The M&A process can be long and complex. Buying or selling a company requires meticulous planning, experienced professionals, and an appreciation of the deal dynamics involved in negotiations.
Companies that have not been involved in previous M&A transactions commonly make mistakes that result in mispricing, unfavourable terms or a failure to complete – which could have otherwise been avoided. This article describes one aspect where sellers must be especially cautious.
Guarding against fraud claims
One of the most dangerous allegations a dissatisfied buyer could make against the seller is one of fraud (which, for example, could have resulted in overpayment). This may relate to the representations and warranties held in the acquisition agreement, or about ‘false or misleading’ information provided during due diligence sessions or in the online data room.
Unfortunately, it is particularly easy for a regretful buyer to allege fraud, regardless of how meritless the claim is in reality. Therefore, due to this possibility of fabricated post-closing lawsuits, sellers should take risk mitigation precautions that will protect them in court. The following should be considered:
- The acquisition agreement should contain an express disclaimer stating that the only representations and warranties being made are exclusively those within the agreement. The seller should be particularly careful if they have made any forecasts and projections.
- The buyer must be made to expressly acknowledge that they have conducted their own research and due diligence upon the business and is therefore not relying on any representation the selling party has made (other than in the acquisition agreement). Such a provision may make it nearly impossible to successfully allege fraud for matters outside the agreement.
- Sellers should contemplate defining the term ‘fraud’ so that it is consistent with the legal definitions in the country and state of your business’s operations. This will again limit the scope and exposure of the term.
Management Advisors Pty Ltd is a highly sought after independent financial services firm and investment bank. Their team has extensive experience in initiating, sourcing and negotiating M&A transactions to completion.