Explore the complexities of M&A negotiations and the legal implications of buyer’s duty in this informative blog post. Learn from a real-life case reference.
M&A Stories
May 13, 2019
Introduction:
Selling a business involves several stages. A potential buyer typically seeks initial financial details, often preceded by a confidentiality agreement. Subsequently, both parties might agree on a purchase price and terms, summarized in a letter of intent. It’s important to note that this document usually doesn’t bind either party, and a definitive acquisition agreement is required for a binding commitment. There may be some binding terms, like an exclusivity period.
The Journey:
After this, the buyer conducts due diligence, and negotiations proceed toward an acquisition agreement. However, many deals that reach the letter of intent stage don’t ultimately close, for various reasons.
The Challenge:
In some cases, if negotiations are terminated, the seller might feel damaged, worrying about the impact on its reputation among prospective buyers, employees, customers, or suppliers. This could lead to the temptation to sue the prospective buyer for breaching a duty to negotiate in good faith.
The Case:
In a specific case, a tech company seller and a prospective buyer signed a confidentiality agreement, clearly stating that neither party was committed to a transaction or continued negotiations. Due diligence followed, and they signed a letter of intent, explicitly stating that its terms weren’t binding. The deal involved purchasing the tech company’s assets for $24 million, with a potential earnout of $10 million.
Unexpected Twist:
As negotiations progressed, the prospective buyer expressed interest in buying the tech company’s stock instead of its assets. Later, it decided not to proceed with the deal.
Legal Outcome:
The seller sued the buyer for damages, alleging a breach of the duty to negotiate in good faith. However, the court ruled in favor of the buyer, emphasizing that neither the confidentiality agreement nor the letter of intent imposed such a duty.
Conclusion:
While the seller’s frustration is understandable, the legal relationship was governed by the agreement’s terms. To avoid such issues, parties can consider explicitly including a duty to negotiate in good faith in their agreements. However, in this case, Pennsylvania law did not imply such a duty. Some states, such as Delaware or California, don’t require an express duty to negotiate in good faith in a written document. The duty is implied.
Case Reference:
This case is referred to CKSJB Holdings, LLC v. EPAM Systems, Inc., Civil Action No. 18-217, United States District Court, E.D. Pennsylvania, (March 29, 2019)
By John McCauley: I help businesses minimize risk when buying or selling a company.
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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