Strategic Buyer’s Refusal to Sign APA Authorized by LOI

Introduction

The Mississippi high court held that an LOI gave a strategic buyer the right to not sign an APA.

The deal

The seller started operations as a Mississippi hospice in June of 2007. The founder and owner ran it until December of 2008. He then transferred the company to his sister, mom and a doctor.

At the same time the seller hired Linda to run the hospice as director of nursing and administrator. None of the owners were involved in the daily operations of the hospice.

Under Linda’s leadership, profits and revenues grew by substantial amounts. Of importance, the patient census grew from six to fifty patients by the end of 2010.

A broker asked the seller in November 2010 whether the seller was interested in selling the business to the buyer, a large Louisiana based health care company, which had a hospice segment that operated hospices nationally.

This led to the seller and buyer signing a LOI in December of 2010.  The LOI was nonbinding and conditioned on the entry into a definitive APA. The expected purchase price was $1.75 million.

The seller and buyer shot for a February 28, 2011 closing date. However, the buyer could not come to terms of employment with Linda who decided to quit the seller if the deal went through and go work for a competitor.

Furthermore, the buyer learned that many of the other seller employees would probably walk with Linda and possibly take patients. To save the deal, the buyer offered Linda a $25K bonus if she would sign a covenant not to compete. Linda would not do so, and so the buyer pulled the deal.

The seller then worked out a deal with another buyer to sell for $1.2 million. They closed but only for $500K because the seller patient census which was 50 patients back when the LOI was signed had dropped to 11 patients.

The lawsuit

The seller sued the buyer in a Mississippi court accusing it of breaching the LOI by not going through with the deal and under several other legal theories which were all rejected by the trial court. The seller appealed to the Mississippi Supreme Court.

There the seller conceded that the buyer did not breach the LOI because the buyer’s LOI obligation to buy the seller’s business was conditioned upon signing an APA; which did not happen.

Instead, the seller argued that the buyer’s conduct before the expected February 28, 2011 closing date implied buyer’s agreement to buy the seller. Primarily the seller pointed to a buyer meeting with the seller employees on February 1, where the buyer said that it was buying the hospice and taking over on March 1. The court rejected this argument finding no evidence that the buyer’s conduct implied that it had agreed to buy the seller. Instead, the evidence showed that the buyer continued in the last month to perform due diligence to see if there was a deal that made sense.

This case is referred to Gulf Coast Hospice LLC v. LHC Group Inc.No. 2017-CA-01634-SCT, Supreme Court of Mississippi, (June 6, 2019)

Comment

Mississippi does imply in every contract an implied covenant of good faith and fair dealing. The court found no bad faith on the buyer’s part in deciding not to sign an APA in the face of Linda’s refusal to sign a noncompete and the risk of the loss of other seller employees and patients.

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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