Signing closing documents before closing acquisition results in costly litigation

In 2016, the parties negotiated a stock purchase agreement by which Seller would sell Target, a car dealership, to Buyers and another colleague in two phases. First, Buyers and their colleague were to purchase 21% of Target for $500,000 cash. Second, and only after Target’s debt was paid down to a specific amount, Buyers and their colleague would acquire the remaining 79% for $3 million pursuant to a promissory note secured by the shares.

The closing for phase one was to occur May 31. Deliverables at closing included a shareholders’ agreement, employment agreements for Buyers, their colleague and Seller, a lease amendment, stock certificates, and the purchase price. However, on May 31, Buyers and their colleague still hadn’t secured financing to pay the purchase price and needed additional time to do so.

As a result, on that date, the parties executed the stock purchase agreement and closing documents, Seller signed the share certificates, and all were placed in escrow with Seller’s counsel pending payment. The parties disputed whether and to what extent Seller agreed to extend the time for payment. Buyers claimed that Seller granted them an undefined extension and then refused one of Buyers’ offer to write a check on June 27. Seller expressly rescinded (that is, cancelled) the entire transaction by email later that day (June 27). Buyers tendered a cashier’s check July 18; Seller rejected it.

Buyers sued Seller for breach of contract in a Missouri trial court, asking the court to order Seller to complete the sale. After evidence was submitted, but before submission to the jury, Seller argued that even if Buyers’ evidence that Seller breached the stock purchase agreement was true, Buyers had no right to compel Seller to complete the sale. The trial court agreed, concluding that Buyers had an adequate remedy to seeks monetary damages from Seller for his breach of the stock purchase agreement.

Buyers appealed to an intermediate appellate court. That court ruled for Buyers.

The appellate court said that the general rule of the law of contracts is well settled that, in certain cases, a breach of contract may give rise to two remedies. One is an action at law for monetary damages for the breach; the other is a suit in equity for the specific performance of the contract.

The appellate court held that Buyers’ evidence of breach of the stock purchase agreement (if believed by a jury) gave Buyers a right to compel Seller to complete the sale because the evidence showed that Buyers’ control of the dealership was a rare opportunity and Buyers could not be made whole by monetary damages.

This case is referred to as Payne v. Cunningham, Nos. ED 105712 and ED 105850., Missouri Court of Appeals, Eastern District, Division Four (Filed: April 24, 2018).

Comment. In 20/20 hindsight, Seller and Buyers would have saved themselves a lot of grief by waiting to sign the closing documents until Buyers had lined up its financing.

By John McCauley: I help people start, grow, buy and sell their businesses.



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Posted in breach of contract, closing, damages, specific performance, stock purchase agreement

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