Contracts. Contract. Agreements.
When you sign a contract to go into business with someone or purchase something, do you really know who you are contracting with? Well, you better because as they say “the devil is in the details.” Not understanding these details and really doing your homework can cost you everything.
The seventh circuit court of appeals recently put forth a ruling concerning the liability of parent companies in regards to their subsidiaries.
The case involved three separate companies: Northbound Group, Inc., Norvax, Inc., and Leadbot LLC. Northbound and Norvax are both in the business of insurance leads. The two entities came to an agreement where Norvax would purchase the assets of Northbound. The purchase went through Leadbot LLC, which is a subsidiary of Norvax, created solely for the purpose of this transaction.
The purchase price of the acquisition was based on an earn-out percentage based on the monthly net revenue of the recently formed Leadbot LLC. The deal was contracted between Northbound and Leadbot, and Norvax, the parent company was not included. Northbound eventually filed a breach of contract suit, but learned that the fledgling company, Leadbot, had no assets. It then filed suit against both Leadbot and Norvax.
Northbound argued that Norvax, being the parent company of Leadbot, was in privity with Leadbot, and thus, in privity with them. Through a deposition of Norvax CEO, Clint Jones, it was established that funds from the buyout came from Norvax, not from Leadbot, and furthermore, that Norvax paid the salaries of Leadbot employees.
Norvax simply argued that they could not be held in judgment because they were not “in contract” with Northbound.
The seventh circuit court agreed with Norvax citing the time-tested standard that you can’t be sued for breach of contract if you are not a party in the contract. The court dismissed some of Northbound’s claims and granted summary judgment on the rest.
This case is sure to highlight the vigilance necessary when dealing with corporate parties in regards to deals with earn-out provisions. If the company contracted to pay the earn-out is not financially viable, you may have little to no legal options when you are not paid.
What’s the take-away for you in all this legal mumbo-jumbo? KNOW who you are getting in bed with and READ all agreements before signing.
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