Target, based out of the Kansas City area, provides movie theater digital marketing/advertising and movie theater concessions. Sellers were the owners of Target. Buyer is a Texas capital investment limited liability company.
In early 2015, Sellers circulated a solicitation seeking to attract potential investors to purchase ownership interest in Target. Buyer responded to the solicitation and requested additional information on Target.
On June 4, 2015, Sellers sent Buyer an information memorandum which contained information about Target’s operations, information about Target’s financial records from previous years, and representations about Target’s predicted financial success moving forward.
On June 30, 2015, Buyer submitted a non-binding indication of interest to Sellers. In Buyer’s indication of interest, Buyer proposed that the purchase of Target eventually be consummated with a combination of equity provided by Buyer and conservative third-party senior debt. Sellers would stay on as Target employees following the purchase by Buyer.
The remainder of the deal is from the facts alleged by Buyer in court filings.
On August 25, 2015, Sellers and Buyer met in Overland Park, Kansas. Sellers presented details of Target’s operations to Buyer who, in turn, presented Buyer’s strategic vision for executing the purchase of Target. In this meeting, Buyer recognized Target’s digital marketing product line had significant competition from another market participant, Competitor. Because Competitor could impede Target’s growth in the digital marketing sector and pose a threat to the purchase of Target, Sellers orally represented to Buyer that Sellers had a close relationship with the president of Competitor and could reach a deal with Competitor which would alleviate the threat of competition.
Sellers and Buyer decided to actively work toward reaching a formal agreement for the sale of Target to Buyer. Accordingly, Sellers sent Buyer Target’s financial information to begin the due-diligence process and Buyer set out to obtain third-party investors.
Immediately following the August 25, 2015 meeting, Buyer contacted numerous investors to obtain third-party financing for the purchase of Target. In September 2015, Buyer obtained a non-binding commitment letter from Third-Party Investor — to support Buyer’ acquisition of Target. Buyer continued to solicit other third parties to participate in the purchase of Target as investors and/or strategic partners.
On September 4, 2015, Buyer submitted a proposed binding letter of intent to Sellers for the acquisition of Target.
On October 26, 2015, One of Sellers had a dinner meeting in Dallas, Texas with Buyer. Sellers represented for a second time that Sellers had a close relationship with Competitor executives and would strike a deal with Competitor to neutralize Target’s primary competition in the digital marketing sector.
On November 2, 2015, Sellers represented for a third time to Buyer, via email, that, by virtue of his relationship with Competitor’s executive team, Sellers were on the verge of reaching an agreement with Competitor that would virtually eliminate Target’s competition in the digital marketing sector.
On November 9, 2015, Sellers represented to Buyer for a fourth time that Sellers were on the verge of closing a deal with Competitor that would have game-changing implications for the growth of the company.
Buyer and Sellers executed the letter of intent on November 11, 2015. The letter of intent included a provision that Buyer’ obligation to complete the purchase of Target was subject to satisfactory due-diligence review of Target by Buyer and their lenders. The letter of intent obligated Sellers and Buyer to negotiate in good faith toward a definitive stock purchase agreement —and other documents incident to such purchase agreement—in conformance with guidelines provided in the letter of intent.
In December 2015, Buyer worked diligently with counsel to draft legal documents necessary for the closing of the purchase of Target. Sellers and Buyer negotiated and traded revisions to the definitive stock purchase agreement throughout January 2016. Although Buyer considered many of Sellers’ revision requests unreasonable or a deviation from industry standard, Buyer remained ready, willing, and able to consummate the purchase of Target.
By February 2016, negotiations broke down due to Sellers’ increasing demands regarding employment agreements, salaries for Sellers, and post-closing income tax distributions. Despite Sellers’ outward bad faith, Buyer had significant time and resources invested in the purchase of Target and thus were still ready, willing, and able to consummate the purchase of Target.
On March 1, 2016, Sellers and Buyer extended the exclusivity provision to March 15, 2016.
Sellers were never able to reach a deal with Competitor and Sellers ultimately sold Target to another buyer. Buyer then demanded payment from Sellers for fees incurred in connection with the purchase of Target. Sellers refused, and the dispute ended up in a federal district court in Kansas.
In the lawsuit Buyer claimed that Sellers negligently misrepresented that Sellers could reach an agreement with Competitor that would virtually eliminate Target’s competition in the digital marketing sector. Buyer claimed that Seller’s competition representation was a material factor in Buyer pursuing this deal.
Sellers early in the litigation asked the court to dismiss the claim, arguing that Buyer could not legally rely on Sellers competition representation since Buyer had the right under the letter of intent to conduct due diligence to determine for itself if Sellers competition representation was true.
The court disagreed, saying that under applicable Kansas law that it would be reasonable for Buyer to rely on Sellers competition representation unless Buyer knew or had reason to know of facts which made Buyer’s reliance unreasonable; which the court said was a question better resolved later when the court could consider all the facts surrounding Buyer’s decision to enter into the letter of intent and consummate the acquisition of Target.
This case is referred to as Cinema Scene Marketing & Promotions, Inc. v. Calident Capital, LLC, Case No. 16-2759-JAR, United States District Court, D. Kansas (February 9, 2018).
Comment. This case is a reminder to sellers to not overpromise when selling a business.
A seller can minimize seller’s exposure for optimistic statements made to buyer during negotiations, by keeping overly optimistic representations out of the seller’s definitive purchase agreement representations and providing in the purchase agreement an acknowledgement by buyer that buyer is only relying upon the seller’s representations contained in the purchase agreement.
By the way, the idea of a target talking to a competitor to reduce competition raises potential antitrust concerns. Talk to a competent antitrust lawyer before agreeing to go down that road.
By John McCauley: I help people start, grow, buy and sell their businesses.
Telephone: 714 273-6291
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