South-Western Legal Studies in Business

Acquiring Firm May Not Use Bad Faith toward Acquired Firm
Description Appeals court held that a firm that acquired another firm used bad faith after it integrated the acquired firm into its operations, by taking actions that resulted in the acquiring firm having to pay a lower price for the acquisition by managerial decisions made after the deal had been completed.
Topic Business Organization
Key Words Buyout; Good Faith and Fair Dealing
C A S E   S U M M A R Y
Facts Pepper started a company, Horizon, that made recreational boats. Genmar, the world's largest maker of recreational boats, approached him about buying Horizon. When the deal was made, Genmar created a subsidiary, GMK, and made Pepper president. Genmar paid $2.3 million for Horizon plus $3 million to be "earned out" over a five-year period based on sales levels of GMK products. After GMK was formed, Genmar told Pepper to stop using the Horizon name on its boats and to focus on making other lines of boats, which was contrary to Pepper's understanding. The other boats were much more expensive to make, resulting in losses for GMK and an inability to meet the sales levels needed to earn the additional $3 million purchase price. Pepper complained and was fired. GMK was closed. Pepper sued Genmar on various claims. The jury awarded Pepper $2.5 million. Genmar appealed.

Affirmed. The jury found that Genmar had breached an implied covenant of good faith and fair dealing. It took actions that frustrated Pepper's efforts to earn the $3 million based on the agreement. There was sufficient evidence that Genmar acted with dishonest purpose, by using the GMK plant in such a way as to reduce the acquiring price and preventing Pepper from realizing his sales-based consideration. This is not a finding of fraud, deceit or misrepresentation, rather it is bad faith applied in case of the acquisition of a business.

Citation O'Tool v. Genmar Holdings, 387 F.3d 1188 (10th Cir., 2004)

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