Minnesota Federal Court Decision on M&A Indemnity

A recent decision by the Minnesota Federal District Court involves claims for breach of reps of warranties and indemnification by a buyer of a ready-to-eat food manufacturing business.  The decision can be found on Westlaw 2009 WL 1086474.  

The case involved the failure by the seller to disclose to the buyer that one of their biggest customers, Exxon, threatened to pull the business, only thereafter working out the relationship with the seller.  The Merger Agreement specifically required seller to rep that since the most recent financials, there has not been any “material adverse effect” in the business relationship with any customer, and no customer has threatened to reduce or terminate the business.  After the closing, Exxon terminated the contract and the buyer sued, looking to recover against the escrow.

This is a garden variety case of this sort, but interesting for the following reasons:

  • the elements for a plain vanilla (i.e. non-UCC Article 2) breach of warranty claim under Minnesota law are: (1) existence of a warranty; (2) breach; (3) causation leading to damages and (4) reliance on the warranty. 

 

  • The court found that the complaints raised by Exxon before the closing (even though they were ultimately worked out) fell within the broad definition of a “material adverse change” in the Merger Agreement.  Therefore, even though the issues appeared to have been resolved, the strict language of the reps required the customer complaints to have been disclosed.
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