There are always risks involved in buying a company. Until you are actually inside a company’s operations, you can never be sure you know everything about it. Conversely, sellers too will bear the risk that buyer’s remorse will lead to post-closing claims against the sellers when they no longer have the company assets to use to defend themselves. Two related, recent Delaware Court of Chancery decisions illustrate the hidden risks when buyers and sellers try to allocate between them the inherent risks in a deal.

EMSI Acquisition v. Contrarian Funds, (May 3) (EMSI I), held that despite extensive attempts to limit a buyer’s right to sue sellers, the contract of sale did not foreclose claims of fraud. The buyers did not get all they wanted, however. In Davis v. EMSI Holding, (May 3) (EMSI II), the same court also held the buyers had to advance the sellers’ costs to defend themselves. In short, the terms of the stock purchase agreement (SPA) the buyers and sellers negotiated failed to fully satisfy either side. This is worth examining.

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