For breach of contract, the usual remedy is a money judgment against the person in breach of the contract. However, in some instances, a court will issue an order requiring the person in breach to perform. In the case of a purchase and sale agreement for a business, is an order of this nature on the menu of remedies that a court will consider? If the buyer or the seller of a business refuses to close on the contract, will a New York court order the parties to close?
Not long ago, Elon Musk was engaged in a protracted legal battle with Twitter in the Delaware Court of Chancery regarding Twitter’s claim that he breached his agreement to buy the company. While the litigation was pending, legal commentators speculated whether the Delaware court would find in favor of Twitter and, if it did, whether the court would order Musk to pay damages. Or would it issue a mandatory injunction ordering Elon Musk to complete the acquisition? No answers were given; eventually, Musk decided to buy Twitter, which he has since renamed X.
In James River Group Holdings, Ltd. v. Fleming Intermediate Holdings LLC,1 Justice Andrea Masley of New York’s Commercial Division ordered the parties to a stock purchase agreement to close the purchase and sale, in accordance with the terms of the contract. Now we know that a New York court will issue a mandatory injunction to complete an acquisition—in the right case.
Plaintiff James River Group Holdings, Ltd. (James River) and defendant Fleming Intermediate Holdings LLC (Fleming) are in the insurance business. On November 8, 2023, James River and Fleming signed a stock purchase agreement for the sale of James River’s reinsurance subsidiary (JRG Re) to Fleming. The sale was scheduled to close on March 1, 2024.
However, Fleming did not close but rather claimed that James River breached the purchase agreement because James River had set loss reserves in JRG Re at a level lower than recommended by outside actuaries. Fleming also demanded that James River supply cash to JRG Re to cover three months of operating expenses and reinsurance claims. James River refused the demands and sued for a mandatory injunction ordering Fleming to complete the purchase.
The court found that Fleming’s loss-reserves point was addressed by a provision in the purchase agreement where Fleming expressly agreed not to challenge reserves as grounds for breach of the agreement. The agreement instead provided for the buyer and seller to true-up loss reserves and other cash items after the closing. Fleming’s point regarding three months of expenses was an item on which the stock purchase agreement was silent. The court said that if the buyer had wanted it, the buyer could have negotiated for it.
The court reasoned that the dispute was a matter of contract interpretation, and the court found the contract to be complete, clear, and unambiguous on its face.
The court listed “severe economic consequences that are impossible to calculate” as a result of the failure to close. James River’s stock price dropped to an all-time low when the news of the buyer’s refusal to close became public. To prepare the subsidiary JRG Re for sale, James River had completed transactions in preparation for closing that could not easily be reversed, if at all. The situation for employees was uncertain. James River’s Bermuda securities regulator had approved the stock purchase agreement so that James River was no longer supposed to be operating JRG Re. JRG Re’s business projects had to be put on hold.
The court ordered the parties to close the sale within 10 days after its decision, and they did so on the 10th day.
The James River v. Fleming story is not over, however. After the sale was closed, Fleming sued James River in the US District Court for the Southern District of New York for securities fraud and breach of contract.
What can be taken away from the James River decision from the New York Commercial Division is that the court may issue a mandatory injunction to close the sale in situations where the court considers the rights of the plaintiff under the purchase and sale agreement to be clear and the plaintiff’s position to be in a deteriorating state.
If you have any questions regarding the content of this alert, please contact Chris Bonner, special counsel, at cbonner@barclaydamon.com, or another member of the firm’s Corporate Practice Area.
12024 NY Slip Op 24162 (Supreme Ct., N.Y. County, April 6, 2024).