Chicago Business Lawyer Blog

A case out of Illinois decided recently by the 7th Circuit Court of Appeals in Chicago shows just how important it is to have strongly worded contracts when dealing with major acquisitions in Chicago.

Our Chicago business lawyers would also point out the importance of doing your due diligence on the environmental factors on a piece of property for sale in Illinois. That cuts to the heart of the matter in this Illinois case that was recently decided.

In 2000, the Wilder Corp., a cattle company, agreed to a deal to sell 6,600 acres of land in Fulton County, Illinois to an organization that wanted to turn the land into a natural preserve. As part of the deal, the cattle company promised to ensure the land was free from any toxins or chemicals and to clean up any trash on the property. The total price of the deal was $16.35 million.

There were no issues until 2006, when the Nature Conservancy found there was petroleum on part of the site. The organization sued the cattle company for breach of warranty and a judge ruled in favor of the organization, forcing the cattle company to dish out $800,000, even though the cattle company claimed it wasn't aware of any problems. It appealed and lost.

In an effort to pass the buck, the cattle company sued a local drainage district that stored petroleum in tanks near the property. The company attempted to argue that the district was responsible for the contamination and should have to pay the damage.

A court found in favor of the drainage district and the 7th Circuit Court of Appeals recent affirmed the ruling, writing that a "blameless contract breaker...cannot invoke non-contractual indemnity to shift the risk that he assumed in the contract."

Experts said the ruling wasn't hard for the appeals court because the drainage district had no part in the contract. It was the cattle company's responsibility to ensure the property was free from environmental issues, per its contract.

Analysts believe that the ruling is significant for two reasons. For one, it shows the importance of strongly worded contracts that allow for no loopholes that could potentially harm a company doing business with another company or an individual. Secondly, it shows that companies must do their research of potential environmental hazards when purchasing a property.

Just as future home buyers must ensure the property is properly inspected not only for structural issues, but also potential toxins, a company planning to purchase a piece of land must make sure there aren't any environmental issues or local ordinances that would make the property unusable for the company's purpose.

Our Chicago business lawyers have experience handling these environmental issues as they relate to local, state and federal environmental laws and the potential hazards for companies looking to purchase land. It's not as simple as buying a property and starting construction.

Along with the frustrations of local government permitting, there are also bigger environmental issues that must be taken into consideration. Rushing through the process without an experienced Chicago business lawyer can make it much more expensive and time consuming.

Continue reading "Illinois Land Acquisition Case Shows Importance of Breach of Warranty Litigation in Chicago" »

With Google coming to Chicago, change will no doubt be coming to Motorola.

With the U.S. regulatory approval process ahead in the wake of Google's announced purchase of Motorola Mobility, there will be platoons of attorneys working on both sides of this deal. Even China is weighing in with claims that Google must seek its government approval. The $12.5 billion deal represented a 63 percent premium to Motorola's stock price at the time.

Chicago merger and acquisition attorneys should be consulted whenever two businesses merge, or one entity decides to purchase another.

Seeking qualified legal advice when dealing with the purchase or sale of a business in Chicago is critical. Common issues include:

-Strategy and Structure: Corporate structure, accounting and tax implications, personnel issues and a host of other legal considerations must be taken into account.

-Negotiation and Drafting: Non-disclosure agreements, term sheet, letter of intent, stock purchases, and asset purchase agreements are just a few of the legal documents that can have a major impact on your sale, purchase or merger. Getting them right -- and ensuring that they are drafted in the best interest of your company -- is critical to the long-term success of your business.

-Due Diligence: Preparing to hurdle the due-diligence threshold is often no easy task -- particularly when dealing with the sale of a private company. Likewise, it's critical that buyers make the most of due diligence. Few surprises at or after closing is typically the result of proper due diligence.

-Risk Management: This is the critical task of assigning responsibility for liabilities that occur before a deal's closing. This may include product liability or environmental concerns. Risk management is an area that can be particularly vital to both buyer and seller.

