In 2010, Seller was an integrated design and manufacturing company specializing in the development, production, installation, repair, and servicing of heavy equipment for use by offshore energy companies in the Gulf Coast region. Seller was founded in 2002 and employed about seventy-five people at Seller’s headquarters in the Houston area.
Potential Buyer is a European company with international affiliates and subsidiaries. One of its affiliates manufactures and sells load handling equipment used in offshore oil exploration and production, including large subsea cranes. Potential Buyer became interested in acquiring Seller so that Potential Buyer could expand its ability to service and repair Potential Buyer’s subsea cranes and other equipment in the Americas.
On December 7, 2010, Potential Buyer and Seller entered into a letter of intent. The letter of intent memorialized Potential Buyer’s nonbinding proposal to acquire Seller’s assets for a price in the range of $18-25 million. This price range was subject to change based upon a valuation determined after appropriate due diligence had been conducted. The parties agreed to use reasonable efforts to negotiate and execute a definitive acquisition agreement on or before February 28, 2011.
The letter of intent included a binding confidentiality provision. It prohibited Potential Buyer from using Seller’s confidential information for any purpose other than evaluating the proposed acquisition, and it specifically prohibited Potential Buyer from using Seller’s confidential information to obtain a commercial, trading or other advantage.
Due diligence began in early February 2011. Potential Buyer team members made several trips to Seller’s Hempstead, Texas facility and interviewed Seller’s principals and employees. Potential Buyer also obtained extensive information from Seller, including Seller’s business plan, technical information, financial documents, customer lists, and equipment sales information.
In the end, Potential Buyer and Seller could not agree upon a purchase price and the deal never closed.
At around the same time, Potential Buyer started up a competing service center in Houston to be headed by an employee of Potential Buyer, who had participated in Potential Buyer’s due diligence review of Seller. The project’s staff also included at least three others from the due diligence team.
Seller became aware of Potential Buyer’s Houston expansion project when Seller learned that Potential Buyer was calling on Seller’s customers. Seller ultimately sold its business to another buyer for $22.5 million.
In December 2012, Seller filed a lawsuit against Potential Buyer in a Houston state court. Seller claimed that it received a depressed price for the sale of its business because of Potential’s Buyer’s unlawful use of Seller’s confidential information, in violation of the confidentiality provision in the letter of intent. A jury awarded Seller $12.7 million in damages, plus attorney fees of $430K.
Potential Buyer appealed to a Houston intermediate state appellate court. This court reversed the jury verdict holding that Seller had failed to prove that it had suffered any loss from Potential Buyer’s claimed actions.
The court noted that Seller did not know of any business that Seller lost to Potential Buyer; that Seller had no firsthand knowledge that Potential Buyer used Seller’s technical information, such as drawings, information, or designs in its Houston expansion project; and that Potential Buyer’s Houston service center did not work on the kind of heavy equipment that Seller did.
Furthermore, Seller’s forensic expert’s testimony that Seller suffered lost profits and diminished value were wrongfully based upon Seller’s bare assumptions of projected revenues and profits in its business plan, unsupported by objective facts, figures, or data establishing that these assumptions were objectively reasonable.
This case is referred to Cargotec Corporation v. Logan Industries, LLC, No. 14-17-00213-CV, Court of Appeals of Texas, Fourteenth District, Houston, (filed December 20, 2018).
Comment. This case illustrates the risk that a seller of a business runs when negotiating with a buyer in the same industry.
The reality is that the seller will have to disclose confidential information to a potential buyer so that the potential buyer can evaluate the business. The risk is that the deal may not materialize, and the potential buyer may use seller’s confidential information to compete against seller’s business. The right to sue the potential buyer for breach of a confidentiality provision helps but proving damages may prove challenging.
By John McCauley: I help people start, grow, buy and sell their businesses.
Telephone: 714 273-6291
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