Dive into the complexities of M&A forum selection clauses with our latest blog post, which analyzes a case where a buyer’s fraud suit against a seller and multiple managers and owners was partially dismissed in Delaware. The court ruled in favor of the seller and four of the seller’s Delaware-based owners, while dismissing the suit against ten defendants who were either non-Delaware entities or residents. This post is essential for legal professionals and M&A enthusiasts aiming to understand the nuances and challenges of litigating across multiple jurisdictions.
M&A Stories
June 4, 2024
When it comes to M&A transactions, it’s standard practice for buyers and sellers to decide on a specific forum for any litigation that may arise. Often, that forum is Delaware, a popular choice due to its well-established body of corporate law. But what happens if the buyer claims fraud by several of the seller’s managers and owners who did not consent to litigate in Delaware and have no significant ties to the state?
This issue arose in a case involving an $88 million acquisition of a defense contractor. The buyer and seller had agreed that any disputes related to the acquisition would be resolved in Delaware courts. Post-closing, the buyer alleged that they had overpaid significantly due to fraudulent financial statements, accounting practices, and undisclosed issues with a major customer.
The buyer filed a lawsuit in the Delaware Superior Court’s complex commercial litigation division against the seller and fourteen other defendants, including managers and owners of the seller. However, ten of these defendants moved to dismiss the case against them, arguing they could not be sued in Delaware because they had neither signed the purchase agreement nor had the necessary connections to Delaware.
The court sided with these ten defendants. The decision was based on the fact that none of these defendants had agreed to the forum selection clause in the purchase agreement, and they lacked other legal ties to Delaware. This group included four entities not organized under Delaware law and six individuals residing outside Delaware.
As a result, the court dismissed these ten defendants from the lawsuit, which complicates the buyer’s legal strategy. Despite the possibility that some of these defendants might be “deep pockets,” the buyer is now compelled to file separate lawsuits in various states, including Illinois, Texas, Colorado, Oregon, and Florida.
This case highlights the complexities and potential limitations of forum selection clauses in M&A agreements, especially when fraud and multiple defendants across various jurisdictions are involved. Buyers should be aware that such clauses might not bind all parties involved, and pursuing litigation may require navigating multiple legal landscapes.
Case Reference: Chumash Capital Investments, LLC v. Grand Mesa Partners, LLC C.A. No. N23C-07-209 SKR CCLD., Superior Court of Delaware, (Submitted: February 22, 2024, Decided: April 10, 2024).
Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.
Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners management, as well as professionals who share an interest in the complexities of M&A law.
By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
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Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles
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