Scope of General Release and change of ownership

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by a searcher
in Illinois, USA

2yrs ago

Scope of General Release and change of ownership

Hello searchers and partners ,

I'm currently under a Letter of Intent (LOI) for a business, and I've encountered an interesting situation. The current owner (seller) has an employee who previously filed a lawsuit against the previous owner of the business that the seller acquired. The lawsuit resulted in an out-of-court settlement with a general release.

Given that this employee is still working for the same business, albeit under a new entity with the same Doing Business As (DBA) name, there's a question regarding whether the general release covers the current (new) entity as well, or if it is limited to the previous owner. My concern is whether the seller and I would be exposed to any potential lawsuits in this scenario, is she decided to suit us.

Thanks in advance.

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reply by a professional 2yrs ago
from Emory University in New York, NY, USA

This is a very common due diligence and corporate transactional structure question. Easily answerable by a review of the release; the sale documents from the previous deal and the corporate structure of your deal. Was it an asset deal? A stock/LLC interest deal?

reply by a professional 2yrs ago
from Emory University in New York, NY, USA

Also, with respect to indemnification, it is always better to buy a company clean than rely on indemnification. There has to be a "pocket" to indemnify and you now have a collection process at best, lawsuit at worst. Do the homework going in.