Google already supplies the Android operating system for smart phones. With the purchase of Motorola, Google is getting a once-proud company that invented the cell phone only to see its market share be taken away by more nimble competitors.

"Motorola Mobility's total commitment to Android has created a natural fit for our two companies," said Google CEO Larry Page. "Together, we will create amazing user experiences that supercharge the entire Android ecosystem for the benefit of consumers, partners and developers."

Industry watchers say a primary motivation for the purchase of Motorola was the control of its patents. As we continue to report on our Chicago Business Lawyer Blog, the patent wars among tech companies has made buying available patents a critical step in protecting against lawsuits.

The issues surrounding mergers and acquisitions are almost limitless. Already, the Chicago Tribune is questioning whether the move will result in layoffs at Motorola's headquarters or renewed vigor for the once-proud company.

Lower taxes could lure some of Google's workforce to Chicago. Relocating Motorola Mobility, however, could be devastating to the area surrounding its headquarters in Chicago's northwest suburbs. Motorola Mobility has about 3,300 Illinois employees.

Continue reading "Google - Motorola Mobility Deal Highlights Complexity of Mergers and Acquisitions in Chicago" »

There is another example of the importance of paying close attention to proprietary details when negotiating business deals. Last week brought the curious case of HP's former CEO Mark Hurd joining Oracle right after entering into a substantial severance agreement, leading HP to file suit immediately. It seemed very odd that Hurd's arrangement wouldn't have been structured so as to prevent Hurd from so quickly joining a potential competitor and possibly benefiting from HP's confidential information.

This week brings news of an apparent puzzling gap concerning trade name and trademark issues in a merger & acquisition transaction from 15 years ago involving a Chicago area funeral business. The essentials of the story involving Lloyd Mandel are as follows:

When he sold his funeral business in 1995, Lloyd Mandel Levayah Funerals, Mandel agreed to stay out of the Chicago-area funeral industry for 15 years. But on July 21, the day after that clause expired, Mandel opened a new shop, this time from a high-rise office building in Deerfield, operating as Lloyd Mandel Mitzvah Memorial Funerals. . . .

The new business has brought the ire of Service Corp. International, the company that paid him some "millions," as he estimates, for his old business.

So, Levayah, owned by Texas-based SCI, began buying weekly quarter-page ads next to the death notices. Billed as an open letter to clients, the ad describes the history of the business and warns customers that they are the original Lloyd Mandel funeral home -- not to be confused with the new venture by their namesake.

. . .

To Lloyd Mandel, there was only one thing to do: He had to reply. He bought a quarter-page ad in the Tribune, hoping Levayah would continue advertising on Wednesdays.

On Sept. 1, the fourth Levayah ad appeared, and Mandel's ad appeared right below it. In his rebuttal ad, Mandel disputed the competitor's advertisement and denounced their use of his name.

So, after 15 years, the purchaser of the acquired business now faces the original seller competing in the same market for the same clients with a very similar name. There seems to be a real possibility for confusion in the marketplace and it would not be at all surprising if this winds up in litigation eventually.

This is a very puzzling outcome. Mr. Mandel says he is entitled to use his own name. And, depending upon the terms of the business sale agreement that may be the case. If the documents are silent on the use of his name, then he may be right. However, from a purchaser's perspective it would be unfortunate if in all the legalese and negotiations regarding the deal, this specific issue was not addressed. One would expect in the case of an acquisition of a business with a founder's name, such as Bob Evans or Jenny Craig for instance, that more often the not the transaction documents would provide for the founder to not engage in a competitive business using his or her name.

Nonetheless, this is not to second guess whoever handled the deal here. Concessions often are made in the interest of obtaining another important objective or reaching a closing. And, there may have been higher priorities than worrying about what would happen 15 years later. (That is a very long non-compete covenant; the purchasing team may have very happy to leave well enough alone.) Still, determining and negotiating permitted and restricted business activities can be deceptively tricky, so great care is warranted to prevent an unfortunate surprise.

