A Fake Interest in Purchasing a Business Gets The Suitor Sued

A Fake Interest in Purchasing a Business Gets The Suitor Sued

By Fredrick P. Niemann, Esq. of Hanlon Niemann, a Freehold, NJ Buying a Business Attorney

 

A food company claims in a suit filed in federal court in Camden that a competitor offered to buy a portion of its business for the sole purpose of obtaining its trade secrets before abruptly calling off the deal.

The company claims in its complaint that it signed a letter of intent to sell its brand of frozen foods to a California company but the interested buyer called off the sale, without giving a reason.  In the meantime, the seller shared its product formulas, ingredient specifications, pricing information, sales and earning data, vendor lists and details of its relationship with Wal-Mart, according to the suit.

The lawsuit claims that the buyer “improperly used seller’s efforts to effectuate the potential sale in order to obtain confidential and proprietary information for the purpose of competing unlawfully with seller” according to the complaint.

Misuse and/or disclosure of the information provided “could cause catastrophic and irreparable harm to seller with respect to one of its brands,” the suit claims.

The plaintiff claims a breach of the contractual obligation to negotiate in good faith, or, in the alternative, breach of the implied duty of good faith and fair dealing and seeks “expectation damages” and “reliance damages,” and seeks to prevent the interested buyer from using or disclosing to others any information obtained from seller.

It appears from a reading of the court papers that the companies signed a confidentiality agreement in which buyer agreed not to use certain information it obtained from seller for any purpose other than to evaluate, negotiate and consummate the acquisition.

In reliance upon the confidentiality agreement, seller provided high-level proprietary and confidential information regarding sales, earnings and customers.

The parties thereafter signed a letter of intent listing assets to be acquired, the purchase price and other terms of the sale. The parties exchanged a draft purchase agreement and counsel raised certain issues to other counsel about the agreement, and the parties discussed those issues.

None of the issues raised presented any insurmountable obstacles to effectuation of the sale. It was alleged and the buyer agreed to draft and send a further revised purchase offer, but never did so.

Soon thereafter, a representative of buyer told the senior vice president of seller that the company saw no issues to keep the sale from closing, and she confirmed that the revised purchase agreement would be sent later that week. But subsequently, seller was informed that the sale would not move forward, and terminated negotiations, while giving “no meaningful explanation for not proceeding.”

Because buyer never asked questions or made comments about earnings, financial data and geographic sales information provided by the seller, and it never made efforts to negotiate liabilities to be assumed, or the scope of assets to be sold, after signing the letter of intent, it is alleged that buyer at no relevant time had an intention to seek to effectuate or negotiate in good faith the sale.

Rather, it “used the potential sale as a sham in order to obtain confidential and proprietary information regarding the brand.

Sounds like the sellers have a really good case.  I’ll be watching its outcome.

 

To discuss your buying a business in NJ, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com.  Please ask us about our video conferencing consultations if you are unable to come to our office.

Posted in Business.