Merging companies when a lawsuit is pending
March 27, 2012
This article was written for and first featured in Financial Times
My builders' merchant business is in the process of merging with a construction firm. However, my company has a civil lawsuit being brought against it, which is at the preliminary stages. The owner of the construction firm is keen for the merger to complete, but I am unsure whether I should wait for the legal action to be resolved and what my legal responsibility is to inform him of it?
The answer depends upon the amount claimed in the lawsuit, the impact on your business if the case is lost, your chances of winning, the likelihood of settling the claim quickly and the structure of the merger. If the assets of a business are sold, rather than the shares, this would normally leave the lawsuit in your old company so that it would not transfer into the merged business.
There is no automatic obligation on a seller of assets or shares in a company to tell the purchaser about the litigation. But if the litigation cannot be settled quickly (a large case could take more than two years to come to court), and the construction owner buys your company without knowing about the litigation, this may lead to a subsequent dispute with him, and would damage your working relationship.
A sensible construction owner will undertake due diligence and require you to sign a written agreement, which will include warranties that there is no current or threatened litigation. If you were to sign such an agreement without disclosing the lawsuit, you could be sued by the purchaser for breach of contract. You must also not say anything misleading about whether there is litigation, as you could be sued for misrepresentation.