Read about a recent M&A dispute where a buyer’s request for an injunction was denied due to the absence of ongoing arbitration. Learn how the court’s decision highlights the importance of precise contractual language. Case reference: NUMSP, LLC v. Etienne.
June 8, 2020
Introduction:
In business acquisitions, both buyers and sellers prefer resolving disputes after the deal closes through binding arbitration, a quicker and more cost-effective alternative to court litigation. However, initiating arbitration can sometimes cause delays. This can become problematic if a buyer needs court intervention to prevent a seller from violating confidentiality, nonsolicitation, or noncompetition terms while the dispute is unresolved.
Background:
In this case, a buyer acquired an IT consulting business in Louisiana that had been established by its owner in 1984. The acquisition took place at the end of 2018 for approximately $850,000, with an additional $150,000 earnout contingent on the acquired business achieving at least 80% of its 2018 revenue in 2019.
Dispute and Lawsuit:
The dispute arose when the buyer informed the seller in late 2019 that it wouldn’t pay the $150,000 earnout due to the 2019 revenue falling below 80% of the previous year’s revenue. Predictably, this disagreement led to a deteriorating relationship. The buyer accused the seller’s founder and others of damaging the business by engaging in unlawful competition that violated confidentiality, nonsolicitation, and noncompetition clauses in the transaction documents.
To address this, the buyer filed a lawsuit against the seller group in a federal district court in Manhattan. The buyer also sought a temporary restraining order (TRO) and preliminary injunction from the court, aiming to prevent the seller’s owner and associates from competing against the business until the dispute was resolved.
Legal Arguments:
The seller group responded by asking the court to deny the buyer’s request for a TRO and preliminary injunction. Instead, they urged the buyer to adhere to the binding arbitration clause as outlined in the asset purchase agreement. The buyer disagreed, contending that the agreement allowed it to seek injunctive relief through court action.
Court’s Decision:
Upon review, the court determined that the asset purchase agreement only permitted the buyer to pursue injunctive relief after initiating arbitration. As a result, the court denied the buyer’s request for a TRO and preliminary injunction since arbitration had not yet begun.
Conclusion:
In hindsight, a slight modification in the agreement’s wording could have given the buyer the ability to request a TRO and preliminary injunction from the court before initiating arbitration. The original phrasing allowed the buyer to “seek from a court an order to compel arbitration, or any other interim relief or provisional remedies pending an arbitrator’s resolution of any controversy or claim…” To provide this option earlier in the process, the agreement could have allowed the buyer to “seek from a court an order to compel arbitration, or any other interim relief or provisional remedies before initiating arbitration or pending an arbitrator’s resolution of any controversy or claim…”
Case Reference:
This case is referred to as NUMSP, LLC v. Etienne, No. 20-CV-2916 (RA, United States District Court, S.D. New York, (May 22, 2020).
By John McCauley: I help companies and their lawyers minimize legal risk associated with private business acquisitions.
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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