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In lawsuit, Blackford Capital platform company alleges seller misrepresented relationship with key customer ahead of 2016 acquisition

BY Sunday, January 14, 2018 07:25pm

GRAND RAPIDS — The relationship between two companies involved in a 2016 acquisition appears to have soured, with both entities now pointing the finger at each other in federal court.

The issue stems from Walker-based Custom Profile Inc.’s 2016 tuck-in acquisition of the plastic extrusion business of Sheboygan Falls, Wis.-based Bemis Manufacturing Co.

As the two companies closed on the $4.65 million asset purchase agreement, they agreed to a manufacturing and supply contract under which Bemis maintained possession of certain equipment and produced various products as directed by Custom Profile.

In a lawsuit filed in October in the U.S. District Court for the Western District of Michigan, Bemis alleges that Custom Profile failed to pay for more than $1.7 million in goods and services it provided to the company between October 2016 and August 2017.

Bemis claims that Custom Profile breached its contract and unjustly enriched itself by benefiting from products Bemis manufactured. Bemis asked the court to award it the amount it is owed plus interest, costs and attorney fees.

For its part, Custom Profile denies the allegations, noting that some of the parts were defective. Additionally, Custom Profile alleges in a counterclaim filed at the end of December that it is owed an amount exceeding the value of the invoice because Bemis made inaccurate representations and warranties in the asset purchase agreement with regard to a “significant” and “profitable” customer.

In the counterclaim, Custom Profile alleges that Bemis knew that bath and kitchen fixtures manufacturer Kohler Co. had terminated its relationship with Bemis prior to the execution of the asset purchase agreement. As such, Custom Profile said Bemis breached the terms of the deal.

“This is a mutual litigation issue involving common contract valuation terms and we are confident about a resolution in this forum,” Custom Profile CEO John Boeschenstein told MiBiz via email.

Grand Rapids-based private equity firm Blackford Capital acquired Custom Profile Inc. in 2012 as the first transaction under its Michigan Prosperity Fund.

Custom Profile said in court filings that it is “entitled to withhold and offset the amount of its claim against any sums that may otherwise be payable to Bemis” under the manufacturing and supply agreement. The company asked the court to enter a monetary judgment against Bemis and to offset any amount due to Bemis by the amount it owes to Custom Profile.

In its response to the counterclaim, Bemis denied the allegations that it withheld information about the loss of the key customer.

Grand Rapids-based Warner Norcross & Judd LLP is serving as legal counsel for Custom Profile. Bemis is being represented in the case by attorneys at the Grand Rapids office of Bodman LLP and Milwaukee-based Godfrey & Kahn S.C.

Representatives of Bemis’ legal counsel did not respond to a request for comment by the time this report was published.

BUYER PROTECTIONS

Custom Profile’s counterclaim reinforces the need for sellers to find ways to protect themselves in business transactions, according to M&A advisers.

In due diligence ahead of the close of any acquisition, a buyer should try to get the seller to agree to allow it to talk to customers, “particularly if they are significant (or) concentrated in nature,” said John Pollock, managing director at private equity firm LV2 Equity Partners LLC in Grand Rapids.

Savvy buyers also try to get contracts with key customers in hand by the time of close, but that rarely happens, he said, noting that closing deals comes down to business judgment on the part of the buyers.

Buyers can protect themselves by holding some of the sale proceeds in escrow for a set time after the close of the deal in case any issues arise in the “normal course of business” in the company, Pollock added.  

Barring that, a buyer also can purchase representations and warranties insurance, which shifts the risk to the insurance provider and can alleviate the need for escrow. The limitation with the insurance, according to Pollock, is that it’s only economical for larger deals.

“As a buyer, you try to protect yourself as best you can through thorough a combination of tools,” he said.

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