The Power of the Written Word: Language of the Contract Trumps Bad Acts

A case discusses whether or not bad acts can override the terms of a purchase agreement.

Merger and acquisition deals are booming. A recent report by The Atlantic notes that merger and acquisition activity tends to come in waves. According to projections by the popular news source, the country is currently in the midst of a massive corporate transaction wave. This assertion is supported by data that shows that 2015 was the biggest year for these deals on record.

Just how big? A reported $4.7 trillion in deals was announced at the time the piece was published.

Business owners: Be wary, issues abound

Although merger and acquisition deals can be lucrative and perhaps beneficial to all involved, a poorly structured deal could be disastrous to a party. A recent case in the Business Litigation Session of the Suffolk Superior Court provides an example. The case delves into issues that can arise when a high level employee from the acquired group becomes a simple employee without any ownership stake, and the transaction includes a deferred purchase price payment provision. If these deals are not structured carefully, issues can arise.

What was this case about?

The case, Sullivan v. Kahn, Litwin, Renza & Co., Ltd., involved the acquisition of one accounting firm by another one. Through this transaction, most of the principals of the acquired group exchanged their interest and became owners in the acquiring firm. One partner Sullivan chose to become an employee without any ownership interest.

Specifically, Sullivan chose to continue his employment with the acquiring entity, while agreeing to a deferred purchase price payment schedule as set forth in the acquisition agreement. Essentially, this provision stated that when he retired he would get a $1 million payout, plus interest, which would span over a period of time.

What went wrong?

After he left his employment, Sullivan was accused of failing to properly perform his job duties and various disagreements arose between Sullivan and his employer. For example, the purchasing company Kahn, Litwin, Renza & Co. (KLR) refused to make the $1 million deferred purchase price payments. In response, Sullivan demanded that the $1 million plus interest be paid immediately - a request that was allowed within the terms of the purchase agreement.

At this point, Sullivan sued KLR for breach of contract and KLR counterclaimed that Sullivan breached the implied covenant of good faith and fair dealing, amongst other things. KLR argues that all of Sullivan's bad conduct constitutes a failure of consideration and a material breach of contract freeing it from its obligation to pay the deferred compensation. This allegation was allegedly supported by evidence that Sullivan provided assistance to four former KLR accountants who were attempting to establish their own accounting firm.

What did the court decide?

The Suffolk Superior Court Business Litigation session held that an employee's deferred compensation package that is provided for within the acquisition agreement cannot be forfeited due to allegations of bad conduct. The only way the forfeiture in this case could be allowed was if there is language contained within the agreement allowing for such action.

What can business owners in Massachusetts learn from this case?

Ultimately, business owners and entrepreneurs in Massachusetts can learn a valuable lesson from this case: the language in the contract can be powerful. The importance of the words used to craft a contract agreement cannot be overstated. As a result, those who are putting together similar agreements are wise to contact an experienced business lawyer. A knowledgeable professional will help clients avoid such pitfalls.