Seller signs binding LOI and then allows buyer to run the business without signing APA. Deal never closes.
M&A Stories
September 22, 2021
Introduction:
In most M&A deals, letters of intent (LOIs) are nonbinding until the parties sign a final acquisition agreement after conducting due diligence. However, one particular case stands out as an exception where a “binding” LOI was signed, leading to unforeseen consequences.
The Deal:
The case involved a Nevada-based advertising data and lead generation business (the seller) and a New York-based video advertising technology company (the buyer). The buyer signed a binding LOI to acquire the seller’s assets, paying a $200,000 deposit as a show of good faith.
Before the deal closed, the buyer requested the seller’s assistance in integrating the assets and developing its market participation and client base. The seller complied with these requests, focusing solely on the buyer’s interests and even abandoning its own customers and arbitrage business.
Despite the seller’s efforts, the buyer never finalized the acquisition documents, and the deal fell through. The buyer claimed the seller had provided inaccurate projections during due diligence.
The Lawsuit:
The seller filed a lawsuit against the buyer in a Delaware Superior Court seeking damages. The buyer attempted to have the claim for unjust enrichment thrown out, arguing that the damages for unjust enrichment overlapped with those for breach of the LOI. However, the court disagreed, stating that the two claims were separate and allowed the unjust enrichment claim to proceed.
This gives the seller’s the opportunity to recover from the buyer the expenses incurred by the seller during the pre-closing period or compensating the seller for their lost business opportunities and revenue.
This case is referred to as Aureus Holdings, LLC v. Kubient, Inc., C.A. No. N20C-07-061 EMD CCLD, Superior Court of Delaware, (Submitted: May 24, 2021. Decided: August 6, 2021.)
Comment:
This case highlights the dangers of acting as if a deal is complete before the closing actually occurs. While it’s common for buyers and sellers to work closely during the pre-closing phase, it’s crucial to establish a comprehensive written agreement specifying the rights, duties, costs, and benefits of both parties during this period.
In conclusion, it is advisable for buyers and sellers to avoid extensive pre-closing operating arrangements and wait until the deal is officially closed to avoid potential risks and legal complications.
By John McCauley: I help people manage M&A legal risks.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
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Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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