Binding effect of preliminary documents in M&A transactions

by Roberta Incorvaia, Leonardo Monti

The Court of Appeals of Milan, with the decision No. 2138 of 17th June 2022, ruled upon a case in which private preliminary documents signed by the potential sellers had a binding effect not only against the buyer, but also between the selling parties themselves, exposing them to mutual liability for damages. The decision at stake concerns a dispute that arose in the context of a negotiation for the selling of quotas of two limited liability companies, which ended up with one promissory seller asking the other one for reparation, based on a breach of the obligations contained in a letter of intent (the “LOI”).

The case

The case originated from a claim for damages brought by the minority quotaholder of the company X S.r.l (the “Company X”) against the sole quotaholder of Company X’s parent company (the “HoldCo”). This claim was based upon an asserted breach of contractual obligations, undertaken in a negotiation procedure aimed at the acquisition of control over Company X.

In particular, the parties had signed with the potential buyer a LOI for the sale of the quotas of Company X (whose quotas were held by the minority quotaholder for 30%) and of HoldCo, which in turn held 70% of the quotas of Company X. The parties agreed to an exclusivity clause in the LOI, requiring them "not to initiate and/or to terminate any contracts or negotiations with third parties related to extraordinary transactions" involving the quotas of both companies. 

After the signing of the LOI, the parties entered into two separate preliminary contracts, as part of a “unitary” transaction, involving the sale of (i) 30% of the quotas of Company X, by its minority quotaholder and (ii) 100% of the quotas of HoldCo, by its sole quotaholder. However, HoldCo’s sole quotaholder transferred 93.75% of the quotas of HoldCo to a third party, different from the potential buyer, in violation of the provisions of the preliminary contract. By virtue of this breach, the potential buyer exercised the right - granted both in the LOI and in the preliminary contracts - not to conclude the final contracts, since he would not have been able to acquire both companies.

Therefore, the minority quotaholder brought an action against the sole quotaholder of HoldCo seeking damages for the breach of a contractual obligation, pursuant to Article 1218 of the Italian Civil Code or, in subordinate, for tort, pursuant to Article 2043 of the Italian Civil Code. The minority quotaholder claimed that the conduct of the sole quotaholder of HoldCo had damaged him for loss of chance, insofar as he has not been able to sell his quotas to the potential buyer.

The decision

The Court of Appeals of Milan found that the potential selling parties had committed themselves not only to the potential buyer, but they also had committed to each other by way of signing a LOI explicitly aimed at the sale of the entire corporate capital of Company X, where the two separate transactions had to be regarded as part of a unitary transaction.

The sole quotaholder of HoldCo failed to comply with its commitment "not to initiate and/or to terminate any contracts or negotiations with third parties” in connection to the quotas, covered by the LOI and preliminary contract, by selling the quotas of HoldCo to a third buyer other than the one with whom it had entered the LOI and the preliminary contract. According to the decision, this latter negligent conduct damaged the minority quotaholder of Company X.

The amount of the damage consisted in the loss of chance to sell the quotas of Company X to the potential buyer.