This is story about how a company negotiating the sale of its business (the “seller”) ended up in court with the company interested in buying the business (the “buyer), over a provision in a letter of intent. In the words of the court:
(The buyer) … and … (the seller) … are scrap metal recycling companies with substantial operations in Nashville, Tennessee. On December 9, 2015, they entered into a Confidentiality and Non-Disclosure Agreement as part of discussions regarding … (the buyer’s) … potential purchase of … (the seller’s) … Nashville assets and business operations. … On January 20, 2017, the parties entered into a letter of intent (“LOI”). … Although non-binding with regard to the terms and structure of the potential acquisition, the LOI included a binding exclusivity provision that granted … (the buyer) … exclusive negotiating rights with … (the seller) …. (through May 20, 2017)
The purchase price was $27 million.
On April 27, 2017, the president of the seller met a competitor who was interested in buying the seller’s business. At that meeting the competitor asked seller what was the seller’s price? The seller said $30 million.
The seller ended up not selling to the buyer or the competitor. However, the buyer found about this April 27, 2017 meeting. The buyer sued the seller for the damages the buyer suffered because the seller negotiated the sale of its business with the competitor during the buyer’s exclusivity period.
The seller admitted the conversation with the competitor but said that it was not negotiating the sale of the business, and therefor did not breach the letter of intent. The court disagreed:
The point of the exclusivity provision is to prevent … (the seller) … from engaging in any discussion— no matter how informal or cursory—that might influence … (the seller’s) … participation in its negotiations with … (the buyer) …. Floating a test balloon price point to the president of a third party in response to a purchase inquiry is exactly the type of exchange which … could have led… (the seller) … to drag … (its) … feet while waiting out expiration of the exclusivity provision.
This United States District Court case from Tennessee is referred to as PSC Metals, Inc. v. Southern Recycling, LLC, No. 3:17-cv-01088, United States District Court, M.D. Tennessee, Nashville Division (March 30, 2018).
Comment. Letters of intent are commonly viewed as nonbinding. And the terms of a potential deal that are contained in an LOI may be nonbinding. However, there are usually important binding provisions in an LOI that can trip up a buyer or a seller.
One common binding provision prohibits a seller from talking to any other potential buyer about a deal during a period often called the exclusivity period, when the buyer and seller are trying to negotiate and close a deal.
In this case the seller was subject to an LOI exclusivity provision. During that period a competitor met with seller and expressed a desire to desire buy seller’s business. That alone would not have tripped seller up. What tripped him up was that seller told the competitor how much it would take to buy seller.
By John McCauley: I help people start, grow, buy and sell their businesses.
Telephone: 714 273-6291