In a Rush to Complete Its Purchase of Health Software

question 14

Essay

In a rush to complete its purchase of health software producer HBO, McKesson did not perform adequate due diligence but rather relied on representations and warranties in the agreement of sale and purchase. Within six months following closing, McKesson announced that it would have to reduce revenue by $327 million and net income by $191.5 million for the past 3 fiscal years to correct for accounting irregularities. The company's stock fell by 48 percent. Assume HBO's financial statements had been declared to be in accordance with GAAP, would McKesson have been justified in believing that HBO's revenue and profit figures were 100 percent accurate?

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Definitions:

Formal Contract

A contract that must have a special form or must be created in a specific manner.

Simple Contract

A contract that is not a formal contract. Also called an informal contract.

Third-Party Beneficiary

A third-party beneficiary is a person who, although not a party to the contract, stands to benefit from the contract's execution or has rights that can be enforced under the contract.

Quasi-Contract

An obligation imposed by law in order to prevent unjust enrichment, treated as a contract for the purpose of remedy despite the lack of a formal agreement.