Alert: Brown Rudnick’s M&A Litigation Trial Victory Highlights the Difficulty of Shifting the Costs of Post-Closing Business Decisions onto the Seller

In a recent case captioned Project Boat Holdings, LLC v. Bass Pro Group, LLC, Brown Rudnick’s M&A litigation team obtained a trial victory in the Delaware Chancery Court on behalf of a Seller of a conglomerate of boat manufacturing companies. The Court found that Project Boat, as the Seller, was not required to indemnify the Buyer for the Buyer’s post-closing decision to voluntarily replace the hulls on a line of bass fishing boats that had been manufactured prior to closing.  This case highlights the allocation of risk associated with business decisions made prior to and after closing.

By way of background, Project Boat sold three bass boat manufacturers to Bass Pro in 2015. After the closing, Bass Pro claimed that due to a design and manufacturing defect in the hull for one model year of boats, Project Boat committed breach of contract and fraud with respect to the representations and warranties concerning the company’s financial statements, specifically its warranty reserve, as well as with respect to representations and warranties concerning undisclosed liabilities, the absence of material adverse effects, and product and service warranties.

Prior to closing, however, the company’s historical practice was to repair or replace boats with similar issues on a case-by-case basis, unless a safety issue was present.  After the closing, Bass Pro deviated from this practice and elected to implement a voluntary replacement program to replace the hulls on every boat from that line and model year notwithstanding the absence of a safety concern.  After implementing the replacement program, Bass Pro then refused to release millions of dollars held in escrow claiming that Project Boat had, among other things, improperly failed to establish a warranty reserve for the total cost of replacing each hull prior to closing.

After a four-day trial, the Delaware Chancery Court found in favor of Project Boat on all counts, concluding that it was not liable for fraud or breach of contract.  Notably, the Court found that Bass Pro, represented by King & Spalding, failed to prove that the full replacement of the hulls was necessary rather than repairing or replacing the hulls on a case-by-case basis.  Therefore, the Court found that Bass Pro failed to prove that the company’s pre-closing warranty reserve was insufficient.  In addition, the Court ordered Bass Pro to issue instructions for the release of the remaining escrow monies to Project Boat.

Project Boat demonstrates the risks that are often shifted from a seller to a buyer in the merger and acquisition context.  Buyers should be aware that courts are reluctant to impute a buyer’s post-closing business decisions onto a seller even if the business decision relates to an issue that occurred prior to closing. Buyers should engage experienced M&A litigation counsel early in  the decision-making process to assist in determining whether any post-closing costs and expenses incurred as a result of pre-closing issues could be recoverable from sellers.

For more information, please contact the authors.