Scope of General Release and change of ownership

May 20, 2024

by a searcher in Illinois, USA

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.

Reply by a professional
from Gonzaga University in Seattle, WA, USA

It depends on what the release specifically says - so I would want to see a copy of that release. It also depends on what the agreement the current seller signed with the prior owner for the business acquisition - often times if there is ongoing litigation or threat of litigation when a deal is pending, the original owner may have agreed to indemnify the current seller and the business from anything relating to that lawsuit. For your own deal, you can protect yourself from liability as well by considering the structure of the transaction (asset versus stock transaction) and having indemnification provisions where the seller would agree to indemnify you for any claims relating to that specific matter after closing.

Reply by a professional
from University of Notre Dame in New York, NY, USA

Like others have mentioned here, the language of the release is important here and would determine coverage. That being said, in the deal docs you'd get the seller to agree to a broad indemnification covering issues like this that would come up post-closing. Happy to chat more or take a look at the release language. DM me or shoot me an email redacted

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