Court holds that the seller had right to terminate the transaction when the buyer failed to process the franchise consent process within the time required by the asset purchase agreement.
M&A Stories
August 25, 2021
Introduction
Deadlines in an M&A acquisition agreement are real and can result in a failed deal.
The deal
This deal involved the sale of a Pennsylvania Hyundai dealership. The buyer and seller signed an asset purchase agreement. It gave the seller the right to terminate the deal if the buyer failed to complete its franchise application submission to the manufacturer within 75 days of the signing of the agreement.
The buyer failed to submit required financial information within the 75 day period and the seller exercised its right to terminate the asset purchase agreement.
The lawsuit
The buyer pushed back, and the dispute ended up in a Pittsburgh federal district court. First, the court had no problem concluding that the buyer did not complete its franchise submission within 90 days of signing the agreement: “The APA is dated July 24, 2019, meaning … (the buyer) … had to finish submitting its application to Hyundai by October 8, 2019, to comply with Section 5.5 within 75 days. … But as discussed above, … (the buyer) … did not complete its application submission to Hyundai until October 24, 2019, when it provided the missing financial documents that Hyundai had required from the outset. … (The buyer) … thus did not satisfy ‘the condition in Section 5.5’ within 75 days of the APA’s execution. As such, … (the seller) … could terminate the APA pursuant to Section 9.1(d) by giving notice ‘prior to or at the Closing.’ There is no dispute that it did so.”
The buyer then argued that the seller had waived its right to terminate the agreement by agreeing to extend the closing date, and thus the seller was required to give the buyer reasonable advance notice before terminating the agreement. The seller did not give any prior notice of its intent to terminate the agreement. The court, however, was not persuaded that the seller was required to do so, and ruled in favor of the seller: “Nor is the Court persuaded that … (the seller’s) … conduct demonstrates that it waived the time-is-of-the-essence provision, or otherwise acted like time was not essential, regardless of the written-waiver requirement. After determining that the original closing date (October 15, 2019) had to be postponed, … (the seller) … agreed to a single, two-week postponement to the closing date. ... The evidence shows … that … (the seller) … made efforts to close the transaction even up to the day it terminated the APA. ... Yet … (the seller) … promptly terminated the APA on November 5, 2019, the day after the parties’ revised closing date—which had passed without the parties closing. Based on these undisputed facts, the Court concludes that … (the seller) … did not waive the time-is-of-the-essence provision or act like time was not essential. Rather, … (the seller) … agreed to a single, short, finite extension of the closing date, and terminated the APA as soon as the revised closing date had passed without a closing. … The Court therefore finds unavailing … (the buyer’s) … argument that … (the seller’s) … termination was defective under Pennsylvania common law due to … (the seller) … not providing reasonable notice before termination.”
This case is referred to as Smail Imports, Inc. v. RMJ, Motors, Inc, No. 2:20-cv-109-NR, United States District Court, W.D. Pennsylvania, (July 27, 2021). https://scholar.google.com/scholar_case?case=15534755054602928284&q=%22asset+purchase+agreement%22&hl=en&scisbd=2&as_sdt=2006&as_ylo=2020
Comment
This case is a reminder that deadlines in an agreement will usually be respected.
By John McCauley: I help people manage M&A legal risks.
Email: jmccauley@mk-law.com
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Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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