. . . According to [Seller], the payment was intended either as a non-refundable “break-up fee in the event that the closing did not occur” or as a payment creditable to the purchase price if the deal was finalized. . . .
In Orderly Health, Inc. v. NewWave Telecom and Technologies, Inc., No. 20-1441 (10th Cir. Oct. 6, 2021) (“Orderly Health decision”), the U.S. Court of Appeals for the Tenth Circuit affirmed the district court’s summary judgment that M&A buyer NewWave was not obligated to make the $250K earnest money payment identified in its Letter of Intent (“LOI”) with seller Orderly despite the breakdown of negotiations and failure of the deal.
Located in Colorado, Orderly specializes in the development of data management systems for healthcare providers. NewWave is a Maryland corporation that provides information technology services to health care companies. In 2018, third-party Affiniti VC introduced the two companies to each other for the purpose of discussing mutual investment, merger, or acquisition opportunities.
On November 27, 2018, the two companies signed an LOI which, among other things, provided a sixty-day “no shop” period for the companies to negotiate exclusively with each other. In early January 2019 and before expiration of the 60-day exclusivity period, Affiniti informed Orderly that NewWave was no longer interested in negotiations and had backed out of the deal. On January 29, Orderly responded by demanding payment of the $250K earnest money that it claimed was due and owing under the LOI. NewWave declined to pay.
With two exceptions, the LOI expressly created no legally binding contractual duties. Orderly Health decision at 1. The two exceptions include Section 3 of the LOI which governed “Confidentiality; Public Announcements” and Section 4 which was entitled “Exclusivity/No Shop.” Id. Section 4, which includes the disputed earnest money provision, is three paragraphs in length and reads as follows:
The Company [Orderly] agrees that it shall not negotiate with any parties other than Purchaser [NewWave] and/or affiliates thereof with respect to a purchase of a majority of its common stock for a period of sixty (60) days from and after the execution of this LOI (hereinafter the ‘Exclusivity Period’) by the Company and the Purchaser.
The Exclusivity Period shall end if the Purchaser requests a reduction in the Initial Purchase Price (or the timing of such payment) of the Company.
At the expiration of the 60-day no shop period with each Party negotiating utilizing commercial best efforts, the Purchaser agrees to pay the Company a non-refundable earnest money deposit of $250,000 (hereinafter ‘Earnest Money’) if the Closing is [sic] has not occurred at such time. For the avoidance of doubt, upon payment of Earnest Money payment the Exclusivity Period shall be extended for 30 days and the Closing Payment balance due will be reduced by $250,000.
Id. at 3.
In arguing its entitlement to the earnest money payment, Orderly focused on the first sentence of the last paragraph, “At the expiration of the 60-day no shop period . . . , the Purchaser agrees to pay the Company a non-refundable earnest money deposit of $250,000 (hereinafter ‘Earnest Money’). . . .” Id. at 2. In other words, Orderly argued that this clause of Section 4 unconditionally obligated NewWave to pay the $250K earnest money at the conclusion of the no-shop exclusivity period. Id. According to Orderly, the payment was intended either as a non-refundable “break-up fee in the event that the closing did not occur” or as a payment creditable to the purchase price if the deal was finalized. Id. at 2-3.
NewWave urged a different interpretation of the third paragraph. According to NewWave, the non-refundable $250K earnest money payment was due only if (1) the companies were still negotiating in good faith at the conclusion of the 60-day no shop period and (2) NewWave elected to extend the exclusivity period for 30 days. Id. at 2. And, because NewWave had terminated negotiations before the no shop period ended and there was no agreement otherwise to extend negotiations, NewWave had no contractual duty to pay the earnest money to Orderly.
For several reasons, the court agreed with NewWave’s interpretation of Section 4.
The court noted that in its ordinary usage, the term “earnest money” denotes “an upfront payment to demonstrate good faith.” Id. at 3. One, therefore, would expect the discussion of earnest money to appear in Section 4’s first paragraph where the 60-day exclusivity period is defined with such language as, “‘In return for payment by Purchaser of $250,000, the Company agrees that it shall not negotiate with any parties other than Purchaser. . . .’” Id. Instead, earnest money was not mentioned until the third paragraph’s discussion of a 30-day extension of the exclusivity period. Id. Accordingly, the $250k earnest money discussed in the third paragraph was not a payment to be made in consideration of the 60-day no shop period.
The court alternatively found that Orderly’s agreement to the 60-day no shop period was made in exchange for reasonable non-monetary consideration. The court explained that under the “commercial realities” of the situation, a potential buyer such as NewWave would “not be willing to devote the resources and time necessary for due diligence unless it was given exclusive rights” for a reasonable period of time to negotiate and close the deal. Id. The court therefore concluded, “It hardly seems out of the question that a company [such as Orderly] eagerly seeking a buyer would be willing not to charge for the exclusivity privilege.” Id. (emphasis added).
The court likewise reasoned that Orderly’s “break-up fee” interpretation of Section 4 might make sense if the earnest money payment had been mentioned “in the self-contained second paragraph” which would immediately terminate the no-shop period if the buyer sought concessions on price or payment options. Id. Instead, the second paragraph imposed no penalty for seeking price or payment accommodations beyond terminating the exclusivity period. Id.
The court therefore concluded, “The natural and, in our view, only reasonable interpretation of Section 4 is that there is no $250,000 charge for the initial 60-day exclusivity period but that NewWave can extend the exclusivity period an additional 30-days by paying that sum.” Id. In support of this conclusion, the court reasoned that it would be “peculiar that . . . NewWave would pay $250,000 for the initial 60-day exclusivity period but would not have to pay an additional sum to extend exclusivity. . . .” Id.
In retrospect, it is somewhat surprising that these two companies litigated their earnest money dispute through appeal, especially in view of the relatively small amount at stake. It is quite likely that, all together, the parties spent far more than $250,000 on attorneys fees. Orderly initially filed its breach of contract lawsuit in Colorado state court, and NewWave successfully petitioned to remove the case to federal district court based on diversity of citizenship. Id. at 2. Fortunately, it appears that the parties were able to streamline the federal litigation somewhat by obtaining the district court’s summary judgment and by inviting the appellate court to rule on their briefs without oral argument. Id. at 4 n*.
Nevertheless, this dispute, which began on January 29, 2019 with Orderly’s first earnest money demand, consumed almost three years until it was finally resolved on October 6, 2021 by the federal appeals court. Moreover, the point of contention in this busted deal was not a complex term or condition of closing but instead a more pedestrian clause of the LOI governing payment of earnest money. The real takeaway from this case, therefore, may be that upfront attention to contractual details may have prevented these unnecessary downstream expenditures of time and resources, especially for the procedural aspects of the transaction.