The Sixth Circuit’s decision yesterday in Escue v. Sequent, Inc. is a largely unremarkable unpublished opinion, but it contains some interesting reflections on how to structure a corporate transaction, all of which should prove useful as you ponder structuring a corporate transaction.
The first issue of significance concerned the effect of a survival clause in the merger agreement. The survival clause provided that certain representations and warranties would essentially survive for two years, presumably with the intent that they would not be actionable afterwards. However, the Sixth Circuit evaluated this clause against the backdrop of a 12-year statute of limitation under Ohio law for breach of contract. Although Ohio law permits modification of applicable statute of limitations so long as the modification is reasonable, any agreement purporting to accomplish that must do so by clear, unequivocal language. Therefore, if that’s what the parties were intending in this agreement, they failed. The Sixth Circuit held that the survival clause did not operate to modify the statute of limitations because it did not include express references to actions, demands, breach of contract, or other similar language. Therefore, the Court refused to invoke the survival clause as a bar to the action.
The second insight from the Sixth Circuit concerns the conduct of due diligence. In this case, certain disclosures in the merger agreement revealed a Department of Labor investigation into an ERISA plan. The disclosure said little more than that, and ultimately the other side claimed breach because the investigation was not described in sufficient detail. However, the applicable provision only required that the selling party list any investigations, not that it elaborate in detail regarding the investigations. Relatedly, the buying party claimed that it was a violation of the representation that the plan was operated consistent with ERISA, but the Court shot that down because there was a qualifier to that provision tying back to the disclosures that included the DOL investigation. Not to bore you with a dissection of this contract language, but this really does illustrate the need for thorough due diligence when one side sees disclosures that should raise eyebrows. Therefore, this case is probably a good one to share with transactional attorneys to help them avoid issues like this down the road.