Seller’s Remorse: Can You Get Your Company Back?

Starting, building, and then selling a business is the modern version of the American Dream. Many times, however, a business owner does not sell 100% of his stake in the company. Some transactions feature an arrangement where the new owner takes control of a majority stake in exchange for a lump sum payment, while the original owner retains a minority interest and continues to receive payments in some form. The seller will often remain with the company for a set period in some capacity, perhaps through a consulting agreement or other employment relationship.

While many of these transactions run their course with two satisfied parties, there isn’t always a happy ending. Unfortunately, the buyer may not be able to profitably manage the business, and the buyer’s ability to make any required continuing payments may be affected. Perhaps the buyer exaggerated its financial health or made promises regarding management strategies that it cannot keep.

The sale of a business is an inherently complex transaction, and the possible remedies available to a seller will always depend on the precise terms of the relevant agreements or other transactional documents. Nonetheless, there are a few legal theories that will apply to almost all business sales.

Rescission – This is an “equitable” remedy that a court may impose if the court finds that one or more grounds to rescind (or void) a contract exist. Grounds for rescission may vary by state, but the most common reason occurs when one of the parties has made misrepresentations about a material term of the contract. In such a case, the seller can argue that the buyer fraudulently induced the buyer into signing the sale documents. For example, the buyer of the business may have made inaccurate statements about the buyer’s financial condition, placing serious doubt on its ability to fulfill any continuing obligations to the seller. Rather than waiting for a seemingly inevitable bad result, a seller may be able to sue for rescission of the agreement(s) involved, and regain control of his business.

Anticipatory repudiation or anticipatory breach – If the buyer of the business has continuing obligations to the seller, and he makes an unequivocal statement that he will not be able to meet such an obligation, then the buyer has anticipatorily repudiated or breached the agreement. It is important to note that the statement cannot be merely doubtful or indefinite. The party must clearly state, through words or actions, that he will not perform according to the agreement. For example, if the buyer has stated that he will not make a payment by the specified date, then the seller does not have to wait for the deadline to pass. The seller can seek to have the contract rescinded immediately.

Breach of contract – A buyer may have simply violated one or more of the various, complex agreements comprising the transaction. While the buyer might have had a transactional attorney draft or review the sale documents, having business trial attorneys examine the operative agreements provides a fresh set of eyes to identify any issues that may have been overlooked. Trial attorneys may be able to craft an offensive strategy that will allow a seller to leverage his way into a more satisfactory situation.

Legal theories and procedures can vary depending upon the state or jurisdiction involved. A business seller should always consult with an experienced business trial attorney in his area to determine his options.

Gaddy Geiger & Brown is a trial firm offering a unique blend of energy, strategy and courtroom experience. To contact to a Kansas City business dispute lawyer,  Kansas City business litigation,  Kansas City employment litigation, Kansas City securities attorney, visit http://www.ggbtrial.com.

Saving Client Dollars with Requests for Admission

Requests for admission (“RFAs”) are concise statements of fact directed to the opposing party in a civil lawsuit. The opposing party must admit or deny each statement. Any statement not denied is treated as a proven fact in the case. In the federal and state courts of Kansas and Missouri, a party has 30 days to admit or deny RFAs. If not denied within the time permitted, the statement is deemed admitted.

RFA’s are cheap, effective and underutilized. They are an excellent device to narrow disputed issues at nominal cost, shorten depositions, and especially useful to obtain three categories of information.

1. Dates and chronology.

For example, the defendant in a failed transaction may request the following admission.

Admit plaintiff and defendant did not negotiate the asset purchase agreement before January 1, 2008.

Admit – Deny

If the plaintiff admits the request, then attempts to offer evidence of misrepresentations before January 1, 2008, the defendant may have grounds to exclude the evidence. As another example, a director defending a corporate negligence case may request the following admission.

Admit the defendant did not serve on the board of directors after January 1, 2008.
Admit – Deny
If the plaintiff admits the request, then seeks to hold the defendant responsible for board decisions after January 1, 2008, the defendant may have a factual defense based on this single admission.

2. Foundation for key exhibits.
For example:
Admit Exhibit 1320 is a true and accurate copy of the original document.
Admit – Deny
Admit Exhibit 1320 is a record of regularly conducted activity within the meaning of Rule 803(6) of the Federal Rules of Evidence.

Admit – Deny
If the opposing party admits these requests, he can no longer object to the authenticity of Exhibit 1320, nor can he raise a hearsay objection to Exhibit 1320. Trial attorneys should use RFAs to eliminate foundation objections for their most important documents.

3. Revealing baseless allegations.

Where a plaintiff has made allegations on information and belief, an RFA can be effective to show the allegation is a shot in the dark. For example:

Admit the plaintiff is aware of no witness who would testify the defendant was involved in preparing any Form 10-K for the Securities & Exchange Commission.

Admit – Deny
Admit the plaintiff is aware of no document that would prove the defendant was involved in preparing any Form 10-K for the Securities & Exchange Commission.

Admit – Deny
Admit the plaintiff is aware of no evidence that would prove the defendant was involved in preparing any Form 10-K for the Securities & Exchange Commission.

Admit – Deny
This trio of requests, at a minimum, will reveal the form of evidence the defendant can expect against her. However, if the plaintiff admits all three requests, the defendant may have grounds to strike parts of the petition or complaint. RFA’s can be used to keep opposing parties and lawyers careful with their claims.

Counsel should seek opportunities to expand their use of RFA’s, not only to improve discovery, but to save client dollars. Moreover, RFAs can focus the attention of opposing counsel to specific strengths and weaknesses, which may lead to early and productive case resolution.

Gaddy Geiger & Brown is a trial firm offering a unique blend of energy, strategy and courtroom experience. To contact to a Kansas City business dispute lawyer, Kansas City white collar criminal defense attorney, or Kansas city appeals attorney visit http://www.ggbtrial.com.