Trouble in PSA Paradise: How to Get Your Company Out of a Termination Bind

You have been negotiating back and forth with another party to purchase assets after signing a Purchase and Sale Agreement (“PSA”). However, after conducting some due diligence, you realized things were not as they seemed, and now you are seeking a way out of the contract. How do you navigate the breakup? How do you rebound from it, and what are your options moving forward?

While the decision to terminate a PSA can be mutual, it can often result from a breach or misrepresentation by one party or the failure of a condition precedent under the PSA. For the non-breaching party, the representations, warranties, and conditional obligations of the breaching party must be clearly stated in the PSA to ensure your unilateral ability to terminate. If your desire to carry out the transaction is subject to any statement or obligation of the other party, it should be expressly defined in the PSA.

A buyer’s representations and warranties are typically more standardized among PSAs and encompass matters such as their corporate ability to participate in the transaction, statements that they meet investor qualifications, and their financial ability to make the purchase (whether in a lump sum or under some extended payback structure such as a promissory note or third-party financing under a loan agreement).

On the other hand, a seller’s representations and warranties can and do vary and often include a laundry list of representations and warranties regarding the condition and operation of the assets being sold, such as the absence of any title or environmental defects and third-party claims or lawsuits pertaining to the assets, proper payment of all taxes, royalties and any other costs associated thereto and compliance in all material respects with applicable leases, pooling and unit agreements, joint operating agreements, and laws.

In the event of a breach or alleged breach of a PSA, the non-breaching party should send a termination letter to the breaching party stating the facts or circumstances that caused the breach, a reference to the section breached under the PSA, and clearly stating the non-breaching party’s intention to terminate, as well as reiterating any obligations and/or duties that will survive the termination. This termination letter is meant to halt any remaining activities under the PSA. Additionally, to the extent a breach actually occurs under the terms of the PSA, the termination letter also eliminates any future enforcement of the PSA from the moment of termination. The termination of the PSA does not, however, affect any legal consequences and liabilities for events undertaken before the termination.

From the seller’s perspective, a breach by the buyer can often mean a missed opportunity to court other buyers. Still, unfortunately, any damages you may have suffered will likely be limited to the amount of the deposit the buyer paid at the time of signing the PSA. The buyer should ensure that the termination provision expressly states that the seller’s damages are limited to the deposit amount and that the deposit amount be returned to the buyer in case of a breach by the seller. There should be an explicit effort to limit any speculative damages such as consequential damages, loss of opportunity damages, and other special damages in order to avoid ongoing liabilities that are not foreseeable by the buyer and seller.

Whether you are a buyer or seller, the attorneys at RR&A are prepared to help you draft, negotiate, and guide you through your next PSA to ensure the most favorable outcome for you and your company.

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