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Let The Seller Beware

Let The Seller Beware

Jul 19, 2016

Selling Business Assets

Caveat emptor may be a familiar warning, but caveat venditor should be your watchwords if your business is in talks to sell valuable assets.

A case decided in federal court in Camden, NJ[1] highlights why companies for sale must exercise extreme care in disclosing valuable confidential business information, trade secrets and other intellectual property assets when dealing with potential buyers.

J&J Snack Foods Corp. claimed that Ruiz Food Products, Inc., a competitor of one of its product lines, approached J&J about selling its Patio® brand of frozen foods. After the two companies entered into a confidentiality agreement and a letter of intent, J&J alleges it shared detailed proprietary and confidential information, including ingredient specifications, product formulas, financial data, customer information, and vendor lists. After the initial asset purchase agreement was reviewed and a revised draft suggested, the deal came to an abrupt halt. J&J claims that Ruiz simply informed it that the deal “would not move forward” – offering no “meaningful explanation.”

Calling the potential sale a “sham” that Ruiz used in order to obtain the confidential information, J&J sued Ruiz for breaching its contractual obligation to negotiate in good faith. J&J alleged that Ruiz never intended to negotiate in good faith or effectuate the purchase deal and claimed that Ruiz used the negotiation as a means to obtain J&J’s confidential information and that Ruiz’s misuse of J&J’s confidential information could cause “catastrophic and irreparable harm” to its Patio brand.

The Court dismissed both counts of the Complaint. Noting J&J had not alleged specific facts supporting its claim that the Confidentiality Agreement had been breached, the Court also interpreted the express terms of the Letter of Intent to be against J&J’s. The Letter of Intent stated that it did not “give rise to any legally binding or enforceable obligation,” and also allowed Ruiz “sole discretion for any reason or no reason” to terminate the negotiation during the due diligence and review period. Accordingly, the Court rejected J&J’s allegation that the Letter of Intent had been breached, and refused to imply a covenant of good faith and fair dealing.

This case tells a cautionary tale. What can a company for sale do to protect its rights? Carefully worded language in non-disclosure agreements, explicit commitments in letters of intent, memoranda of understanding and other typical deal documents, and enforceable and effective remedy provisions in those agreements are essential. Still, precautions must be taken to determine what confidential information to disclose, how to share it, and how to assure that the corporate suitor – and individuals to whom it is disclosed – are legally accountable, especially where the crown jewels of the seller may be at stake. For example, a company for sale may withhold or redact key portions of its confidential information until the very late stages of the sale process. It may also establish an electronic data room for its confidential information, restrict who can access this data room (or certain types of documents therein) to a very limited group, and monitor and document who actually accesses those documents.

To paraphrase another time-honored saying, it is wise to prepare for the worst, and hope for the best, when embarking on any business transaction.

[1] J&J Snack Foods Corp. v. Ruiz Food Products, Inc., Civil Action No. 1:15-cv-07804-JBS-AMD, U.S. District Court, District of New Jersey, Opinion February 29, 2016.

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