Explore the legal complexities surrounding a buyer’s ability to approach seller’s employees despite a Letter of Intent (LOI) in business acquisitions. Understand the case of American Mortgage & Equity Consultants, Inc. v. Everett Financial, Inc. and key factors affecting the outcome.
March 12, 2020
Introduction:
In the context of business acquisitions, both buyers and privately held sellers commonly use documents called letters of intent (LOIs). These LOIs outline the main terms of the deal but are typically not legally binding. They also include binding details about ending negotiations, confidentiality, and even rules about hiring and approaching employees of the seller. However, not fully understanding the legal implications, parties sometimes create and finalize LOIs without proper legal guidance, which can result in legal disputes if the deal falls through.
The Scenario:
In a specific case involving competitors in the mortgage lending industry, the parties engaged in negotiations for a potential deal. They went through five different versions of an LOI, but none of these drafts were formally agreed upon. The central point of disagreement was the buyer’s reluctance to agree to refrain from recruiting the seller’s employees. The buyer’s legal team created the LOI drafts, while the seller’s CEO, who lacked legal expertise, negotiated and suggested changes. One of these changes was the addition of a clause preventing the buyer from soliciting the seller’s employees.
Legal Action:
Ultimately, the deal did not materialize, leading the seller to file a lawsuit against the buyer in a federal district court in Minnesota. The seller accused the buyer of violating the LOI by attempting to recruit its employees. The seller requested a preliminary injunction from the court, aiming to prevent the buyer from approaching its employees while the legal dispute was ongoing.
The Court’s Decision:
However, the court declined to issue the preliminary injunction. The court’s reasoning was that the seller was unlikely to win the lawsuit. Specifically, since no version of the LOI had been formally signed by both parties, the buyer had no legal obligation to avoid soliciting the seller’s employees.
Key Factors:
The only version of the LOI that the seller signed was a modified version prepared by the buyer. This modified LOI included the no-solicitation clause, added by the seller’s CEO. The court interpreted this action as the seller rejecting the buyer’s original version of the LOI and making a counteroffer by submitting the buyer’s draft with the added modification. Because the buyer never signed this modified LOI, there was no formal acceptance of the counteroffer.
Furthermore, the LOI had sections containing both binding and nonbinding provisions. The seller’s proposed non-solicitation clause was not part of the binding section.
Commentary:
In this situation, it would have been wiser for the seller to involve a legal professional. This would have ensured that the non-solicitation clause was included as a binding provision and that both parties signed the desired version of the LOI.
Case Reference:
This case is referred to as American Mortgage & Equity Consultants, Inc. v. Everett Financial, Inc., No. 20-cv-426 (ECT/KMM), United States District Court, D. Minnesota (February 28, 2020).
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).
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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