Explore a real-life M&A transaction involving a wholesale distributor of candy and tobacco products. Delve into the complexities of change of control provisions, supplier consent, and the legal aftermath. Learn from the Musallam v. Ali case as we highlight the importance of clarity in M&A agreements.
M&A Stories
November 6, 2018
In this case, we explore a transaction involving the sale of a wholesale distributor specializing in candy and tobacco products. The company in question (Target) held crucial contracts with Supplier 1 and Supplier 2 for the direct purchase of tobacco products.
The story unfolds in April 2012 when the owner of the company (Seller) approached a rival convenience store distribution business (Buyer) to discuss the sale of Target’s stock. Unlike Target, Buyer lacked direct contracts with suppliers, obtaining tobacco products through intermediaries at higher costs.
A critical aspect of the deal was the change of control provision in Target’s agreements with suppliers. This provision stipulated that a change in ownership without prior supplier consent would result in the termination of the supply agreement.
Buyer and Seller agreed to terms, signing a letter of intent with an immediate closing date, subject to supplier preapproval. While Supplier 1 granted approval, Supplier 2’s consent was pending. A stock transfer and asset purchase agreement were executed, stating a $500K stock price, contingent on Supplier 2’s approval. If denied, the price would drop to $250K.
The agreement detailed that the value of furniture, fixtures, and equipment would be mutually agreed upon by both parties, with land and building values determined by appraisal before the July 1, 2013 closing date.
On June 28, 2013, Supplier 2 denied approval. Despite discussions to resubmit the application and a proposal to postpone the closing, an agreement couldn’t be reached. Seller did not attend the July 1 closing, leading to a lawsuit on July 2, claiming the purchase agreement was unenforceable.
The jury sided with Buyer, finding Seller obligated to sell and awarding Buyer $900K in lost profits damages. The trial court awarded attorney’s fees to Buyer. Seller appealed and lost at the intermediate appellate level. He then appealed to the Texas Supreme Court.
Seller contested the jury’s decision that the purchase agreement was valid, arguing that it was up to the trial judge to make that decision. The Texas Supreme Court sent the case back down to the intermediate appellate court to consider that argument.
Comment:
The case underscores the importance of clarity in M&A agreements of all the essential terms before signing the acquisition documents.
Case Reference:
Musallam v. Ali, No. 17-0762, Supreme Court of Texas (Opinion delivered: October 26, 2018).
By John McCauley: I help people start, grow, buy and sell their businesses.
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