Explore a recent case where a seller contested the enforceability of a Delaware forum selection clause in an asset purchase agreement (APA) and the subsequent ruling by the 9th Circuit Court of Appeals in the realm of mergers and acquisitions (M&A).
September 11, 2019
M&A Stories
Introduction:
In the realm of mergers and acquisitions (M&A), the choice of Delaware courts for dispute resolution is a common preference due to their reputation for competence. This preference often leads to the inclusion of Delaware forum selection clauses in M&A agreements. However, disputes may arise post-closing, and in some cases, challenges are made against these forum selection clauses. In this blog, we explore a recent case where a seller contested the enforceability of a Delaware forum selection clause in an asset purchase agreement (APA) and the subsequent ruling by the 9th Circuit Court of Appeals.
The M&A Deal:
In this case, the buyer acquired the assets of an Idaho-based business, with the transaction involving both cash and an earn-out agreement. Notably, the asset purchase agreement (APA) included a Delaware forum selection clause.
The Legal Battle:
Following the completion of the deal, the seller initiated legal proceedings against the buyer in an Idaho federal district court, seeking to recover amounts allegedly owed under the APA. In response, the buyer invoked the forum non conveniens doctrine, requesting the court to dismiss the action. They argued that the APA’s Delaware forum selection clause required the seller to pursue the dispute in Delaware.
The seller, however, opposed this move, contending that the Delaware forum selection clause within the APA was unenforceable. They argued that it directly contradicted Idaho’s strong public policy as expressed by the state legislature. Idaho law explicitly declares such provisions, like the one in the APA, as “void,” considering them against the public policy of Idaho.
The Trial and Appeal:
The trial court initially rejected the seller’s argument. Undeterred, the seller took the case to the 9th Circuit Court of Appeals. In a significant ruling, the appellate court deemed the Delaware forum selection clause within the APA unenforceable. It did so by applying the federal forum non conveniens doctrine and concluding that the clause ran counter to Idaho’s robust public policy, as outlined in state law.
Key Takeaway:
Notably, the 9th Circuit’s decision aligns with recent rulings in other federal circuits, including the District of Columbia, 2nd, 3rd, and 5th circuits. Moreover, it’s worth noting that four other states, namely Montana, North Dakota, Oklahoma, and North Carolina, share a similar legal stance with Idaho regarding the enforceability of such forum selection clauses.
Case Reference:
Gemini Technologies, Inc. v. Smith & Wesson Corp., No. 18-35510, United States Court of Appeals, Ninth Circuit (Filed: July 24, 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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