Can You Sell a Business with Pending Litigation?
If you are a business owner, selling a business with pending litigation may be complex. With appropriate disclosure, communication, planning, and legal guidance, it may be possible to sell a business with pending litigation.
Discover the types of common commercial litigation business owners may encounter, and your responsibilities when looking to exit during a claim.
What types of litigation could my business encounter?
Commercial litigation can arise for a variety of reasons in the business world. Some common scenarios that may lead to a business owner being sued include breach of contract, partnership disputes, employment issues (including wrongful termination, discrimination, or workplace bullying), intellectual property disputes, debt collection, consumer damage claims, product liability, false advertising, or real estate disputes.
While accidents and commercial disputes may not ever be completely avoided, it is important to take necessary steps to reduce the risk as much as possible. A good place to start is with solid contracts and agreements, appropriate employee training, and strict compliance with laws and regulations. Commercial insurance may provide an additional layer of financial protection.
Selling a business with pending litigation
Put simply, if you have appropriately disclosed the nature of the commercial litigation your business is involved in, and the buyer wishes to proceed, it is legal to sell the business. It is important to answer any questions the buyer may have with the utmost honesty.
Buying a business with a pending claim
If you are a prospective buyer, as mentioned above, it is legal to purchase a business with a Seller who has pending claims involving that business. However, it may not mean that it is the best idea. While the seller should provide honest information about the commercial conduct of the business, it is imperative to conduct your own due diligence.
After the due diligence is complete, you should have a more solid idea around whether purchasing the business is the right move for you.
Things to consider with the sale of a business during litigation
While the sale of a business under normal circumstances is generally not always straightforward, a pending claim against the Seller adds an additional component of risk and complication.
Things to consider:
● Reputation damage. Depending on the type of claim, the brand and business reputation may be damaged. If substantial damage is done, the business may not be viable moving forward.
● Financial compensation. The owner of the business (or in the case of a share sale, the Company itself) may be forced to pay damages to the plaintiff if it loses the litigation. In this event, it is important to have a purchase agreement outlining who will be responsible for paying the damages.
● Value of the business. It is important to consider the impact of the commercial litigation on the value of the business. For example, if there is an ongoing intellectual property dispute, would the value of the business take a significant hit if it were deemed the intellectual property belongs to an external party? In some industries, a business has virtually no value without its intellectual property!
When is it not legal to sell a business involved in legal proceedings?
If a company is in the process of liquidation, it is unable to be sold as it is insolvent. If you are looking to purchase a company, it is a good idea to check the ASIC public notices register first to ensure the company is not listed as insolvent. This is the same for an Asset sale, where the Seller is in liquidation, or is bankrupt – a third party may have rights to those assets.
Seek legal assistance for the sale or purchase of a business
To avoid unnecessary complications during the sale or purchase of a business, get in contact with a commercial lawyer. They can help you with a sale of a business contract that clearly states the terms and commercial details of the sale. This would include things like the purchase price, settlement date, assets included in the sale, and additional components such as caveats in the event that the Seller loses any outstanding business litigations.
Bradley & Bray's team of leading Sunshine Coast Commercial Lawyers have been advising on commercial legal matters for a wide range of businesses for over 45 years. We provide legal advice and representation on all matters related to buying and selling businesses. Our commercial lawyers will help you navigate the legal complexities of this process to ensure that you are fully informed throughout every stage of your business sale or purchase. Reach out to our Commercial team today.
This article is general in nature and does not constitute legal advice. If you require legal advice in relation to your personal circumstances, you must formally engage our firm, or another firm to provide legal advice in relation to your matter. Bradley & Bray lawyers take no responsibility for any use of the information provided in this article.
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