Explore the importance of forum selection clauses in M&A deals. Learn from the case of Robson v. Duckpond LTD. where a forum selection clause determined the location for resolving disputes over a buyer’s promissory note in a company acquisition.
October 26, 2019
Introduction:
When a company is acquired, it’s essential to decide where any potential disputes will be resolved. This is usually outlined in the purchase agreement. The buyer often prefers a convenient location, often where the target company operates.
On the other hand, if the seller is taking back a buyer’s promissory note as part of the deal, they might want the option to enforce it in a location convenient to them in case of default.
The Deal:
In this specific case, the buyers were based in Cyprus and bought a company from a seller in Missouri. They ran the company from Cyprus, and their stock purchase agreement had a forum selection clause that favored Cyprus.
As part of the deal, the seller received a $3.2 million note with a forum selection clause specifying Missouri.
The Lawsuit:
Unfortunately, the buyers weren’t satisfied with the post-closing performance of the acquired company and stopped making payments on the note. In response, the seller filed a lawsuit against the buyers and the old company to collect the outstanding balance in a Missouri federal district court.
The buyers tried to argue that the forum selection clause in the stock purchase agreement (Cyprus) should apply, as they planned to file a counterclaim for fraud in Cyprus, and this was connected to the seller’s claim against them.
However, the court ruled in favor of enforcing the Missouri forum selection clause, stating that there was no legal reason not to. Therefore, the buyers will have to deal with the note collection in Missouri and likely pursue their fraud claim in Cyprus.
Comment:
The court emphasized that challenging a forum selection clause can be an uphill battle and noted that these clauses generally prevail, except in unusual circumstances.
In typical cases where the purchased company’s performance doesn’t meet expectations, it’s best for both parties to agree on a single forum for dispute resolution in both the note and the purchase agreement. In this case, that would have been a wise choice.
Case Reference:
This case is referred to as Robson v. Duckpond LTD., No. 4:19-CV-1862 CAS., United States District Court, E.D. Missouri, Eastern Division (October 21, 2019)
By John McCauley: I help companies and their lawyers minimize legal risk associated with small U.S. business mergers and acquisitions (transaction value less than $50 million
Email: jmccauley@mk-law.com
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Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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