When it comes to buying a business, what you don’t know may hurt you, but what you do know could hurt you as well. What’s going on? Choice of law is going on, specifically, the choice of law provision in a definitive purchase agreement pursuant to which a seller is selling its business for millions of dollars or a buyer is acquiring a business for millions of dollars. The only difference is: if Delaware law governs the purchase agreement, then the buyer will likely be entitled to recover from the seller for a breach of the seller’s representations and warranties in connection with the sale even though the buyer knew they were untrue at the closing. Whereas, if Texas law governs the transaction documents, if the buyer knows a representation or warranty of the seller is untrue at closing, the buyer will not be able to recover from the seller for that breach unless otherwise provided by the purchase agreement. Such a provision is a big red flag for a seller, but if Delaware law governs no such announcement is required.
What you don’t know and what you do know can hurt you if you don’t know the rules of the game and how to use them in your favor.