Read about a recent case where the Delaware Court of Chancery refused to enforce a forum selection clause in a merger agreement due to a lack of consent. Learn how the sales manager’s lack of access to the full agreement affected the court’s decision.
M&A Stories
June 1, 2021
Introduction:
In a recent case, the Delaware Court of Chancery refused to enforce a forum selection clause in a merger agreement. The clause was contested by a former sales manager of a California-based target company who had signed the agreement without being given access to the full document.
The Deal:
The case involved a strategic merger and acquisition of a copier and printer company based in California. The sales manager, who held a fraction of class B target stock, signed the signature page of the merger agreement without being provided with the complete agreement. Unbeknownst to him, the agreement included a 5-year noncompete, nonsolicitation, and a forum selection provision requiring disputes to be resolved in Delaware.
After the deal’s closure, the sales manager received $136K in cash and $80K in buyer equity. Other stockholders received varying consideration amounts, ranging from $2 million to $22 million.
The Lawsuit:
The target sales manager worked for the target company for approximately two years post-closure before leaving to join a start-up competing with the target. The buyer sued him in the Delaware Court of Chancery, alleging breach of the 5-year noncompete and nonsolicitation covenants, claiming that he solicited a target employee for the competing business.
The sales manager, in response, moved to dismiss the complaint for lack of personal jurisdiction. The buyer argued that the Delaware forum selection provision in the merger agreement conferred personal jurisdiction over the sales manager.
Court Ruling:
The court dismissed the buyer’s complaint against the target sales manager, citing a lack of “meeting of the minds” concerning the Forum Selection Provision. The sales manager had never reviewed or been informed of this provision before signing the agreement. The court found the provision to be akin to a “contract of adhesion,” where one party, in a weaker position, adheres to the contract with little choice over the terms.
This case is referred to as Ubeo Holdings, LLC v. Drakulic, C.A. No. 2020-0669-KSJM, Court of Chancery of Delaware, (April 30, 2021).
Comment:
While generally, not reading a contract before signing does not excuse one from its obligations, this case serves as a reminder for buyers and majority owners of target companies. Ensure that all parties have a reasonable opportunity to review the contract with experienced acquisition lawyers before signing to avoid similar issues.
By John McCauley: I help people manage M&A legal risks.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
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Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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