Jeremy A. Gibson is a Chicago business lawyer very experienced in the trademark, non-competition and other proprietary aspects of buying and selling of businesses. We would be happy to review your merger & acquisition situation. We can assist business buyers or sellers throughout the area, including Arlington Heights, Buffalo Grove, Chicago, Deerfield, Des Plaines, Evanston, Glenview, Highland Park, Hinsdale, Lake Forest, Libertyville, Mount Prospect, Naperville, Northbrook, Oak Brook, Palatine, Rolling Meadows, Schaumburg, Skokie, Oak Brook, Oak Park, Vernon Hills, Waukegan, Wheeling and Wilmette.

This is to provide and discuss a few practice points collected at a recent, mid-August meeting sponsored by the Midwest Business Brokers and Intermediaries associaton ("MBBI").

For background, the membership of MBBI includes business brokers, M&A intermediaries, investment bankers, attorneys, accountants, banks, SBA lenders, valuation service providers, individual buyers, private equity groups and corporate buyers. Members may represent buyers or sellers of businesses with revenues ranging from a few hundred thousand dollars to over $100 Million. In addition to helping business owners confidentially sell or acquire companies, members have expertise in performing business valuations, raising capital and providing financing, legal, and accounting services related to the M&A transaction. More information is available at www.mbbi.org.

The meeting attendees including a number of prospective buyers looking to purchase small manufacturing businesses. The consensus seemed to be that even well-qualified buyers with adequate resources are finding it difficult to locate suitable businesses for sale. It may be that the recession has led to a larger pool of buyers who once were employees, but after layoffs and the like, now want to try to control their own fate by purchasing an existing business.

An informal survey of attendees indicated that even for relatively small deals, it remains most likely that the parties will enter into a "letter of intent" or "LOI" rather than proceeding to negotiate a definite agreement right away. An LOI is a short, preliminary agreement that usually sets out briefly the transaction scope, structure and pricing elements and establishes an exclusivity period. It is similar to a term sheet. It usually is helpful to confirm that the parties are on the same general page, before proceeding to incur the time and expense of due diligence and hasing out all the transaction details. Typically, care is exercised to address the degree to which an LOI is binding or non-binding.

Another key point mentioned was the concept of seller's or owner's discretionary income. Often valuation methods may include a consideration of price to earnings ratio or a multiple of net income. So, under such a method, the higher the income, the higher the purchase price expected. Buyers should be aware that net income for privately held businesses often is suppressed by non-essential expenses incurred at the choice or preference of the owner. For example, an owner may elect to take a higher level of salary, have family members or friends be compensated for services to the business or, with some reasonable business basis, channel vehicle, networking, subscription and other expenses through the operation. Accordingly, buyers should not be surprised when seller's take the position that such expenses should be added to the operating results of the business for valuation purposes.

Jeremy A. Gibson is a Chicago business lawyer with significant experience in the buying and selling of businesses. Please contact us to discuss your merger & acquisition issue or other concern. We are availabe to work with business buyer or sellers throughout the area, including Arlington Heights, Buffalo Grove, Chicago, Deerfield, Des Plaines, Evanston, Glenview, Highland Park, Hinsdale, Lake Forest, Libertyville, Mount Prospect, Naperville, Northbrook, Oak Brook, Palatine, Rolling Meadows, Schaumburg, Skokie, Oak Brook, Oak Park, Vernon Hills, Waukegan, Wheeling and Wilmette.

I was talking to a businessman the other day about an investment he was considering. He is looking at one of those self storage facilities. It seems like an attractive opportunity at the right price. It's fully leased with many longtime tenants for its almost 200 units. It appears to be a relatively simple and stable business model, with relatively few workers, utilities or expenses. The purchaser gets not only the operation but the real estate as well. This seems promising and no red flags jumped out.

However, even though I try to be very practical about risks and expenses, I encouraged him to be very thorough and consider zoning, geotechnical and environmental assessments. Why? Because when you're entering into a merger or acquisition or loan or similar transaction you have to worry about more than your own worries. You have to consider what the next investor, purchaser or lender is going to think or do. In other words, you don't want to get stuck with the hot potato or left standing when the music stops.

