Sale of Business Law Blog

If You Guaranty a Contract For Your Company, Can You Become Liable For Its Breach?

On July 23, 2010, the Superior Court of Connecticut was presented with the following question: if someone signs a contract on behalf of a corporation, under what conditions will that person be individually liable as a guarantor if the corporation defaults? The Court determined that the answer had to do with whether or not the provision of the contract providing for the guaranty was clear and unambiguous.

    In this case, the provision read as follows: “the signer of this agreement does by his execution personally and individually undertake and assume the full performance hereof including payments of amounts due hereunder.”  The Court in Yellow Book Sales & Distribution Company, Inc. v. Valle, –A.2d— 2010, WL 3326845 (Conn. Super.) held that this provision was too ambiguous to be enforced.

    Connecticut General Statutes § 52-550(a)(2), the codification of the statute of frauds in Connecticut, provides in relevant part that “[n]o civil action may be maintained in the following cases unless the agreement, or a memorandum of the agreement, is made in writing and signed by the party, or the agent of the party, to be charged.”  Id. at 2.  Applying that law, the Court reasoned: 

 

"It is well established that an agent, by making a contract only on behalf of a competent disclosed or partially disclosed principal whom he has power so to bind, does not thereby become liable for its nonperformance.  If a contract is made with a known agent acting within the scope of his authority for a disclosed principal, the contract is that of the principal alone, unless credit has been given expressly and exclusively to the agent, and it appears that it was clearly his intention to assume the obligation as a personal liability and that he has been informed that credit has been extended to him alone.  When these two principles are read together, the law presumes that where a writing contains the signature of a duly authorized agent, the party to be charged is the principal and not the agent because the agent individually is not a party to the agreement.  Instead, the principal is the party to the agreement.  Otherwise, every agreement signed by an agent on behalf of his principal would be admissible as a promise by the agent individually to answer for the debt of his principal."

Id. at 4.

"In the present case, when looking at the document as a whole, the agreement is ambiguous as to whether the defendant was individually a party thereto.  On the one hand, [the provision] attempts to make the Signer a party to the agreement by requiring the Signer to undertake a personal obligation to secure the debts of the principal.  Nevertheless, the rest of the agreement excludes the Signer entirely and specifically provides that the agreement is between Yellow Book and Moving America.  In other words, all of its provisions except for [the specific] paragraph relate exclusively to the duties and obligations of Moving America and Yellow Book.  The parties' signature also indicates that the agreement is between Yellow Book and Moving America because it is signed by the defendant in his capacity as President of Moving America."

Id. at 5.

The Court held that because the writing is ambiguous as to whether the defendant individually was a party to the agreement, it did not furnish a complete agreement as to its terms.  Id. at 8.  Further, it did not satisfy the statute of frauds as a matter of law.  Accordingly, the Court granted the defendant's motion for summary judgment and denied plaintiff’s. 

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New York Court Upholds Cause of Action for Indemnification Under Asset Purchase Agreement

On July 19, 2010, the Federal District Court for the Southern District of New York decided a case in which it interpreted an asset purchase agreement (“APA”). The Court in Koch Industries, Inc. v. Aktiengesellschaft, -- F.Supp.2d --, 2010 WL 2927441 (S.D.N.Y.) held that “when defendants sold plaintiffs a polyester manufacturing business in 1998, defendants fraudulently concealed that the business was violating antitrust laws.” Under the indemnification provision of the APA, , the plaintiffs would be entitled to damages for the period prior to the closing.  The reason was that the terms of the APA clearly applied to that situation,

“[u]nder the APA, defendants agreed to indemnify plaintiffs for losses associated with the conduct of the polyester business prior to the Closing. Specifically, Section 2.4 of the APA requires Hoechst to pay all “Retained Liabilities” and provides that the “Buyer [Kosa] shall not assume or become liable for any obligations, liabilities or indebtedness of any member of the Seller Group, and ... the members of the Seller Group shall retain all of their respective liabilities, other than the Assumed Liabilities, whether or not relating to the ownership or operation of the Polyester Business.” Section 17.2(a)(i) of the APA requires Hoechst “to defend, indemnify and hold harmless the Buyer Indemnified Parties from and against ... [a]ny and all Losses resulting from or in connection with, directly or indirectly, the failure of Seller and its Affiliates to pay, perform and discharge when due all Retained Liabilities.”

Id. at 1-2.

    The Court held that “Plaintiffs have satisfied their burden at summary judgment to show that defendants are liable, under the indemnification provision of the APA, for a portion of the Defense Costs that constitutes “Retained Liabilities.” The calculation of proper damages on the indemnity claim remains an issue for trial.” Id. at 23.

