Explore the intricacies of M&A negotiations and legal pitfalls in our latest blog post. Delve into a cautionary tale highlighting the consequences of breaching exclusivity provisions in LOIs. Gain valuable insights into industry-specific legal disputes and learn how to navigate potential pitfalls to safeguard your M&A transactions.
M&A Stories
May 29. 2018
In a recent legal case, a company aiming to sell its business found itself entangled in a court battle with a potential buyer due to a breach of an exclusivity provision outlined in a letter of intent (LOI). Here’s a breakdown of the events:
The parties involved were two scrap metal recycling companies, with significant operations based in Nashville, Tennessee. Discussions commenced in December 2015, marked by the execution of a Confidentiality and Non-Disclosure Agreement, signaling the buyer’s interest in acquiring the seller’s Nashville assets and business operations. Subsequently, on January 20, 2017, they entered into an LOI. While the LOI wasn’t binding concerning the specific terms of the potential acquisition, it contained a critical binding clause: an exclusivity provision granting the buyer exclusive negotiating rights until May 20, 2017.
The proposed purchase price stood at $27 million.
However, on April 27, 2017, the president of the seller engaged in a meeting with a competitor, who expressed interest in acquiring the seller’s business. During this encounter, the competitor inquired about the seller’s price, to which the seller responded with a figure of $30 million.
Despite ultimately not proceeding with either the buyer or the competitor, news of this meeting reached the buyer, prompting legal action. The buyer alleged damages resulting from the seller’s breach of negotiating exclusivity by entertaining discussions with a third party during the stipulated period.
The seller defended its actions, asserting that the conversation with the competitor didn’t constitute negotiation for the sale of the business and therefore didn’t breach the LOI. However, the court ruled otherwise:
The purpose of the exclusivity provision is to prevent the seller from engaging in any discussions, regardless of their informality, that could influence its negotiations with the buyer. Disclosing a potential purchase price to a third party during the exclusivity period precisely fits the scenario that could have hindered negotiations and undermined the spirit of the agreement.
This case underscores an essential lesson in M&A negotiations. While LOIs are commonly perceived as nonbinding, they often contain crucial binding provisions that can significantly impact the parties involved. One such provision typically prohibits sellers from engaging in discussions with other potential buyers during an exclusivity period, which is pivotal in negotiating and finalizing a deal.
In conclusion, the seller’s breach of the LOI’s exclusivity provision serves as a stark reminder of the legal ramifications that can arise from seemingly innocuous actions during M&A negotiations.
Case Reference:
PSC Metals, Inc. v. Southern Recycling, LLC, No. 3:17-cv-01088, United States District Court, M.D. Tennessee, Nashville Division (March 30, 2018).
By John McCauley: I help people start, grow, buy and sell their businesses.
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
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