Article
Source: The M&A Lawyer | Volume 22, Issue 4
Article
04.30.18
On February 27, the United States Supreme Court resolved a long-standing circuit split by ruling, in Merit Management Group, LP v. FTI Consulting, Inc.1, that the purchase price paid to a stockholder of an acquired corporation could be recovered by the bankruptcy trustee of the buyer, even though the payment had been made through a third-party financial institution (Citizens Bank of Pennsylvania, as escrow agent). Prior to this ruling, the majority of circuit courts had held that such payments could not be recovered by a bankruptcy trustee, due to the safe harbor provided by Section 546(e) of the Bankruptcy Code.
While the outcome of Merit Management hinged on whether certain payments made through third-party financial institutions could be recovered in bankruptcy, it can also serve as a more general reminder to M&A legal practitioners, or perhaps a “wake-up call” to some, that clients and their stockholders may be at risk of forfeiting consideration previously received in a deal, not because of their own company’s liabilities, but because of the liabilities of the buyer. In fact, it may be even more of a wake-up call to those who had previously advised their clients based on the majority view, and now must take a step back to reassess the risks involved.