The asset purchase agreement gave the seller the right to terminate the asset purchase agreement if the FCC did not consent to the sale before a deadline. The seller’s termination of the deal 6 months after the deadline was valid.
M&A Stories
August 27, 2021
Introduction:
In certain business acquisitions, the closing of a deal may be deferred to obtain necessary approvals, such as from government agencies. This blog discusses a case where a buyer’s inability to secure an extension for the closing deadline resulted in the termination of the deal by the seller.
The Deal:
The deal involved the sale of a television station’s assets, and the purchase agreement granted the seller the right to terminate the deal if the FCC’s consent for the sale was not obtained before a specified deadline. The parties promptly applied for the FCC license transfer, which typically takes about 60 days. However, complications arose when the seller’s minority shareholders petitioned the FCC to deny the application, claiming that the assets were undervalued due to an upcoming reverse spectrum auction that could increase the station’s license value.
The FCC transfer application remained pending, and to bridge the gap, the seller and buyer entered into an agreement allowing the seller to continue running the station for a monthly fee while the buyer handled programming, advertising, and revenue collection. This agreement was signed about four months before the original closing deadline.
The Termination:
Nearly six months after the closing deadline passed, the buyer reached a settlement with the seller’s minority shareholders. The buyer believed that this settlement would pave the way for the closing, despite the lack of FCC consent. However, the seller held a different view. On the day the minority shareholder suit was dismissed, the seller exercised its right to terminate the deal, primarily due to the looming deadline for participating in the FCC auction, which was causing uncertainty for the station owner.
Legal Outcome:
The terminated deal ended up in federal court, and the court of appeals ruled in favor of the seller. The court determined that the seller had the right to terminate the deal as per the purchase agreement since the FCC consent was still pending, and the closing deadline had passed, with no material breach of agreement on the seller’s part.
The buyer attempted to invoke the doctrine of ‘equitable estoppel’ under New York law to prevent termination, but the court rejected this argument, emphasizing that the contract clearly granted the seller the termination right. The court upheld the district court’s summary judgment in favor of the seller, citing that seeking strained interpretations for those who fail to protect themselves in commercial transactions does not promote justice.
This case is referred to as Novia Communications, LLC v. Weatherby, No. 20-3608, United States Court of Appeals, Sixth Circuit, (August 4, 2021).
Conclusion:
The key lesson for buyers in similar situations is to obtain a written agreement to extend the closing deadline to avoid the risk of deal termination when facing delays in obtaining necessary approvals.
By John McCauley: I help people manage M&A legal risks.
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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