Articles Posted in Mergers & Acquisitions

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After a merger in 1995, William and Patricia Cavallaro received 38 shares of stock in Camelot, the merged company. Their three sons received 54 shares each. When Camelot was subsequently acquired, the Cavallaros received a total of $10,830,000, and each son received $15,390,000. The IRS issued notices of deficiency to the Cavallaros for tax year 1995, determining that Camelot had a pre-merger value of $0 and that when the merger occurred, William and Patricia each made a taxable gift of $23,085,000 to their sons. Therefore, each of the Cavallaros incurred an increase in tax liability in the amount of $12,696,750. The Tax Court ultimately concluded that William owed $7,652,980 and that Patricia owed $8,009,202. The Cavallaros appealed, arguing that the Tax Court erred by failing to shift the burden of proof to the Commissioner. The First Circuit affirmed in part, reversed in part, and remanded, holding (1) the Tax Court correctly determined that the burden of proof was on the Cavallaros; but (2) the Tax Court misstated the nature of the Cavallaros’ burden of proof. Remanded. View "Cavallaro v. Koskinen" on Justia Law

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Pursuant to a merger agreement, Sellers agreed to indemnity Buyer for the tax liabilities of the company being sold. The tax bills for indemnification purposes, however, were to be calculated as if certain deductions were not going be taken when both parties knew they would be. These deductions reduced the company’s tax liability to zero. After the merger, the company’s tax prepayments and credits were refunded in their entirety, thus benefitting Buyer. Because the calculation of the indemnity obligation was based on a counterfactual measure of tax liability, that calculation resulted in Sellers’ owing Buyer a substantial amount of liability. Buyer filed this complaint asserting claims for declaratory relief and breach of contract. At issue in this case was whether the prepayments and credits affected the tax indemnification obligation of Sellers. The district court entered judgment on the pleadings in favor of Sellers, concluding that the indemnification provision unambiguously required that the indemnity obligation be offset by the amount of the refunded prepayments and credits. The First Circuit vacated the judgment of the district court, holding that the indemnification provision was ambiguous as to how the tax refunds affect the indemnification obligation of Sellers. Remanded. View "Mercury Sys., Inc. v. S’holder Representative Servs., Inc." on Justia Law

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Plaintiff obtained a $23 million judgment in New York against a New Jersey corporation ("Corporation") with its principal place of business in Massachusetts. Plaintiff sought to secure payment on that judgment by bringing suit in the District of Massachusetts against the Corporation’s president and its corporate parents, alleging that Defendants had looted BI of more than $18 million in assets in order to render it judgment-proof. Plaintiff later learned that one of BI’s corporate parents planned to merge with an Austrian subsidiary, which would place the company’s assets out of Plaintiff’s reach. The district court issued a temporary restraining order, later converted into a preliminary injunction, barring the merger. Defendant unsuccessfully moved to vacate the injunction and then appealed. While the appeal was pending, Defendants effected the merger. The district court issued civil contempt sanctions on Defendant for violating the court’s preliminary injunction order. The First Circuit affirmed, holding that the district court (1) did not exceed the bounds of its authority when it imposed the civil contempt sanctions; and (2) did not err when it declined to vacate the underlying preliminary injunction. View "AngioDynamics, Inc. v. Biolitec AG" on Justia Law

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Dragon Systems, Inc. (Dragon), a voice recognition software company that faced a deteriorating financial situation, hired Goldman Sachs (Goldman) to provide financial advice and assistance in connection with a possible merger. In 2000, Lernout & Hauspie Speech Products N.V. (Lernout & Hauspie) acquired Dragon. When it was discovered that Lernout & Hauspie had fraudulently overstated its earnings, the merged company filed for bankruptcy, and the Dragon name and technology were sold from the estate. Plaintiffs, two groups of Dragon shareholders, filed suit against Goldman, alleging negligent and intentional misrepresentation, negligence, gross negligence, breach of fiduciary duty, and violations of Mass. Gen. Laws ch. 93A. A jury found in favor of Goldman on Plaintiffs’ common law claims, and district court found that Goldman had not violated chapter 93A. The First Circuit affirmed, holding (1) the district court correctly articulated the legal standard applicable to Plaintiffs’ chapter 93A claims and correctly applied that standard to its factual findings; and (2) Plaintiffs’ arguments that they were entitled to a new trial on their common law claims because of evidentiary errors and erroneous jury instructions were without merit. View "Baker v. Goldman, Sachs & Co." on Justia Law

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Plaintiffs, holders of PHC, Inc. stock, filed separate but similar class actions suits in Massachusetts, alleging that an announced merger between PHC and Acadia Healthcare Company, Inc. was the result of an unfair process that provided them with too little compensation. A federal district court consolidated the two cases and, after the merger was consummated, granted summary judgment for Defendants, concluding that Plaintiffs were unable to demonstrate that they suffered an actual injury. The First Circuit vacated the judgment of the district court, holding that the court abused its discretion by not allowing discovery before ruling on the motion for summary judgment. Remanded.View "MAZ Partners LP v. PHC, Inc." on Justia Law

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A pension fund and other America Online (AOL) shareholders brought a class action against Credit Suisse First Boston (CSFB), former CSFB analysts, and other related defendants (collectively, Defendants), alleging violations of sections 10(b) and 20(a) of the Securities Exchange Act and of SEC Rule 10b-5. Specifically, Plaintiffs claimed (1) CSFB made material misstatements and fraudulently withheld relevant information from the market in its reporting on the AOL-Time Warner merger; and (2) the shareholders purchased stock in the new company at artificially inflated prices as a result of the alleged misstatements and omissions. The district court awarded summary judgment to Defendants. The First Circuit Court of Appeals affirmed, holding (1) the district court did not err in excluding the shareholders’ expert testimony for lack of reliability; and (2) without the expert’s testimony, Plaintiffs were unable to establish loss causation. View "Bricklayers & Trowel Trades Int'l Pension Fund v. Credit Suisse Secs. (USA) LLC" on Justia Law

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In 2002 one of the company's founders informed the company that he wanted the company to buy out his 23 percent stock ownership interest. The company agreed to pay $255,908 plus $400,000, the equivalent of one year's salary, for a one-year covenant not to compete. The company amortized the covenant payments over the 12-month duration, which straddled tax years 2002 and 2003. The IRS determined that the covenant was an amortizable section 197 intangible, amortizable over 15 years and not over the duration of the covenant. The tax court upheld the decision. The First Circuit affirmed. A "section 197 intangible" includes any covenant not to compete entered into in connection with the acquisition of any shares, substantial or not, of stock in a corporation that is engaged in a trade or business.