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© 2009 Nissenbaum Law Group, LLC

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What Value Should be Assigned to Shares Under a Buy Sell Agreement in Which the Value is Not Listed in the Contract?

A buy sell agreement is an effective tool to create a predictable value for shares in a closed (non-public) corporation. However, what happens if the buy sell provision refers to an exhibit that is not attached and the formula simply cannot be applied as intended in the agreement? The New York Appellate Division dealt with that issue in Sullivan v. Troser Management, Inc.,    N.Y.S.2d    , 2010 WL 2636019 (N.Y.A.D. 4 Dept.), 2010 N.Y. Slip Op. 05894

    That case was decided on July 2, 2010. “[T]he dispute … relate[d] to the value of an 18% stock interest in a ski resort under the parties' “buy-sell” agreement (“agreement”).” The Court held that “the purchase price provision of the agreement [was] unenforceable, and the value of plaintiff's stock should therefore be determined pursuant to the formula set forth in the unrelated New York case, Lewis v. Vladeck, Elias, Vladeck, Zimny & Engelhard(57 N.Y.2d 975), i.e., based on a percentage interest in defendant's assets.” Id at 1.

    The Court concluded that “[t]he ‘Purchase Price’ provision of the agreement expressly states that the price of the shares of stock shall be ‘an amount agreed upon annually by the Stockholders as set forth on the attached Schedule A.’ It is undisputed that no Schedule A exist[ed]. That provision further state[d] that, ‘[i]n the event that no annual value is established, the value shall be the last agreed upon value except that if no such agreed upon value is established for a period of two years, the value shall be the last agreed upon value increased or decreased by reference to an increase or decrease in book value of [defendant] from the date of the last agreed upon value to the date of death or disability” of the stockholder seeking to sell his or her shares.’ Id at 1

    The problem was that “the stockholders … never agreed upon a value of the stock, and … the purchase price of [the] shares therefore [could] not be ascertained in accordance with the terms of the agreement… Indeed, there is no evidence in the record that plaintiff has ever agreed upon a value of the stock.  Id at 2

    Therefore, the method of valuation was based solely on a percentage interest (in this case, 18%) in the assets of the ski resort.

 

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© 2009 Nissenbaum Law Group, LLC

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New Jersey Appellate Division Confirms that the Consumer Fraud Act Does Not Apply to the Sale of Business

Caselaw: New Jersey: The New Jersey Appellate Division recently evaluated a claim arising from allegations of fraud in connection with the sale of business and associated real estate. In 539 Absecon Boulevard, LLC. v. Shan Enterprises, et. al., 2009 WL 774474, the defendants had sold the plaintiff a motel business; the real estate upon which the motel resided; and adjacent property. The plaintiff, the purchaser in the transaction, claimed that the seller had falsified its income figures and therefore, defrauded the purchaser in the sale transaction. Among its other claims, the plaintiff-purchaser sued the seller for fraud and a violation of the New Jersey Consumer Fraud Act (“CFA”).

 

The CFA is a broad, remedial statute aimed at protecting New Jersey consumers from a seller’s wrongdoing in connection with the sale of merchandise and other services. However, while the CFA specifically applies to sales of real estate, it has previously been construed not to apply to sales of businesses. Nevertheless, the lower Court made the determination that the CFA applied to this sale transaction. Its analysis was based upon its conclusion that “a distinction could be made when, as here, the transaction involved both the sale of a business and the sale of real estate.” The Court viewed the transaction as primarily being real estate driven with the business operating thereon to simply be an “improvement” attached to the property. The Court awarded treble damages and attorney’s fees to the plaintiff accordingly.

 

However, the Appellate Division reversed the decision, specifically finding that the CFA was not aimed at transactions involving the sale of a business. The Appellate Division specifically noted that the New Jersey legislature determined that it wanted to extend the CFA’s reach to real estate, but had specifically not addressed the sale of business. The Appellate Division concluded that had the legislature wanted such a transaction addressed, they would have included it within the statutory language.

 

Moreover, the Appellate Division noted that the real estate was not the main draw of the transaction but instead was “incidental to the motel business” that had been sold. Accordingly, it dismissed the lower Court’s rationale for applying the CFA. The Appellate Division specifically noted that the CFA is aimed at sellers of merchandise that are offered to the public as a whole, and that a one-time business sale transaction was of a nature not covered by the Act.

 

Accordingly, the Appellate Division specifically concluded that the CFA does not apply to the sale of a business, even if that sale includes a sale of real estate. The New Jersey Supreme Court denied certification in June, so the ruling stands.

 

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© 2009 Nissenbaum Law Group, LLC

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