Recent Developments in Acquisition Finance

April 05, 2018

The question of when parties to a potential transaction actually become bound to each other is obviously an important one, and sometimes the answer can be surprising, or less than entirely clear. A recent Texas Court of Appeals decision demonstrates, in an acquisition context, that even a sophisticated party that has taken all the usual steps to avoid becoming bound prior to signing up definitive documentation may find itself inadvertently bound to a contract prior to such time. The case is a reminder to parties negotiating acquisitions and acquisition financings to practice a touch of extra prudence in the course of negotiation in order to avoid this inadvertent result. 

Financing Papers and Current Law

Parties to a financing will typically negotiate terms in successive rounds of increasing detail: emails of headline terms may lead to multiple iterations of a term sheet, after which definitive loan documents are negotiated and finalized. When a financing needs to be committed, the final term sheet will typically be attached to a commitment letter which will set forth specific and limited conditions precedent to providing the financing – including the execution of definitive loan documentation. For a term sheet that is intended to be non-binding and to stand only as a memorandum of proposed financing terms, typically a legend will be included on it stating as much, making clear that it is not intended to give rise to any binding obligations, which would arise only upon the parties’ entry into definitive loan documentation.

If the financing is subsequently consummated, or if it is abandoned by both parties, whether or not such conditions and caveats are effective is academic. Their effectiveness will be tested only when one party – typically the borrower – takes the position that a contract has been established despite those conditions and caveats, and that the contract should be enforced against the lender.

Courts have used differing approaches in rendering decisions in this area. 

New York and Delaware courts have recognized, generally, two types of binding preliminary agreements: “Type I” agreements, whose material terms (including that the relevant parties will be bound) have already been agreed, but whose parties anticipate that the agreement will be documented more formally at some future time, and “Type II” agreements, the material terms of which still need to be negotiated but whose parties have demonstrated an expectation that they will continue to work in good faith towards negotiating a definitive agreement. The terms of Type I agreements, and the obligation to continue to negotiate Type II contracts in good faith, can each constitute an enforceable contract in these states.1

Texas, by contrast, generally will not enforce “Type II” agreements: “[U]nder Texas, law, an agreement to negotiate in the future is unenforceable, even if the agreement calls for a ‘good faith effort’ in the negotiations.”2 Texas courts will enforce “Type I” agreements, provided they can find an intention by the parties to be contractually bound coupled with terms specific enough to determine the existence of a breach and provide an appropriate remedy.3

It is worth noting that, although many courts in certain circumstances will recognize a binding contract even though the parties anticipate a more formal agreement in the future, most courts will respect a clear statement in the relevant term sheet or letter of intent stating that it is not intended to create a binding agreement. In the specific context of acquisition financing term sheets, courts in New York have gone further and rejected altogether the “Type I / Type II” analysis as too rigid. In this context they have preferred instead to focus on the intention of the parties and the importance they attach to their anticipated future entry into definitive loan documentation. In a noted New York decisionwelcomed by lenders, the court held that “[t]he fact that the [term sheet] summary was extensive and contained specific information regarding many of the terms to be contained in the ultimate loan documents and credit agreements does not change the fact that defendants clearly expressed an intent not to be bound until those documents were actually executed.”

In the absence of clear expressions of intent, however, courts need to infer the intent of the parties from their various written and oral communications. This was the task before the Texas Court of Appeals in Le Norman Operating LLC. v. Chalker Energy Partners III, LLC.5

Background of the Case

The story behind this case began in 2012 when Chalker Energy Partners III LLC (Chalker) and others (collectively, Sellers) engaged a financial-services firm (the Advisor) to conduct the sale of certain Texas oil and gas leases (Assets). The Advisor began the process by announcing the proposed sale to potential buyers, including Le Norman Operating LLC (LNO).

Negotiations - Round 1

In September 2012, the Advisor emailed LNO an Information Memorandum and Confidentiality Agreement which LNO (and Chalker, as agent for the Sellers) signed.

The following month, LNO attended a slide presentation created by the Advisor regarding the use of a virtual data room and received two “Confidential Bid Instruction” letters (Bid Documents) which laid out the rules and procedures (Bid Process Rules) under which bids would be submitted, a Purchase and Sale Agreement (PSA) would be negotiated, and a hoped-for sale would be consummated.

On the following month’s bid deadline, November 5, LNO offered US$322 million for all of the Assets which, alongside a bid from Jones Energy, was one of the two top bids. The Advisor asked both LNO and Jones Energy to increase their bids by November 9. LNO raised its bid to US$345 million and, consistent with the procedures in the Bid Process Rules, Chalker took this bid back to the other Sellers.

