A recent California Court of Appeals decision gives a good illustration of the importance of paying close attention to every detail of important contracts during merger and acquisition due diligence. See Triyar Hospitality Management, LLC. v. WSI (II) – HWP, LLC., Civil No. B276243 (Cal. App. 2nd Dist. January 15, 2019) (unpublished). Triyar involved the acquisition of a hotel owned by WSI in Thousand Oaks and the key contract/agreement was the hotel management agreement that WSI had with Hyatt Corporation (“Hyatt”). The purchaser alleged that the management agreement was so favorable to the management company that, when it was not renewed by Hyatt, the termination of the agreement allegedly added $11 million to the value of the hotel. Despite the importance of the management agreement, the buyer did not give the renewal date sufficient attention during the due diligence period under the purchase agreement. Eventually, the deal fell through because the buyer did not meet various other contingencies.

After the deal fell through, the purported buyer finally learned that the management agreement had been terminated. At that point, the buyer sued. Among other things, the buyer claimed that the seller committed fraud by not telling the buyer that the management agreement had not been renewed. According to the purchaser, the seller failed to announce the non-renewal so that the deal would fall through and, then, the seller would reap the reward of getting out from under the onerous management agreement.

Legal Lessons:

• During due diligence, pay close attention to dates in important contracts
• If something happens during due diligence that adds value to the deal, make sure the deal gets done
• Retain an experienced San Diego corporate attorney with extensive experience in mergers and acquisitions

Details From the Triyar Case

In Triyar, the important dates were these: The management agreement was set to expire at the end of 2015, but Hyatt had a renewal option. The deadline for renewing the management agreement was June 30, 2014. The purchase agreement between Triyar and WSI was signed on May 23, 2014. The purchase price was $39 million. The purchase agreement was expressly subject to Hyatt’s management agreement. Triyar and WSI agreed to a due diligence period that was to expire on July 3, 2014. Triyar was having some troubles with its financing and the due diligence period was extended to July 17, 2014. A further extension was sought, but WSI wanted a $100,000 non-refundable payment and Triyar refused.

In the meantime, during June and early July 2014, Triyar was conducting its due diligence and attempting to confirm Hyatt’s continuation as the managing agent. However, Triyar did not pay close enough attention to the June 30, 2014 renewal deadline. As the court described, the Vice-President of Triyar stated: “I wasn’t looking for a renewal notice. I wasn’t — I wasn’t focused — we were told it’s a long-term agreement. I was not focused on the June 30th date.” Had Triyar paid close enough attention, very likely, they would have learned early enough about the non-renewal by Hyatt. If the non-renewal by Hyatt really truly added $11 million in value to the hotel, Triyar could have and should have done everything possible to get the deal done (including payment of $100,000 to extend the due diligence period). As it was, Triyar allowed the purchase agreement to expire without consummating the deal.

Contact San Diego Corporate Law Today

If you would like more information about joint ventures and drafting joint venture agreements, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard can be reached at (858) 483-9200 or via email. Mr. Leonard’s law practice is focused on business, transactional, and corporate matters and he proudly provides legal services to business owners in San Diego and the surrounding communities.

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