By Todd A. Levine
We have recently seen a rash of cases involving private equity firms’ or public companies’ purchases of closely held companies prior to the recession.  Unfortunately, many of the acquired businesses did not survive the recession and the buyers—seeking to recoup some or all of their investment—then resorted to litigation.   Many of these buyers have sued the sellers for fraud based claims.   The grounds for the fraud claims vary, but generally the buyers claim the sellers failed to make proper disclosures regarding the acquired company’s financial health or related issues.

Given that a buyer has a responsibility to conduct due diligence prior to purchasing a company, and there are limited duties of disclosure in arms length transactions, the majority of these cases appear to truly amount to nothing more than buyer’s remorse.   While it is unlikely that the buyers will prevail on a fraud theory, they are using the threat and expense of protracted litigation to force a settlement.  Depending upon the parties’ litigation stamina, relative financial positions and the evidentiary support (or lack of evidence) for the claims, these cases are often disposed of with “nuisance value” settlements or dismissals of the claims by operation of law.
As the economy rebounds, it is possible that we will see fewer of these cases, or the buyers will adjust their legal theories to continue to point the finger at others as they continue to make their own business mistakes.