August 16, 2012 Articles

Using Employees Retained after an Acquisition in Litigation

Retained employees might be the most valuable source of information in litigation against the seller of a business, but their involvement presents challenges

by Mark R. Jacobs

When private equity firms acquire a new business, many of those firms hire former employees of the acquired business to stay in key positions after the transaction closes. Retained employees have valuable institutional knowledge crucial to achieving the business's goals as the business moves forward as a private-equity-backed venture. Those retained employees may also have substantial knowledge that is material to any post-closing disputes that may arise between the buyer and the seller of the business. For instance, the buyer may hire the business's controller and later discover that the financial information provided to the lawyer by the seller during due diligence was inaccurate, thereby breaching the seller's representations and warranties regarding the accuracy of its financial statements. Or the buyer may retain the business's head of sales and subsequently determine that the seller breached its representations and warranties concerning its projected orders from its top customers.

In situations such as these, the retained employees can provide crucial insight into the seller's operations that is relevant to litigation over the seller's conduct in connection with the acquisition, such as identifying the seller's key players and describing the seller's business methods that gave rise to the buyer's claims. In fact, the employees retained by the buyer may have participated in the activity that is the subject of the buyer's allegations. Although the retained employees may be valuable resources in litigation, their prior relationship with the adverse party and their personal involvement in any potential misconduct raise important issues to be considered in preparing a buyer's litigation strategy.

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