Butler Rubin Wins Dismissal of Fraud Suit over $55M Tech Merger

CHICAGO, September 9, 2017 – Butler Rubin obtained dismissal of fraud claims asserted against its clients, the former shareholders of California-based Hunter Technology Corp., in a suit brought by Illinois-based Sparton Corp. following Sparton’s acquisition of Hunter in a $55 million merger. Sparton accused former Hunter shareholders of fraudulently inflating Hunter’s working capital to obtain a higher purchase price during the merger negotiation process in violation of Delaware law and in breach of the representations and warranties in the merger agreement regarding the accuracy of Hunter’s financial statements.  Sparton also accused the shareholder’s representative of failing to use commercially reasonable efforts to resolve certain specific indemnity liabilities asserted against Hunter prior to the merger.

The former Hunter shareholders moved to dismiss Sparton’s claims on the basis that Sparton failed to plead fraud with particularity and failed to state a claim for breach of contract. In August 2017, in a twenty-six page decision, Vice Chancellor Montgomery-Reeves of the Delaware Court of Chancery granted the defendant shareholder’s motion in its entirety.  The Vice Chancellor agreed with the defendant shareholders that Sparton failed to allege critical details regarding the purported fraud, such as “who specifically did what or how they ‘assisted’ in allegedly misstating the invoices or financial statements.”  In addition, the Vice Chancellor held that the merger agreement’s indemnification provisions precluded Sparton from recovering for alleged adjustments to working capital on a breach of contract theory.  Finally, the Vice Chancellor rejected Sparton’s claim that the former Shareholders bore responsibility for certain specific indemnity matters, finding Sparton’s “conclusory allegation” that the representative did not use commercially reasonable efforts to resolve the matters insufficient to state a claim.

Partner Mark Schwartz led the team representing the former Hunter shareholders and argued the case before the Court of Chancery earlier this year.  The team also included associate Sandra Durkin and paralegal Angela Kubacki.  The win was a decisive victory following two rounds of briefing on the motion to dismiss after Sparton attempted to amend its complaint.

Formed in 1980, Chicago-based Butler Rubin has established itself as a well-known law firm assisting clients nationally and internationally in complex business disputes, including insurance and reinsurance, post-closing disputes, antitrust law, class actions, defense of corporate directors and officers, labor and employment law, healthcare litigation, and insolvency.