JW Childs Associates has been dealt a blow in its ongoing indemnification case against the former owners of pet supplies outfit Hartz Mountain.
The roots of the legal tussle date back to December 2000, when JW Childs acquired Hartz from the Stern family, a deal valued at around $308 million. As part of the purchase agreement, there was “boiler-plate” indemnification language that the firm felt provided sales guarantees for certain products.
The Hartz investment, by all accounts, appeared to be a success for JW Childs. In the initial acquisition the firm reportedly injected $98 million of equity into the deal, and last year unloaded Hartz for $388 million to Japanese trading group Sumitomo. As part of the sale to Sumitomo, JW Childs retained the right to continue to pursue the indemnification claims against the Stern family.
The primary claim was related to Hartz’s flea capsule product line. JW Childs held that language in the sale contract to indemnify for any loss in value of existing Hartz products equated to a sales guaranty.
The flea-capsule product line experienced a drop in revenue after JW Childs acquired the business, which was attributed to the introduction of a competitive product by Hartz rival Pet Company. The disposition indicated that JW Childs believes it may have paid as much as $35 million more than it would have had the firm accounted for the reversal of the flea capsule’s financials.
Those claims, however, were rejected by Justice Ira Gammerman of the New York State Supreme Court. In the ruling, levied earlier this week, Gammerman dismissed roughly $50 million in potential indemnification exposure for the Stern family.
This case, like others involving private equity groups, shines a light on due diligence. Most recently, Thomas H. Lee Partners was named in a lawsuit involving its investment in Refco, and earlier this week ABRY Partners filed a suit against Providence Equity Partners related its acquisition of F&W Publications. In each case there are questions, whether from the defendant’s side or the plaintiff’s, over how responsible the buyers should be for their conducting their own research.
The decision regarding JW Childs could be a precedent-setting case for the M&A market, at least for deals going through New York State. It essentially rebukes the notion that boiler-plate language can protect buyers from deterioration in specific areas of an acquired business. If buyers’ want downside protection, they will need to specify explicit risks in the contract instead of including a form sheet with language that is all inclusive.
In a disposition, the judge cited past cases, and noted that “the language of the clause is broad enough to provide indemnity against ‘losses’ not resulting from any breach of any duty, that does not mean that the clause can be so construed”.
The Sterns, who had owned Hartz for more than 75 years prior to the sale to JW Childs, were represented by Tannenbaum, Helpern, Syracuse & Hirschtritt.
Vincent Syracuse, a partner from the firm, told PEO that the decision is essentially a reaffirmation against buyer “stealth tactics” as a way to seek indemnification. “The judgement decisively ruled that if [JW Childs] wanted a product guaranty, than they should have negotiated for it specifically instead of using a form book,” he said. “I think it’s a very important case, particularly in the sense that it states when certain risks are indemnified, they need to be addressed specifically in the contracts.”
There are still some indemnification claims pending from JW Childs’ suit, although Syracuse indicated that Justice Gammerman’s ruling eliminates roughly 90 percent of the Stern family’s exposure.
Calls to JW Childs were not returned by press time.