The buyer signs a nonbinding letter of intent to acquire a business. The deal never closes. A Texas intermediate appellate court finds that a prospective buyer owed the seller no duty of good faith and fair dealing.
M&A Stories
October 11, 2021
Introduction:
In the world of mergers and acquisitions (M&A), it’s common for buyers and sellers of private companies to sign a nonbinding letter of intent outlining their agreed-upon deal. However, a recent case in Texas highlights an important lesson for prospective buyers: in Texas, there is no legal obligation to negotiate in good faith.
The Deal:
In this particular case, a Houston-based investigative agency, offering background checks, surveillance, and civil process services, was the seller. The buyer, a Houston-based intelligence, information, investigation, and security consulting firm, expressed interest in acquiring the seller’s business. They engaged in discussions, with the buyer’s owner even indicating the deal was practically a done deal and advising the seller to prepare for the transaction.
The Letter of Intent:
On July 9, 2015, the buyer and seller signed a Letter of Intent, where the buyer offered to buy the seller’s assets and business operations for $725,000, subject to certain conditions. These conditions included the buyer’s satisfactory due diligence, execution of various agreements, and obtaining suitable financing.
The Unforeseen Turn:
Despite plans for a closing on July 15, 2015, the buyer’s lawyer informed the seller on July 30 that the deal would not proceed because the buyer’s financing fell through.
The Lawsuit:
In response, the seller filed a lawsuit against the buyer, claiming a breach of the buyer’s duty to negotiate in good faith. However, the Texas appellate court ruled that Texas law does not recognize such a duty to negotiate in good faith. Even if there is an agreement to negotiate in the future, it is unenforceable under Texas law, regardless of whether the agreement calls for a good faith effort in the negotiations.
This case is referred to as K. Griff Investigations, Inc. v. Cronin., No. 14-19-01020-CV, Court of Appeals of Texas, Fourteenth District, Houston, (Memorandum Opinion filed August 17, 2021)
The Takeaway:
The case serves as a valuable reminder for buyers operating in Texas. Unlike some other states where the covenant of good faith and fair dealing is implied in contracts, Texas does not impose such an obligation on parties during negotiations.
In conclusion, prospective buyers in Texas should be aware that once they sign a nonbinding letter of intent, there is no legal duty to negotiate in good faith. This case highlights the importance of being cautious and realistic when dealing with letters of intent in Texas, as they may not carry the same level of commitment and enforceability as in other states.
By John McCauley: I help people manage M&A legal risks. #M&Astories
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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