Seller Can’t Use LOI to Stop Buyer from Soliciting its Employees

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March 12, 2020

Introduction

Buyers and privately held sellers generally use letters of intent in business acquisitions. They primarily serve as a statement of the key business terms of the deal and are nonbinding. They also usually contain binding terms such as when and how to terminate negotiations, confidentiality, and the hiring and firing of seller employees.

Unfortunately, buyers and sellers sometimes don’t appreciate the legal risks involved in using LOIs. As a result, they often draft and sign LOIs without legal help. And this can lead to litigation if the deal does not close.

The deal

This deal involved competitors in the mortgage lending business. In this case the parties went through 5 drafts of an LOI that was never signed. The main sticking point was the buyer’s refusal to agree to not solicit seller’s employees. Buyer’s legal counsel drafted the drafts and seller’s CEO (a nonlawyer) negotiated and proposed modified language which included a no solicitation of seller employee clause.

The lawsuit

The deal never happened. The seller sued the buyer in a Minnesota federal district court. It accused the seller of soliciting its employees in violation of the LOI and asked the court to issue a preliminary injunction against the buyer ordering it to not solicit seller’s employees pending the resolution of the litigation.

The court said that it would not issue a preliminary injunction because the seller was not likely to win the lawsuit. Specifically, the court said that the buyer had no obligation to not solicit seller employees because no LOI was signed by the parties.

The only version of the LOI signed by the seller was a version prepared by buyer. Seller took this LOI draft; added the no seller employee solicitation provision; and signed it. The court said that the seller’s modification of the buyer draft LOI and seller’s signature of the modified LOI amounted to a seller rejection of the buyer version of the LOI and a counteroffer by the seller of the buyer drafted LOI with seller’s modification. However, the buyer never signed this modified LOI and thus never accepted this counteroffer.

Furthermore, the LOI had the usual breakdown of binding and nonbinding provisions, and the seller’s proposed non solicitation of employee language was not part of the binding provisions section of the LOI.

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).  

Comment

The seller would have been better served getting a lawyer involved to make sure that the non-solicitation provision was including as a binding provision; and that the buyer and seller sign the desired version of the LOI.

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 

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Posted in letter of intent, modification as counteroffer, no solicitation of seller employees, nonbinding Tagged with: ,

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