Explore a case study involving oral promises in an M&A deal and the legal implications. Learn how a buyer’s actions led to a court battle.
M&A Stories
January 10, 2019
In 2016, a company based in the greater Sacramento area, known as BenefitsCONNECT, engaged in negotiations to sell its assets, including intellectual property and source code, to a Chicago-based cloud platform. The buyer, a cloud-based employee benefits and health exchange services provider, financed the acquisition through a Private Equity Firm.
During negotiations, the buyer’s CEO made an oral promise to license the source code back to the seller for use in their new venture, Aurora. The deal was sealed in an asset purchase agreement.
However, about three weeks after the agreement, the buyer changed their stance, refusing to renew the Aurora licensing agreement. The seller argued that their reliance on this oral promise had influenced them to accept a lower sale price.
The buyer claimed that the integration clause in the asset purchase agreement, which stated that only promises within the agreement were enforceable, should nullify the seller’s claims. They argued that, as parties represented by legal counsel, the seller could not reasonably rely on oral promises not explicitly in the agreement.
The court disagreed with the buyer, stating that integration clauses may not necessarily prohibit reasonable reliance on fraudulent misrepresentations. The court believed the issue of reasonable reliance was a matter of fact that couldn’t be resolved with a motion to dismiss.
The buyer also attempted to dismiss the seller’s negligent misrepresentation claim, based on the same oral promise. The court disagreed, asserting that the integration clause didn’t bar this claim either.
Additionally, the court pointed out that Delaware law imposed a duty of disclosure on the buyer when they were in a business relationship with the seller from which both expected financial benefits. The buyer had a duty to provide accurate information.
In summary, the court found that the seller’s reliance on information provided during negotiations, which subsequently changed after the agreement was executed, was sufficient if true to support their claims.
Case Reference:
Underwood v. BENEFIT EXPRESS SERVICES, LLC, C.A. No. 18-347-RGA-MPT, United States District Court, D. Delaware, (December 28, 2018).
By John McCauley: I help people start, grow, buy and sell their businesses.
Email: jmccauley@mk-law.com
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