Learn how a forum selection clause in an M&A deal affected a California supplier not directly involved in the acquisition agreement, leading to litigation in California. Read about the court’s ruling and its implications.
M&A Stories
June 10, 2021
Introduction:
In acquisition agreements, parties often agree to resolve disputes in a specified forum. In some cases, even a related company that is not a signatory to the acquisition agreement may be bound by the forum selection clause.
The Deal:
In this M&A deal, a California supplier and distributor, both commonly owned, were involved. A Kentucky distributor purchased the assets of the distributor and entered into a supply agreement with the supplier. The asset purchase agreement (APA) contained a forum selection clause requiring litigation in California.
The Lawsuit:
After the deal’s closing, conflicts arose between the buyer and seller in California, leading to a legal complaint. Simultaneously, the supplier accused the buyer of breaching the supply agreement’s purchase minimum in a Kentucky federal court. The buyer sought to enforce the APA’s California forum selection clause to transfer the supply dispute to California, despite the supplier not being a party to the APA.
Court Ruling:
The court granted the buyer’s request, acknowledging that the supplier was not a signatory to the APA’s forum selection clause. However, because the disputes between the buyer and the supplier were related to the buyer’s conflicts with the seller, the court ruled that both disputes should be resolved in the same forum. The court considered the APA’s allegations and their implications for the supply agreement, making it reasonable for the California-based supplier to litigate the supply agreement issues in California.
This case is referred to as Amwear USA, Inc. v. Galls, LLC, No. 5:20-CV-354-REW, United States District Court, E.D. Kentucky, Central Division, Lexington, (May 18, 2021).
Comment
In this case, despite the tactical advantages of defending a lawsuit in Kentucky, the buyer strategically chose to litigate in California due to the buyer’s claim being based on actions by the supplier’s related company, the seller. Had the buyer insisted on a Kentucky forum selection clause in the supply agreement, the outcome might have been different. Seeking a California forum selection provision in the supply agreement could have potentially avoided this legal dispute.
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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