Explore the intricate world of M&A legal challenges in our latest blog post, “Failed IT Business Deal: Seller’s Lawsuit Against Buyer’s Lender Dismissed.” Delve into the complexities and risks faced in business transactions as we dissect a significant case arising from the unsuccessful sale of a Houston-based information-technology company. Uncover the pitfalls, delays, and legal nuances that shaped this narrative, offering valuable insights for businesses navigating similar waters. From breach-of-contract damages to the intricacies of third-party-creditor beneficiary claims, our M&A story sheds light on crucial aspects of the deal-making process. Join us on this legal journey, where every detail matters, and discover essential lessons for a resilient business strategy.
M&A Stories
July 22, 2018
In a significant case stemming from the unsuccessful sale of a Houston-based information-technology company, commonly referred to as the target, a recent court ruling sheds light on the complexities and risks in business transactions.
The target’s seller had entered into an agreement to sell their target stock to another Houston-based information-technology company, hereafter known as the buyer. To secure financing for the acquisition, the buyer’s owner engaged with a bank specializing in federal Small Business Administration (SBA) loans, citing the urgency of closing the deal by year-end.
Despite assurances from the bank, the loan process faced repeated delays over fourteen months. Frustrated by the continuous setbacks, the buyer’s owner eventually sought alternative financing, resulting in the deal’s collapse. By the time of the trial in March 2013, the target had ceased operations and had no remaining employees.
The buyer’s owner alleged that the bank failed to give the transaction the attention it required, making promises and subsequently offering explanations for each unmet commitment. The protracted delays and uncertainty negatively impacted the target’s operations, causing a decline in morale and employee departures.
In October 2009, the target’s seller initiated legal action against the bank, claiming to be a third-party-creditor beneficiary based on the loan commitment letters. The trial jury awarded the target’s seller $1 million in breach-of-contract damages in 2013. However, the Texas Supreme Court overturned this decision, ruling that the bank and the buyer did not intend to confer a direct benefit on the target’s seller.
According to the court, the loan-commitment letters’ references to financing the buyer’s purchase did not unequivocally express an intent to benefit the seller. As a result, the target’s seller was deemed not to be an intended third-party beneficiary, precluding them from suing the bank for breach of contract.
This case highlights the significant risk involved in business sales, emphasizing the importance of securing financing certainty alongside favorable pricing. The timing of this failed deal, coinciding with the unfolding financial crisis, underscores the challenges businesses faced during that period.
Case Reference:
First Bank v. Brumitt, No. 15-0844, Supreme Court of Texas, (Opinion delivered: May 12, 2017)
By John McCauley: I help people start, grow, buy and sell their businesses.
Email: jmccauley@mk-law.com
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