The Wrong Way to Terminate an M&A Contract
It is often thought that buyers can generally terminate merger and acquisition agreements with impunity in light of the numerous conditions to buyer’s obligations to close. A recent decision by the U.S. Court of Appeals for the Second Circuit shows that this is not always the case, highlighting a wrong way for a buyer to terminate an M&A contract.
In Matrix Realty Group, Inc. v. Food Management Group, LLC, 200 U.S. App. LEXIS 13444, the Second Circuit affirmed a decision of the U.S. District Court for the Southern District of New York finding that the buyer, Matrix, had anticipatorily breached its agreement to purchase the assets of Food Management Group and its affiliates, awarding damages of over $9,000,000.
The case involved a sale of assets by a debtor-in-possession in a bankruptcy. Purchase agreements in this context are often stripped-down versions of their private-market cousins with far fewer representations, warranties, covenants and conditions.
In Matrix, the buyer indicated both in letters to the seller and in hearings before the bankruptcy court that it desired to cancel the purchase agreement and had no intention of completing the transaction. It made no apparent attempt to link its decision to any specific closing condition in the purchase agreement.
As a result, the Court found that the buyer had wrongfully repudiated the contract, entitling the seller to claim damages for total breach and relieving the seller of its obligations for future performance. The Court stated that “[r]epudiation occurs when a party manifests an intent not to perform, either by words or by deeds,” and found that the buyer had done so in spades.
In order to benefit from the doctrine of anticipatory breach or repudiation, the non- repudiating party must generally show that it was “ready, willing and able” to perform. In Matrix there was no question as to seller’s willingness to perform but its ability to do so was another matter. The District Court found that the seller was unable to deliver some of the assets that were subject to the purchase agreement. Nonetheless, the Circuit Court held that the purchase agreement was “severable and divisible” and that the seller was able to perform “the bulk of [its obligations].” In its holding, the Court noted that this was a “complex transaction, involving sophisticated parties.”
How can a result like that in Matrix be avoided? A buyer seeking to terminate an M&A agreement should tie its termination to seller’s breach of specific representations, warranties or covenants in the agreement or seller’s failure to satisfy a particular closing condition and not merely assume that the seller cannot perform all of its obligations.
Matrix demonstrates that there is a wrong and expensive way for a buyer to terminate an M&A contract.
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