Explore the Mississippi high court’s ruling on a strategic buyer’s refusal to sign an Asset Purchase Agreement (APA) after signing a Letter of Intent (LOI) in this M&A legal blog. Delve into the background, hurdles, outcome, and legal action of the case.
June 25, 2019
M&A Stories
Introduction:
In a recent case, the Mississippi high court ruled on the refusal of a strategic buyer to sign an Asset Purchase Agreement (APA) after signing a Letter of Intent (LOI).
The Background:
The story unfolds with a Mississippi hospice, which commenced operations in June 2007. After a year, the founder transferred ownership to his sister, mother, and a doctor. Concurrently, Linda was hired as the director of nursing and administrator, managing daily operations.
Under Linda’s leadership, the hospice saw substantial growth in profits and revenues, with patient numbers increasing from six to fifty by the end of 2010. In November 2010, a broker approached the seller, asking if they were interested in selling to a Louisiana-based healthcare company. This led to the signing of a nonbinding LOI in December 2010, with an anticipated purchase price of $1.75 million and a planned closing date of February 28, 2011.
The Hurdles:
Challenges arose when negotiations hit roadblocks. The buyer couldn’t reach an employment agreement with Linda, who planned to quit and work for a competitor if the deal proceeded. Additionally, concerns emerged that other seller employees might follow Linda, potentially taking patients with them. To salvage the deal, the buyer offered Linda a $25,000 bonus if she agreed not to compete. Linda declined, prompting the buyer to abandon the purchase.
The Outcome:
Subsequently, the seller sold the hospice to another buyer for $500,000, as patient numbers had dwindled from 50 to 11.
Legal Action:
The seller filed a lawsuit against the buyer in Mississippi, alleging breach of the LOI and other legal claims. However, the trial court rejected these claims, leading to an appeal to the Mississippi Supreme Court.
In the Supreme Court:
During the appeal, the seller acknowledged that the buyer had not breached the LOI, as the buyer’s commitment to purchase was contingent on signing an APA, which never occurred. Instead, the seller argued that the buyer’s actions before the expected closing date implied an agreement to buy. Specifically, they pointed to a meeting where the buyer stated its intent to take over on March 1. The court dismissed this argument, citing insufficient evidence of the buyer’s intent to purchase. It was evident that the buyer continued its due diligence to assess the feasibility of the deal.
Key Takeaway:
Mississippi law implies a covenant of good faith and fair dealing in contracts. In this case, the court found no evidence of bad faith on the buyer’s part when deciding not to sign an APA, considering Linda’s refusal to sign a noncompete and the potential loss of employees and patients.
Case Reference:
Gulf Coast Hospice LLC v. LHC Group Inc., No. 2017-CA-01634-SCT, Supreme Court of Mississippi, (June 6, 2019)
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
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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