The Sellers as a group were willing to provide only 82% of the Assets at that price. The parties negotiated and made several offers and counteroffers, but the negotiations ultimately were unsuccessful, and LNO withdrew its bid on November 14. 

Negotiations - Round 2

On November 19, in response to a new offer from the Sellers, LNO emailed the Advisor a bid of US$230 million for 67% of the Assets, consisting of seven bullet-point terms. Chalker submitted this bid to the Sellers on November 20 and received commitments from the Sellers sufficient to deliver the 67% of the Assets for which LNO had bid. Although the parties had not yet finalized or entered into a PSA, and while there was substantial work to be done on the deal documentation generally, evidence was admitted that the parties at this point considered the deal done. For example, one of the Sellers who was monitoring the sales process emailed an LNO investor congratulating him on “winning the bid.”

At 5:53 p.m. on November 21, the night before Thanksgiving, Chalker emailed LNO an updated draft of the PSA, remarking that, as “[our] crew will largely be taking tomorrow and Friday off,” Chalker would not expect to hear from LNO until the following Monday.

Thanksgiving Misgivings

Jones Energy then submitted a revised bid. On Thanksgiving day, in correspondence between Chalker and one of the Sellers, Chalker acknowledged that the new Jones Energy bid had benefits that the “current deal cannot deliver,” and submitted it to the Sellers on Friday, November 23. The Sellers accepted the Jones Energy bid and the parties finalized a PSA and signed it up on Wednesday, November 28th – the same day that LNO, unaware that the deal had slipped away from them, belatedly sent their own revised PSA draft to Chalker.

The Trial Court

On learning of the Sellers’ deal with Jones Energy, LNO sent several written demands that the Sellers honor the contract they viewed as having been formed on November 19 and 20. The Jones Energy deal nevertheless closed on December 12 and LNO thereafter filed a lawsuit against the Sellers asserting claims for breach of contract, among others.

The trial court granted the Sellers’ motion for summary judgment and dismissed LNO’s breach of contract claim. The grounds for the judgment included the following:

  • There had never been a “meeting of the minds,” because the Confidentiality Agreement, Bid Instructions and Data Room Presentation precluded a binding contract without an executed and delivered PSA.
  • There could have been no meeting of the minds because any offer and acceptance was subject to the bid-process rules.
  • The surrounding circumstances showed that the parties had not intended to be bound by any agreement.
  • A meeting of the minds could not be inferred from the language used by the parties.
  • An executed and delivered PSA was a condition precedent to contract formation.

The Appellate Court

LNO appealed the dismissal of its breach of contract claim. In assessing LNO’s appeal, the court looked closely at the history of correspondence between the parties. Their starting point was the Confidentiality Agreement, signed at the very outset of negotiations, which read in relevant part:

“No Obligation. 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 and neither Party will be under any legal obligation of any kind whatsoever with respect to such transaction by virtue of this or any written or oral expression thereof, except, in the case of this Agreement, for the matters specifically agreed to herein. For purposes of this Agreement, the term “definitive agreement” does not include an executed letter of intent or any other preliminary written agreement or offer, unless specifically so designated in writing and executed by both Parties.”

The court found that this expectation, namely that any transaction would be documented pursuant to a definitive agreement, was a consistent thread through at least the first round of negotiations. In addition to the negotiation procedures relating to the PSA in the Bid Documents, LNO’s initial November 5 bid was explicitly “subject to the execution of a mutually acceptable Purchase and Sale Agreement (‘PSA’) between the parties for the sale of the Assets.” LNO’s revised bid on November 9 also made explicit reference to the bid instructions and included a draft PSA, based on the form provided in the data room.

Nevertheless, the appellate court sided with LNO. The court’s ruling covered three distinct issues, each of which is instructive for any party seeking to ensure that it does not become contractually bound to a counterparty earlier than desired.

Issue 1 - Round 2 was Not Necessarily Subject to the Bid Process Rules

When LNO withdrew from Round 1 of the negotiations, its representative stated that it could “no longer pursue the transaction as altered by the Sellers.”

