A buyer of a company wants the purchase agreement to specify that a post-closing dispute will be litigated in a state or country convenient to it. Often both sides can agree that the most convenient forum is where the target business is located.
On the other hand, a seller of a business taking back buyer’s promissory note as part of the purchase price, may want the right to go into a court convenient to the seller to enforce the note in the event of a default.
In this case the buyers were based out of Cyprus and purchased the target company from the seller who was based out of Missouri. The buyers operated the company out of Cyprus and the stock purchase agreement between the buyers and the seller had a Cyprus foreign selection clause.
As part of the deal the seller was given a $3.2 million note with a Missouri forum selection clause.
Apparently, the buyers were not happy with the post-closing performance of the target company and stopped making note payments to the seller. The seller sued the buyers and his old company to collect the balance due on the note in a Missouri federal district court.
The buyers tried to convince the court to overlook the note’s Missouri forum selection clause and go with the stock purchase agreement’s Cyprus forum selection clause. The buyers argued that they were going to file a counterclaim against the seller for fraud in Cyprus because of the Cyprus form selection clause, and thus seller’s note collection claim should be litigated in Cyprus too since the seller’s claim against the buyers is connected to the buyers’ claim against the seller.
The court disagreed saying that there was no legal reason for not enforcing the note’s Missouri forum selection clause. That means the buyers will have to fight the note collection in Missouri and probably prosecute its fraud claim in Cyprus.
This case is referred to as Robson v. Duckpond LTD., No. 4:19-CV-1862 CAS., United States District Court, E.D. Missouri, Eastern Division (October 21, 2019)
The court said it is an uphill battle to challenge a forum selection clause: “the practical result is that forum-selection clauses should control except in unusual cases.”
It is common for the buyer to stop making payments on a purchase money note if the purchased company’s performance does not match up to seller’s representations in the purchase agreement, negotiations or in the data room. In such a case the buyer would want to resolve any disputes between the buyer and the seller in one forum. Meaning that this deal’s note and purchase agreement should both have selected the same forum for dispute resolution.
By John McCauley: I help companies and their lawyers minimize legal risk associated with small U.S. business mergers and acquisitions (transaction value less than $50 million
Telephone: 714 273-6291
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