By: Luiz Gustavo Doles

In mergers and acquisitions (“M&A”) operations, there is an extremely relevant issue with regard to the completion of business in general: the possibility of compensation for the loss of an opportunity.

This is a very abstract topic, which makes the use of a practical case a good way to understand when this duty to compensate arises. The Court of Justice of São Paulo (TJ-SP) denied a claim for compensation from a Brazilian group that was negotiating the sale of two of its companies with American investors. The national company was claiming the expenses it had incurred with lawyers and specialized consulting during the negotiations and amounts related to the “loss of opportunity” – for having failed to serve other interested parties in the deal. The negotiations lasted two years and consisted of the full sale of companies in the chemical products distribution sector, valued at more than R$100 million.[1].

When filing the lawsuit, the Brazilians argued that the investors had completely broad access to social and strategic information, possessing knowledge of the entire range of clients, businesses and management of the companies, demonstrating great interest in the purchase, in addition to demanding exclusivity in the business.

Two years later, they claimed in the lawsuit that they had received a notice announcing, “abruptly and unjustifiably”, the termination of negotiations because the investors had purchased another company located in Brazil that would operate in the same market segment.

The value of the compensation, calculated at around R$16.5 million, would be mainly because the investors demonstrated that the deal would be closed, and the extensive negotiations associated with an exclusivity clause in the sale would have generated the loss of the “effective and real” chance of a deal under the same conditions and at a time when the country's economy was favorable to the market.

With this, the judges of the 2nd Chamber of Business Law of the TJ-SP analyzed the matter based on two issues: contractual liability, taking into account the signed documents, and extra-contractual liability, through facts and the behavior of the parties during the negotiation.

There was material evidence that the Brazilian companies relied on an exchange of emails to prove that the investors had made a purchase proposal. Through this exchange of emails between the parties, it was proven that there was a clause in the letter of intent for the deal stating that until the final contract was signed there would be no legal obligation, either to the Brazilians or to the Americans, with regard to the operation. Furthermore, it was also concluded that the withdrawal of the investors from the negotiation was due to the frustration of the deal and the consequent abuse and breach of trust, offending the good faith of the contracting parties.

The lawyer for the North American side argued that the decision was important for preserving the M&A market, as these transactions are generally structured in the same way.

It is worth noting that the decision of the TJ-SP is relevant not only for the outcome of the case itself, which prioritizes what was agreed in the contract, but also for alerting to the importance of communication between the parties during the negotiation period.

Therefore, the main point under analysis is the argument used by the applicant to justify the compensation, that is, the “loss of an opportunity”.

This principle can be defined for the purpose of granting compensation under this title when there is an effective financial loss resulting from the impossibility of some event occurring in the future which, however, still raises some doubts at the time of its application.

Thus, in cases where a preliminary contract (memorandum) does not establish obligations until the final contact is made, there can be no talk of loss of opportunity, since due to their legal nature, M&A operations have extremely volatile dynamics, which can change their characteristics countless times throughout the development of the business.

The terms of the contract must be respected, leaving no gaps for the party that felt harmed by a fact that is common in the business world to take advantage of the lawful situation to obtain compensation for the loss of a possible and remote opportunity. Furthermore, the opportunity that was lost must be relevant and verifiable, and cannot be used for speculation. The case presented shows a heated market in which the company would have a high probability of being acquired, a fact that can be proven, for example, by presenting surveys of M&As carried out during the period with similar companies.

Therefore, experienced consultancy in negotiations is necessary and essential to enable the concerns of the parties involved in an M&A transaction to be overcome, making it possible to avoid, or mitigate, the problems resulting from a failed deal attempt.

[1] Process: 0005452-31.2013.8.26.0100, rapporteur CARLOS ALBERTO GARBI, 2nd Reserved Chamber of Business Law/ TJSP.

With the collaboration of Andreia Carvalho.