When LNO made its seven bullet-point email bid on November 19, the bid had included only a cursory reference to the PSA and, in contrast to LNO’s Round 1 offers, had not been made explicitly subject to a PSA being entered into. It also was not in the format required by the Bid Process Rules. For example, the bid stated, “We will not be modifying or accepting any changes to the base deal described above and don’t want to be jerked around anymore. We will give you [until] 5:00 pm CST tomorrow to accept….” This timeline was inconsistent with the Bid Process Rules. Notwithstanding the inconsistency, Chalker contacted the Sellers (none of which objected to the deviation), reverted to LNO before LNO’s deadline, and corralled approval on November 20 with respect to the required 67% of the Assets. The Advisor summarized the status to LNO as follows: “We have the group on board to deliver 67% subject to a mutually agreeable PSA. We are calling to discuss next steps and timing. Chalker et al [sic] will be turning a PSA tonight to respond to your last draft. Please give me a call to discuss schedule and timing.” 

In light of this history, the appellate court found that “LNO presented more than a scintilla of evidence that the Bid Documents and other bid procedures did not apply to the negotiations between the parties as of November 19, 2012,” and that, accordingly, the trial court had erred in concluding that the “Confidentiality Agreement, the Bid Instructions and the Data Room Presentation preclude a binding contract without an executed, delivered purchase and sale agreement, or ‘PSA.’”

Issue 2 - The Confidentiality Agreement’s Drafting was Open-Ended

Even if the Bid Process Rules were found to have applied to the Round 2 negotiations, the appellate court found that, while the Confidentiality Agreement clearly provided that “an executed letter of intent or any other preliminary written agreement or offer” could not constitute a definitive agreement, it was silent as to what could. Accordingly, depending on the precise facts of the case, LNO’s email bid of November 19, together with the subsequent emails between the parties indicating that the Sellers had decided to move forward with LNO’s offer, could potentially have constituted a definitive agreement that met the requirements of the Confidentiality Agreement, and therefore the trial court had erred in finding that “[a] PSA was a condition precedent to contract formation.”6

Issue 3 – The Absence of an Executed PSA Does Not Necessarily Preclude a “Meeting of the Minds”

The final question examined by the court was whether the parties in fact met the threshold requirements for contract formation under Texas law.

The court referenced the Sellers’ acceptance, without negotiation, of the terms set forth in LNO’s November 19 seven bullet-point email, the lack of outstanding issues in the last-circulated drafts of the PSA, and the expectation set forth in LNO’s November 19 email that the PSA could be signed almost immediately. In light of these facts and the parties’ conduct over the relevant period, the appellate court found that, given the underlying facts as they may be adduced at trial, it is possible the parties had in fact agreed to the material terms of the contract, including whether to be bound, with the degree of specificity necessary to create a contract. Accordingly, the trial court had erred in granting summary judgment on the basis that there had been no meeting of the minds. 

What This Means for Sponsors

Issues similar to those raised by Le Norman are obviously not unique to sellers of oil and gas interests in Texas, and may arise in a wide array of contexts relating to acquisitions and their financings. Are there any simple, practical steps that one may take to mitigate these risks?

One approach is simply to end emails, or other relevant communications potentially presenting the issue, with something to the effect of, “Of course nothing is binding until we’ve signed up mutually satisfactory documentation.” Such a statement shows a clear intention not to be bound, and also points to what would be needed in order to achieve a binding agreement. In terms of email generally, for institutions utilizing email signatures and auto-text, it could help to add a sentence to the above effect, to make clear that, unless otherwise specifically agreed, no email from that institution should be taken as an offer or acceptance of a binding obligation. 

In the context of financing term sheets, letters of intent and the like, it is best to be specific. For example a term sheet that references “definitive documentation reasonably satisfactory to you and us” as a condition precedent to a transaction could be interpreted to include exchanges of emails as “documentation,” when that is unlikely to have been intended. Had the term sheet referenced instead, say, “definitive documentation consistent with that for [an identified precedent transaction] or as otherwise agreed by you and us,” such a broad reading would be substantially harder to justify. 

We look forward to updating you on additional developments in the next issue.  


1) See, e.g., Vacold LLC v. Cerami, 545 F.3d 114 (2d Cir. 2008); Bryant v. Way, No. 11C-01-164 RRC, 2011 Del. Super. LEXIS 228 (Super. Ct. May 25, 2011). 
2) Martin v. Martin, 326 S.W.3d 741, 750 (Tex. App. 2010). 
3) Id. at 749.
4) Amcan Holdings, Inc. v. Canadian Imperial Bank of Commerce, 70 A.D.3d 423, 427 (1st Dep’t 2010).
5) No. 01-15-01099-CV, 2017 Tex. App. LEXIS 9297 (1st Dist. Oct. 3, 2017).
6) Id. at *24.

Return to main page

Subscribe to Dechert Updates