June 22, 2020

Texas M&A Case Law Update: Takeaways from Chalker Energy Partners III v. Le Norman Operating LLC

by Debra Gatison Hatter, Madison Alexander

IN BRIEF

  • Texas courts will respect the contract negotiations process and a seller’s right to define the steps in a sale process. This is especially important for sellers in this pandemic environment and will be as we see increased numbers of businesses for sale post-COVID-19 with many buyers may be especially motivated to negotiate hard.
  • The fact that a winning bid is selected is just one step in the sale process, but the deal isn’t done until there is clear evidence of an agreed-upon definitive agreement.

Petitioners were 18 individuals and entities who owned working interests in some 70 oil and gas leases in three Texas counties (the Assets).[1] The petitioners (Sellers) wished to sell the Assets after development was complete. The Sellers designated Chalker Energy Partners III, LLC (Chalker) as their representative for the sale process, who then hired Raymond James to conduct the sale.

The bidding process involved the usual steps, beginning with providing bidders access to a data room after signing a confidentiality agreement (NDA). The bidders were to then submit bids, and after receiving the bids the Sellers had 24 hours to select the winning bid. After a bid was approved by the Sellers, Chalker was to negotiate a definitive purchase-and-sale agreement (PSA) with the winning bidder.

The NDA contained a “no obligation” clause providing that “the Parties hereto understand that unless and until a definitive agreement has been executed and delivered, no contract or agreement providing for a transaction between the Parties shall be deemed to exist.” The clause goes on to provide that “the term ‘definitive agreement’ does not include an executed letter of intent or any other preliminary written agreement or offer, unless specifically designated in writing and executed by both Parties.”

Le Norman Operating LLC (LNO) expressed interest in purchasing the Assets and signed the NDA. On the deadline for the bidding procedures, November 5, LNO submitted its bid for $332 million for all of the Assets, stating that the bid was subject to “a mutually acceptable (PSA).” These negotiations eventually fell through after multiple conversations back and forth regarding an increased sale price.

The Sellers subsequently decided to sell 67 percent of the Assets, and LNO responded on November 19 with an e-mail titled “RE: Counter Proposal.” LNO specified a list of items in the proposal and gave the Sellers until 5:00 p.m. the next day to accept.

The Sellers voted to move forward with the sale based on the November 19 e-mail from LNO. Before LNO’s deadline to respond on November 20, Chris Simon, the Raymond James employee guiding the sale process, e-mailed Chalker’s vice president of land and business development, Bill Dukes, to inform him that the Sellers were “on board to deliver 67% subject to a mutually agreeable PSA.” Mr. Dukes sent LNO a revised PSA.

On November 22, Jones Energy presented Chalker with a new offer, and the Sellers elected to pursue the transaction with Jones Energy instead of LNO. Chalker and Jones Energy executed a PSA on November 28. That same day, LNO, unaware of the deal between Chalker and Jones Energy, sent a redline PSA to Chalker.

Once LNO discovered the deal with Jones Energy, LNO demanded that the Sellers honor the alleged contract entered into through e-mail exchange. Subsequently, LNO sued the Sellers for breach of contract, alleging that the Sellers breached the “agreement” that Mr. Simon and Le Norman reached through their e-mails on November 19 and November 20 to sell 67 percent of the Assets.

Analysis and Conclusion

The issue before the court was whether the e-mails between the two parties constituted a “definitive agreement.” Both parties agreed that “unless and until a definitive agreement has been executed and delivered, no contract or agreement providing for a transaction between the Parties shall be deemed to exist.” The no-obligations clause in the NDA was evidence that the parties agreed that a definitive agreement was a condition precedent to contract formation. Chalker’s acceptance stating that the purchase was “subject to a mutually agreeable PSA” demonstrated that a definitive agreement between the parties was a condition precedent to contract formation.

The court compared the exchanged e-mails between Chalker and LNO to a “preliminary agreement,” which the signed NDA specifically stated was not a definitive agreement. As further evidence that no definitive agreement had been reached, the court found that the parties had multiple documents that had yet to be negotiated, including an escrow agreement, a noncompete agreement, and a joint operating agreement. Additionally, LNO continued to modify the PSA demonstrating that there were ongoing negotiations between the parties after the e-mails were exchanged on November 19 and November 20.

LNO argued next that there was a fact issue as to whether the Sellers waived the condition precedent by the e-mails sent on November 19 and 20. The court held that those e-mails were not a waiver of the bidding procedures and that the parties did not waive their right to a definitive agreement. Further, the court found that the no-obligation clause was unambiguous and provided both parties with the “freedom to negotiate without fear of being bound to a contract.”

Notably, the court mentioned that Chalker (and the Sellers) were protected by stating in the NDA that the term of the Agreement was one year or on the date that the parties entered into a further written agreement covering confidentiality. This was clear evidence that both parties agreed that the NDA would govern negotiations for the sale of the Assets. Additionally, the NDA stated that Chalker had the right to “conduct the process relating to a possible transaction in any manner it deems appropriate or change the procedure for conducting that process.”

Finally, the court addressed whether the Sellers and Chalker had waived their right to a definitive agreement. To waive this right through conduct of the parties, the party alleging waiver must point to evidence showing intentional relinquishment of that right or intentional conduct inconsistent with claiming that right. Although LNO points to inconsistencies in Sellers’ conduct, including a deviation in deadline and format from the specific bidding procedures the Sellers had in place, this was not sufficient evidence to show an intentional relinquishment of the right to a definitive agreement.

[1] No. 18-0352 (Supreme Court of Tex.) (argued Dec. 4, 2019, decision published Feb. 28, 2020).

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Debra Gatison Hatter

Partner, Clark Hill

Debra Gatison Hatter is a Member (Partner) at Clark Hill in Houston, TX.  She focuses her practice on corporate transactions and advice, including securities, mergers and acquisitions, joint ventures, strategic partnerships, debt and equity financings, corporate governance, structuring and general business matters. Debra represents private equity funds and their portfolio companies, public companies and privately held businesses in the energy, technology, telecommunications, healthcare, and industrial services industries, among others.

Madison Alexander

Corporate Associate, Clark Hill

Madison Alexander is a Corporate Associate in the Clark Hill Dallas office. She focuses primarily on mergers, acquisitions, and corporate governance.