Explore a legal case study where a buyer lost a substantial claim due to a seller’s breach of exclusivity in an M&A deal. Learn key takeaways and legal insights.
M&A Stories
March 19, 2019
Introduction:
When selling a privately-owned business, the initial document often signed is a letter of intent (LOI). This document outlines key sale terms but also contains binding commitments, such as an exclusive negotiation period.
The Story:
In our case, two scrap metal dealers are at the center, as previously discussed in our blogs: “Seller of scrap metal business waived Buyer’s breach of a nondisclosure provision” and “Court finds that seller of business may have violated an LOI exclusivity provision.”
The prospective buyer aimed to purchase the seller’s Nashville scrap metal operations. On January 20, 2017, they signed an LOI with a purchase price of $28 million. Despite the LOI stating that these terms were nonbinding, it also prohibited the seller from negotiating with other parties until May 20, 2017.
Legal Dispute:
Unfortunately, the deal fell through, and the buyer accused the seller of negotiating with a competitor during the exclusive negotiation period. This led to a lawsuit in a Tennessee federal district court.
The court found that the seller had breached the exclusivity provision and awarded the buyer $90,000 in reliance damages incurred during the negotiation. However, the buyer’s claim for $21.6 million in lost profits was denied because the parties hadn’t finalized the deal’s business terms, making it unforeseeable.
Key Takeaway:
To mitigate such risks, buyers can protect themselves by including liquidated damages clauses in the LOI, specifying compensation if the exclusivity provision is breached. The amount must be reasonable, but something significantly higher than $90K would probably be enforceable.
Case Reference:
PSC Metals, Inc. v. Southern Recycling, LLC, PSC Metals, Inc. v. S. Recycling, LLC, 371 F. Supp. 3d 443 (M.D. Tenn. 2019).
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
Legal Disclaimer
The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.
Recent Comments