Business Law 102: Suing Someone For Fraud In An Asset Purchase Agreement

Asset purchase agreements, commonly known as APAs, are critical in mergers or acquisitions. The agreement is a fundamental business law consideration during these transactions, and both buyer and seller should be aware of the details.

There should be a secure exchange of business divisions or assets, whether the business is big or small. While the APA plays a role in facilitating business transactions, there is the risk of fraud. For example, one party may intentionally misrepresent critical information or hide material facts.

If you find yourself in a fraudulent deal, you may want to sue the other party for financial losses or unfavorable terms. Rather than battle the legal landscape alone, our team of experienced lawyers is here to guide you — starting by providing the following information.

What Are Asset Purchase Agreements?

Asset purchase agreements are legal contracts that outline the terms and conditions for selling business divisions or assets. It formalizes and legitimizes the purchase of a business or significant asset, detailing the deal structure, price, limitations, and warranties.

For example, APAs are drawn up when a buyer acquires certain assets, such as equipment, inventory, customer contracts, or intellectual property. The contract is also used in mergers where businesses transfer specific assets.

Identifying Fraud In An APA

Identifying fraud in an APA helps safeguard the integrity of business transactions and prevent financial losses, legal disputes, and damaged reputations. There are three main requirements for fraud: perceived financial pressure or opportunity to commit fraud and rationalization.

There are a few practical steps to consider that ensure fairness in the exchange:

• Diligently assess the due diligence reports and ensure that all information aligns with the APA details.
• Verify financial statements and look out for any inconsistencies that may indicate fraudulent misrepresentations.
• Investigate seller’s history and track record for a pattern of dishonesty or unethical behavior.
• Seek legal counsel to draft and review the APA.
• Interview key individuals involved in the transaction for additional insight, looking out for inconsistent statements or evasive responses.

Legal Requirements For Suing For Fraud

Accusations of misrepresentation and fraud must meet key criteria to pursue legal action:

• A false statement of fact was presented in the APA.
• The false statement was deliberately made.
• The false statement (or omission) must be material, having played a significant role in the decision-making process.
• The aggrieved party must have entered the contract based on their trust in the statement.
• The reliance of the aggrieved party must have been reasonable and justified.
• There must be proof of actual damage because of the fraudulent conduct, such as financial losses or emotional distress.

There are a few additional details specific to Florida, such as the statute of limitations, typically four years for fraud cases. In some cases, the state may require clear and convincing evidence to prove fraud, a higher burden of proof.

When filing a lawsuit, it’s important to draft a specific complaint. Experienced legal counsel helps to ensure that all relevant information and details of the alleged fraud are included, such as who committed the fraud, what misleading actions were done, when it occurred, and how it caused damage.

Litigation Process For Suing For Fraud

Specific facts are key when suing for fraud, yet the legal process can still be complex and time-consuming. The following steps are important for successful results (or prevent litigation entirely).

Consult With An Attorney

The first step in tackling a fraud case is to identify an experienced attorney with experience in APA fraud. The attorney will evaluate your case, advise on the best action, and ensure you have all the necessary information.

File And Serve A Complaint

After confirming your valid fraud claim, the attorney will help you draft and file a specific formal complaint about the details. The complaint must then be served to the defendant, notifying them of the lawsuit and providing them with a chance to respond.

Discovery Phase

During discovery, both parties exchange information and evidence relevant to the case. The process may include depositions, interrogations, documentation, and other ways of getting information.

Negotiation And Settlement

Once all evidence has been presented and confirmed, parties may discuss alternate resolution options, such as negotiations, mediation, or arbitration. These options for settling prevent the case from going to trial.

Pre-Trial Motions

If no settlement is reached, then the case may go to trial. Before this occurs, either party can file pre-trial motions. For example, the motion to dismiss or the motion for summary judgment.

Preventing Fraud In An APA

Prevention is better than cure, and there are a few ways to prevent fraud from occurring in the first place.

Due Diligence And Legal Counsel

Conducting due diligence with the help of legal counsel should pinpoint any red flags. The process may involve background checks, investigating the seller’s history, and reviewing financial records and contracts.

Clear Documentation And Disclosure

Language in the APA should be clear and precise to prevent any misunderstanding or misinterpretation. Full disclosure of all material information should be included, with representations and warranties accurately defined.

Risk Mitigation And Protection

The APA should include clauses for indemnification and escrow amounts to prepare for potential fraud, help address disputes, and provide remedies. For example, insurance policies and third-party audits are valuable for added protection.

Transaction Structure

Pay careful attention to the transaction structure and consider earn-out provisions that align interests and verify asset performance. Whatever the structure, it’s important to comply with regulations and legal standards.

Education And Vigilance

Educate the team about fraud risks and implement effective procedures to report any red flags during the APA process. Maintain vigilance throughout the transaction and consider using legal representation and warranty insurance for ultimate protection.