Delaware Court of Chancery holds that the seller subsidiary, a party to a take-or-pay supply agreement with the target, is subject to the stock purchase agreement Delaware forum selection clause, even though it was not a party to the SPA.
M&A Stories
October 13, 2021
Introduction:
It is very common in acquisition agreements to agree to what courts will hear legal disputes. And sometimes, the agreement applies to agreements involving related companies.
The Deal:
In this case, a Chicago-based multinational food processing and commodities trading corporation acquired a company that manufactures citrus products for $175 million in cash. As part of the deal, a subsidiary of the Houston-based seller agreed to purchase a minimum quantity of the product from the acquired company under a take-or-pay supply agreement. The buyer and seller were not part of this supply agreement.
Forum Selection Clause:
The stock purchase agreement, involving the buyer and seller, stipulated that all disputes related to both the stock purchase and supply agreements would be resolved in Delaware. However, the supply agreement itself did not have a forum selection clause. The seller’s subsidiary was not part of the stock purchase agreement.
The Lawsuit:
After the acquisition, issues arose concerning the supply agreement between the buyer and seller. The seller and its subsidiary sued the buyer and the acquired company in a Texas Court. Subsequently, the buyer and acquired company requested that the Delaware Court of Chancery enforce the forum selection clause in the stock purchase agreement and order the dispute to be resolved in Delaware. The Delaware court agreed and directed the resolution of the supply agreement dispute in a Delaware court.
This case is referred to as Florida Chemical Company, LLC v. Flotek Industries, Inc.. C.A. No. 2021-0288-JTL, Court of Chancery of Delaware, (Submitted: July 21, 2021. Decided: August 17, 2021)
Comment:
This case illustrates how a company can be compelled to resolve a dispute in Delaware based on a forum selection clause in an agreement they didn’t directly sign. The buyer could have saved time and money by including a Delaware forum selection clause in the supply agreement as well.
By John McCauley: I help people manage M&A legal risks.
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