A recent Texas case highlights the importance of making clear which agreements are binding and which are not. In Le Norman Operating LLC v. Chalker Energy Partners III, LLC, No. 01-15-01099-CV, 2017 WL 4366265 (Tex. App. Oct. 3, 2017), a group of sellers of oil and gas interests closed a transaction with Jones Energy to sell those assets, but not before being sued by a jilted third party, Le Norman Operating LLC (“LNO”). LNO alleged that the sellers had entered into a prior binding agreement with LNO for the sale of the same assets. As the Texas Court of Appeals reminds us, it is important for a seller in a completive sale process to comply with its own bidding procedures and to ensure that the actions of its representatives do not unintentionally create a binding agreement.
In Le Norman Operating, a group of sellers sought to divest their oil and gas interests located in the Texas panhandle and engaged a financial services company, Raymond James, to conduct a competitive bidding process. Raymond James provided potential purchasers with access to a virtual data room and typical bid documents: an information memorandum, a confidentiality agreement, a data room presentation, two confidential bid instruction letters and a form purchase and sale agreement.
After receiving the first round of bids, Raymond James asked the two highest bidders, LNO and Jones Energy, to increase their bids. The sellers’ representative, Chalker Energy, selected LNO’s increased bid for 100% of the assets to present to the other working interest owners. However, the sellers were willing to sell LNO only 82% of the assets, subject to a reversionary interest. After several counter-offers, LNO informed Chalker Energy via email that it would no longer pursue the transaction “as altered by the Sellers.”
Five days later, the sellers offered to sell a smaller percentage of the assets to LNO. On November 19, 2012, LNO responded by sending Raymond James an email with the subject line “RE: Counter Proposal” that listed the following specific terms:
- $230 M for 67% of the 8/8ths [Raymond James] supplied database property set
- Eff date same at 9 1 12
- Execution of the PSA on or before 11 20 12, closing on or before 12 31 12
- Non-compete for ALL owners for one year with two mile halo around any unit being sold
- PSA similar to what we returned with the above caveats
- Our interest is not subject to the development agreement
- All parties staying in will execute JOA, it will be attached to the PSA
Further, the email 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 [November 20] to accept. Best we can do and you hopefully understand I have recommended to my Board to pass if the timeline is not met or a counter proposal is sent. Good luck.
The email did not reference the formal bid procedures. LNO’s proposed procedure specifically conflicted with the bid procedures which would have allowed each seller 24 hours from receipt of a recommendation by Chalker Energy to make a written election to participate. The sellers did not receive Chalker’s recommendation until November 20—the same day their acceptance was due to LNO.
Nevertheless, the sellers decided to participate. Raymond James emailed LNO before LNO’s deadline and stated: “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. will be turning a PSA tonight to respond to your last draft. Please give me a call to discuss schedule and timing.”
LNO and the sellers began finalizing the PSA and key exhibits, including escrow agreements, a non-compete agreement and a joint operating agreement. During the PSA negotiations, several emails were exchanged between various sellers and LNO referring to LNO “winning the bid” and “what is being sold to [LNO].”
On November 21, 2012 (the day before Thanksgiving), Chalker Energy emailed LNO an updated draft of the PSA. Yet, after sending that draft, the sellers accepted a competing offer from Jones Energy. The sellers and Jones Energy finalized and executed their PSA on November 28. That same day, LNO delivered its response to Chalker Energy’s prior draft PSA. However, after LNO learned of the Jones Energy agreement, LNO sent the first of several written demands that the sellers honor the “contract” they had entered into with LNO on November 19-20.
The Jones Energy deal closed, but Jones Energy refused to release $12.5 million in escrowed funds. Jones Energy alleged that the sellers’ failure to disclose LNO’s demands was a breach of the Jones Energy PSA. LNO later filed suit against the sellers for, among other things, breach of their November 19–20 agreement. The district court granted partial summary judgment for the sellers, dismissing LNO’s breach of contract claim in part because there was no meeting of the minds and no evidence that the parties intended to be bound by any agreement. LNO appealed.
The Texas Court of Appeals, First District, examined whether a valid contract existed between LNO and the sellers. It outlined the applicable test as follows:
Parties form a binding contract when the following elements are present: (1) an offer, (2) an acceptance in strict compliance with the terms of the offer, (3) a meeting of the minds, (4) each party’s consent to the terms, and (5) execution and delivery of the contract with the intent that it be mutual and binding. Whether the parties formed a contract is generally a fact question, although it may be determined as a matter of law.
Further, the court specified that “[a] binding agreement may exist when parties agree on some terms sufficient to create a contract, leaving other provisions for later negotiation” and “when an agreement leaves essential (or material) matters open for future negotiation and those negotiations are unsuccessful, however, the agreement is not binding upon the parties and merely constitutes an agreement to agree.”
The sellers argued that the terms of the bid documents and the confidentiality agreement governed any potential contract between LNO and the sellers. The sellers maintained that the terms of these documents precluded the existence of a valid, binding contract in the absence of an executed PSA.
The court relied on guidance from the Texas Supreme Court “that the determination of whether a ‘contemplated formal document’ was a condition precedent to the formation of a contract or ‘merely a memorial of an already enforceable contract’ depended on the intent of the parties, which is usually a question for the trier of fact.” The court noted that the initial bid procedure failed to result in a sale of the assets. LNO’s November 14 email stated that it could no longer pursue the transaction. The court stated that LNO sent its November 19 email after the initial bid process had concluded, and the email did not conform to the requirements of the bid process. Moreover, the sellers continued to negotiate with LNO after it had deviated from the established bidding procedures. The court determined that LNO had “raised a genuine issue of material fact regarding whether the alleged contract set out in the November 19–20, 2012 emails was subject to the bid process rules.”
The court also concluded that “the plain language of the Confidentiality Agreement does not preclude, as a matter of law, the existence of a valid, binding contract in the absence of an executed PSA.” The Confidentiality Agreement provided that “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 that a letter of intent or preliminary agreement was not a definitive agreement. Yet the Confidentiality Agreement did not further define what constituted a “definitive agreement.” This omission led the court to conclude that a “fact issue exists as to whether the November 19–20 email chain and subsequent written elections were sufficient to constitute a ‘definitive agreement’ for the sale of the Assets.”
The sellers also argued that there was no meeting of the minds between them and LNO or any intent to be bound. Nonetheless, the court found that a fact question existed “as to whether the parties intended to be bound by the terms set out in the November 19–20 emails and as to whether the November 19–20 emails and written elections were sufficiently definite, certain, and clear as to the essential terms of the sale as to constitute an enforceable contract.” In support, the court referenced the specific terms and language in LNO’s November 19 email and the fact that the sellers ultimately elected to participate in the transaction. Even though the sellers and LNO had not negotiated or agreed on every provision of the sale, the court reasoned that there was “at least some evidence that the parties agreed and had a meeting of the minds on the essential terms of the sale sufficient to create a contract . . . .”
So what’s the lesson? As Le Norman Operating illustrates, parties to a competitive bidding process and their agents should strictly adhere to any prescribed bidding procedures. Procedural deviations and meanderings by either party may establish a course of action that unintentionally couples the parties to what may have been intended to be non-binding negotiations.