the customer was not replaceable, and it can be proven that the target was negatively impacted by the
loss of this customer, the buyer can argue that it did not receive the value that was represented to it by
the seller. In other words, the buyer did not receive the benefit of its bargain. A financial analysis of the
customer’s impact on the target company may be performed by the practitioner.

The Practitioner Should Evaluate Whether the Buyer Overpaid for the Target

When determining if the buyer received the benefit of its bargain, it is important to consider the perspec-
tive of the seller. It is also important to consider the perspective of other third parties interested in ac-
quiring the target. The practitioner should compare what the buyer paid for the target with what the sell-
er would have accepted or other offers made by interested third parties. Additionally, if the buyer itself
made previous offers, those should also be reviewed and evaluated in determining the benefit of its bar-
gain and whether a valid claim for damages exists.

Even though a buyer may claim that it would have paid less for a company, this does not mean that the
seller would have accepted less. However, it is worth noting that if the seller made material misrepresen-
tations, the importance of the seller’s perspective is diminished.

The Practitioner Should Evaluate How the Target Company Is Performing Subsequent to the Acquisition

The practitioner should consider the performance of the target company subsequent to the acquisition.
The practitioner should compare the buyer’s and seller’s budgets or forecasts prepared prior to (or short-
ly after) the acquisition with the actual to-date performance of the target.

If the postacquisition value of the target company is substantially the same or greater than the buyer’s
expected transaction date value, then the buyer may have received the benefit of its bargain.

It is important to note that the practitioner should consider how much time has passed since the acquisi-
tion because the target company’s most recent financial results may indicate that the buyer received the

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