Very Risky for Seller to Give Buyer Keys to Business Before Closing


Seller signs binding LOI and then allows buyer to run the business without signing APA. Deal never closes.

M&A Stories

September 22, 2021


Most letters of intent are nonbinding. That is because a binding acquisition agreement is only agreed to after the buyer had done its due diligence on the business. At that point the purchase price might change and the parties are prepared to allocate responsibility for pre and post-closing risks of the target business between the buyer and the seller.

The deal

This deal was unusual in that the parties signed a “binding” letter of intent. The seller is a Nevada based business specializing in advertising data and lead generation. The seller offers first look access to video ad placements, and participates in advertising arbitrage, or the business of buying and selling advertisement space and opportunities.

The New York based buyer is a video advertising technology company. In March 2019 the buyer entered into a binding letter of intent (“LOI”) to acquire substantially all of the assets of the seller. In connection with the LOI, the buyer paid a good faith deposit to the seller of $200,000.

After executing the LOI, the seller helped the buyer integrate the seller’s assets into the buyer. The seller assisted the buyer with the integration at the buyer’s request. The seller also aided the buyer with developing its market participation and client base. The seller purportedly identified opportunities for market penetration, explained the buyer’s new role and services to the seller’s customers, and integrate human resources-related data. For example, the buyer specifically requested that the seller focus on accounts related to a buyer business, which was newly acquired by the buyer. The seller abandoned its own customers and arbitrage business in order to comply with the buyer’s request. The buyer kept all revenue generated by the seller’s efforts related to this new buyer business.

The buyer also requested that the seller shift its entire sales effort to the buyer’s new, not-yet launched buyer product in September 2019. The seller’s business development team also worked solely on pursuing and generating leads for this buyer product and then turned those over to the buyer, preventing the seller from working on any the seller-centered opportunities. The buyer directed the seller employees to develop the buyer relationships.

Throughout the Exclusivity Period of the LOI, the seller worked toward adapting to the buyer’s projected combined business strategy, to the detriment of its own revenue-generation and corporate financial well-being. By November 2019, the seller completely abandoned its arbitrage business, turned over its customers to the buyer and began exclusively using the buyer’s systems and platforms. In sum, the buyer compelled the seller to only pursue business opportunities for the buyer’s benefit, to shift its entire sales infrastructure to the buyer’s desired systems and remade its business model to focus on either the newly acquired buyer business or the new buyer product launch-depending on the buyer’s preference at the time.

During this time, the buyer represented to the seller that it was actively working to consummate the transaction. However, the buyer never drafted or finalized the acquisition documents and the closing never occurred. The buyer claimed that it backed out of the deal after discovering during due diligence that the seller’ projections were grossly inaccurate and misstated.

The lawsuit

The seller sued the buyer in a Delaware Superior Court for damages. The buyer asked the court to throw out the seller’s claim for unjust enrichment. The court refused to do so.

The buyer argued that the seller can not bring an unjust enrichment claim because the seller was also asking for damages for breach of the letter of intent. The court disagreed finding that claimed damages for the buyer’s unjust enrichment were separate and different its damage claims for breach of the letter of intent: “… (the seller) ,,, contends that it acted to … (the buyer’s) … benefit — without compensation — to make the expected ‘combination/integration go smoothly.’ Therefore, the LOI does not preclude an unjust enrichment claim because the LOI does not govern this aspect of the parties’ relationship.”

This case is referred to as Aureus Holdings, LLC v. Kubient, Inc., C.A. No. N20C-07-061 EMD CCLD, Superior Court of Delaware, (Submitted: May 24, 2021. Decided: August 6, 2021.)


It is common for the buyer and seller to agree to do a deal. But then there are usually months before the due diligence, acquisition agreements, and government and other third party approvals are completed before a closing can occur.

In the interim there is a strong temptation to act as if the deal is done. This case illustrates some of the risks associated with acting before closing as if a closing has occurred.

So, if the buyer and seller want a pre-closing operating arrangement, then they must enter into a comprehensive written agreement specifying the respective rights, duties, costs and benefits of the buyer and seller, in such pre-closing operating arrangement.

Better yet, don’t do a pre-closing operating arrangement. Just wait until the deal closes.

By John McCauley: I help people manage M&A legal risks.



Telephone:      714 273-6291 

Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles

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