Business seller fights all the way to Texas Supreme Court to challenge validity of purchase agreement

Seller owns Target, a wholesale distributer of candy and tobacco products. Target had contracts to buy tobacco products directly from Supplier 1 and Supplier 2, which will be referred to collectively as Suppliers. In April 2012, Seller approached Buyer, the vice president of Competitor, a convenience store distribution business, about purchasing Target. Competitor did not have a direct contract with Suppliers, thus it bought those companies’ tobacco products through middlemen and paid higher prices for them than did Target.

Because Suppliers ordinarily would not enter into new contracts to sell directly to wholesalers, businesses that wanted to buy directly from them usually sought to do so by buying companies that had direct contracts. But the Suppliers direct-purchase contracts would not necessarily transfer if Target was sold: both Suppliers reserved the right to discontinue direct sales to Target absent their approval of its purchaser.

Buyer and Seller reached an agreement regarding the sale of Target and signed a letter of intent. The closing date was listed as immediate, subject to preapproval from Suppliers. Supplier 1 initially refused to approve the application to transfer Target’s ownership but did so after Buyer and Seller resubmitted the application.

While waiting on approval from Supplier 2, Buyer and Seller executed a stock transfer and asset purchase and sale agreement by which Seller agreed to sell to Buyer all Target stock shares along with other assets used in the business such as land, buildings, inventory, vehicles, fixtures, and equipment. The purchase price for the stock was $500K, subject to the contingency that if Seller was unable to obtain written approval from both Suppliers for the direct contracts to remain in force, the price would be reduced to $250K. Because Supplier 1 had approved the change of ownership, the sales price hinged on Supplier 2’s approval.

The purchase agreement provided that the sales price for the furniture, fixtures, and equipment such as stamping and packing machines would be their value as mutually agreed upon by Buyer and Seller prior to the closing date, and the price of the land and building would be the value set by an appraisal to be accomplished before the closing date. Closing was to take place on or before July 1, 2013.

On June 28, 2013, Supplier 2 notified Buyer that it would not approve the change in ownership. Seller and Buyer discussed resubmitting the application to Supplier 2 as they had done with Supplier 1. Seller also proposed postponing the July 1 closing date, but Buyer would not agree to the change. At that point, Seller and Buyer had not come to an agreement as to the value of the furniture, fixtures, and equipment, and Seller disputed the value of the land and building as determined by the appraisal.

Buyer appeared for the closing on July 1, but Seller did not. Instead, on July 2, Seller sued Buyer in a Texas trial court seeking a declaratory judgment that the purchase agreement was unenforceable and void because Buyer and Seller did not agree on all its essential terms. Buyer counterclaimed against Seller, asserting various claims including a claim for damages because Seller had indeed breached the purchase agreement.

The case was tried to a jury and the jury found that Seller had an obligation under the purchase Agreement to sell the business to Buyer. The jury also found that Buyer suffered $900K in lost profit damages. The trial court awarded attorney’s fees to Buyer.

Seller asked the court to disregard the jury’s finding, arguing that the validity of the purchase agreement was a question for the trial judge and not the jury. Neither the trial judge or a Texas intermediate court of appeal would consider Seller’s argument, holding that Seller had waived its right to make this argument.

The Texas Supreme Court, however, disagreed, and ordered to lower courts to consider Seller’s argument that the determination of the legality of the purchase agreement was up to the trial judge and not the jury.

This case is referred to as Musallam v. Ali, No. 17-0762, Supreme Court of Texas (Opinion delivered: October 26, 2018).

Comment. Seller had to spend a lot of time and money to get the court system to consider his legal argument that the purchase agreement was not enforceable.

In 20/20 hindsight, Seller and Buyer could have probably eliminated this dispute by signing an agreement that had set an agreed upon purchase price for the business land, buildings, inventory, vehicles, fixtures, and equipment.  Of course, valuing these assets would have taken time, would have slowed up the signing of the purchase agreement, and risked losing the deal.

By John McCauley: I help people start, grow, buy and sell their businesses.



Telephone:      714 273-6291

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Posted in deferred closing, post signing asset valuation

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