For example, I have had a long-time specialty in managing environmental risks and matters for mergers, acquisitions, divestitures and financings. It's clear that when the deal centers around factories, refineries, mines and the like no one is going to question doing extensive due diligence about the potential for chemical contamination to present material hidden or contingent liabilities. But, with less alarming properties and businesses there's often an understandable tendency to want to avoid the expense of environmental studies or tests. Still, if there's a decent chance that these issues will come up down the road anyway, then it is far better to bite the bullet and deal with it upfront, rather than have an issue be unearthed when you're now stuck with problem.

Once I was involved in litigation that arose when the purchaser of a sand and gravel pit later discovered that a previous owner had his trucks collect waste drums on their return trips and then bury them in a corner of the property. This eventually resulted in a multi-million dollar remediation. There's no guarantee that standard environmental investigations would have diagnosed this condition, but it would have been preferable to have made the attempt. And, this can apply to other aspects of a business that can present time bombs, including potential employment, product liability, regulatory compliance and contractual obligation risks.

So, if you are considering investing in new business or property, remember that it's important to worry about the concerns of the other guy, in addition to your own, to avoid getting stuck in the middle.

The Chicago business attorneys of Jeremy A. Gibson & Associates, P.C. are experienced in mergers & acquistions and other due diligence scenarios and are available to meet you in our Chicago, Deerfield and other satellite offices.

Recently, there has been a lot of unwanted attention on the credit default swap market and its role in contributing to the economic meltdown and need for Wall Street bailouts. It is beyond our scope today to comment on whether one person's portfolio insurance or hedging is another's bet at a casino. However, I can say from personal experience that there is a sensible and useful role for insuring the unknowns involved with the purchase and sale of a business.

On several occasions, I have arranged so-called "representation and warranty" or environmental insurance policies in connection with mergers and acquisitions matters. These facilitated reaching the closing by providing assurances that certain risks would be capped and assets would be available if contingencies materialized. In other words, if it turned out that there were hidden problems with the acquired assets or problems that were worse than expected, such as accounting, product liability or regulatory compliance issues, then there would be a mechanism in place.

For example, when a family business that had numerous shareholders was being sold, both the buyers and sellers found the insurance option appealing. The sellers wanted to fund their retirements and estate plans and not have potential post-closing liabilities hanging over their heads for the typical one to three or more years that indemnifications remain in place. Likewise, the buyer, and its lender, preferred to seek a claim against one large, creditworthy institution rather several, dispersed individuals of uncertain wherewithal.

In another instance, the seller was a subsidiary of a foreign corporation and was liquidating its U.S. businesses and assets. The buyer also was a foreign company and was inexperienced with evaluating and assessing the potential liabilities of acquiring a manufacturing business. So, the buyer insisted upon procurement of an insurance policy to cover the risks that long-term cleanups of groundwater contamination would exceed the available estimates.

Insurance can be an excellent tool for helping close deals. But, it is important to understand that it is not a magic wand. Before a reputable insurer will take these risks from the shoulders of the parties, it will want to do thorough due diligence, which can be time consuming and require additional work by lawyers and other advisors. And, of course, the insurer will charge a substantial premium. Still, the comfort from having a solution in place from day one, can be well worth the effort and expense.

Jeremy A. Gibson & Associates, P.C. handles mergers and acquisitions matters such as the one discussed above. We are available to serve and meet with clients throughout the Chicago, Illinois area, including Arlington Heights, Buffalo Grove, Deerfield, Des Plaines, Evanston, Glenview, Highland Park, Hinsdale, Lake Forest, Libertyville, Mount Prospect, Naperville, Northbrook, Oak Brook, Palatine, Rolling Meadows, Schaumburg, Skokie, Oak Brook, Oak Park, Vernon Hills, Waukegan, Wheeling and Wilmette. Contact us anytime for a complimentary consultation with a Chicago corporate lawyer.