Significant 2020 Decisions Affecting Private Company M&A – Corporate/Commercial Law

Bizar Male

This newsletter is our seventh annual review of significant
state court decisions relevant for private company M&A
transactions and related governance matters and disputes.

Hallisey v. Artic Intermediate, LLC ,
C.A. No. 2019-0980-MTZ (Del. Ch. Oct. 29, 2020)


Acquiror was not entitled to a post-closing purchase price
adjustment in its favor due to having delivered its Closing
Statement after the contractually agreed deadline.


This decision involved a motion for judgment on the pleadings
filed by Hallisey, as seller representative (Seller Rep) under a
Securities Purchase and Exchange Agreement (SPA), on the basis that
the acquiror (Buyer) had lost its ability to obtain a purchase
price adjustment for the $20 million deal as a result of having
delivered a Closing Date Report after the deadline provided for in
the SPA.

The SPA provided Buyer with six months after closing in order to
deliver a Closing Date Report setting forth Buyer’s good faith
determination of closing cash and closing net working capital, as
part of the purchase price adjustment mechanism. Buyer delivered
the Closing Date Report almost three months after the deadline, and
sought a $12 million purchase price adjustment. Buyer maintained
that the delay was valid and justified, given manipulations and
misrepresentations by the target’s Chief Financial Officer,
which led to him being terminated about a month before the Closing
Date Report was due. The Seller Rep sought judgment on the
pleadings based on the language of the SPA. Buyer opposed the
motion, alleging that the Seller Rep had unclean hands.

The court rejected Buyer’s unclean hands argument as
inapplicable given that the Seller Rep was appealing based on
contract law and not to equity. Similarly, the court held that
where the dispute involves a documented contract supported by valid
consideration, equitable estoppel is not applicable. The court held
that under the plain language of the SPA, failure to timely deliver
a Closing Date Report obviated the rest of the purchase price
adjustment process. The court held that given there were no
material disputed facts, judgment on the pleadings was warranted in
favor of the Seller Rep.


The decision is an important reminder that failure to meet
bargained-for deadlines can have drastic consequences under
Delaware’s pro contractarian approach. It is not uncommon for
acquirors to struggle to meet the deadline to deliver a Closing
Statement in connection with purchase price adjustment mechanics,
given unforeseen problems with a target company’s financials.
Reasoning that the target stockholders would not be prejudiced by a
short delay, and therefore it is ok to deliver the Closing
Statement late because there would be no damages, is an incorrect
analysis. Acquirors should either timely deliver the Closing
Statement based on the best information they have at their disposal
under the circumstances, or negotiate for an extension. Simply
delivering the Closing Statement late, as in Hallisey, could result
in a complete loss of a purchase price adjustment in the
acquiror’s favor.

AB Stable VIII LLC v. MAPS Hotels and Resorts
One LLC, Mirae Asset Capital Co., Ltd., Mirae Asset Daewoo Co.,
Ltd., Mirae Asset Global Investments, Co. Ltd., and Mirae Asset
Life Insurance Co., Ltd.
, No. 2020-0310-JTL (Del. Ch. Nov.
30. 2020)


The court held that whether or not a seller’s business
was conducted in the ordinary course consistent with past practice
during the executory period of an acquisition agreement depended on
whether there had been a change in the routine operations of
seller’s business under normal circumstances, regardless of
whether such changes were in response to outside factors beyond the
control of the seller.


AB Stable VIII LLC (Seller) and MAPS Hotels and Resorts One LLC
(Buyer) entered into a Purchase and Sale Agreement (Agreement) on
September 10, 2019, pursuant to which Buyer agreed to acquire all
of the membership interests in Strategic Hotels & Resorts LLC
(Strategic). Strategic owned 15 limited liability companies, each
of which owned a luxury hotel. Buyer notified Seller on April 17,
2020, the scheduled closing date for the acquisition of Strategic,
that a number of Seller’s representations and warranties were
inaccurate and that Seller had failed to comply with its covenants
under the Agreement. As a result, Buyer claimed it was not
obligated to close and that Seller’s failure to cure the
breaches by May 2, 2020 would give Buyer a termination right.
Seller initiated litigation on April 27, 2020, seeking, among other
things, specific performance of the Agreement. After the suit was
filed, Buyer terminated the Agreement and then filed counterclaims
seeking various determinations, including that Seller had breached
its obligations under the Agreement and failed to satisfy certain
conditions to closing. This summary focuses on Buyer’s
allegation that Seller failed to satisfy the interim operating
covenant that required Seller to operate its business only in the
ordinary course, consistent with past practice in all material

The Alleged Breach of the Interim Operating

On March 24, 2020, during the executory period, Strategic
temporarily closed two of its hotels, the Four Seasons Palo Alto
and the Four Seasons Jackson Hole, in response to low demand and
governmental orders due to the COVID-19 pandemic. This accelerated
the standard seasonal closure of the Four Seasons Jackson Hole by
two weeks. Around this time, Strategic significantly reduced
operations at its other hotels as well in response to the pandemic.
Buyer argued that these actions deviated from the ordinary course
of business in breach of the interim operating covenant, which in
turn gave rise to the failure of a closing condition.

Section 7.3(a) of the Agreement provided that, as a condition to
Buyer’s obligation to close, “Seller shall have performed
in [all] material respects all obligations and agreements and
complied in all material respects with all covenants and conditions
required by this Agreement. The interim operating covenant provided

“Except as otherwise contemplated by this Agreement or as
set forth in Section 5.1 of the Disclosure
Schedules, between the date of this Agreement and the Closing Date,
unless the Buyer shall otherwise provide its prior written consent
(which consent shall not be unreasonably withheld, conditioned or
delayed), the business of the Company and its Subsidiaries shall be
conducted only in the ordinary course of business consistent with
past practice in all material respects, including using
commercially reasonable efforts to maintain commercially reasonable
levels of Supplies, F&B, Retail Inventory, Liquor Assets and
FF&E consistent with past practice, and in accordance with the
Company Management Agreements.”

Court’s Finding that Seller Breached the Interim
Operating Covenant

Seller argued that for purposes of the interim operating
covenant, the “business” was the business of Seller as an
asset management firm and a manager of managers who in turn
operated the hotels. It contended that in that capacity, it
continued to operate its business as it always had, letting the
managers of the hotels make the decisions. The court rejected
Seller’s interpretation of “business” based on the
plain language of the interim operating covenant which referenced
the business of the Company and its Subsidiaries and detailed that
operating the “business” in the ordinary course included
using commercially reasonable efforts to maintain reasonable levels
of certain supplies and inventory consistent with past

Seller argued that the “ordinary course of business”
meant it should have flexibility to address changing circumstances
in unforeseen events and that this covenant would be satisfied so
long as it engaged in “ordinary responses to extraordinary
events.” Seller argued that its hotel closures and reduced
operations were ordinary course responses to the COVID-19 pandemic.
The court rejected this interpretation and agreed with Buyer that
“ordinary course of business” involved comparing how the
business routinely operated under normal circumstances, without
regard to any extraordinary event, such as the COVID-19

The court also considered the meaning of the words “only in
the ordinary course of business consistent with past
practice.” The court noted that there are two potential
reference points for determining whether the company has operated
in the ordinary course: (i) how the company has operated in the
past, and (ii) how comparable companies operate. Here, the wording
“only” and “consistent with past practice”
meant that the court should just consider the former.

The court rejected Seller’s argument that the interim
operating covenant imposed only an obligation to use commercially
reasonable efforts, as opposed to an absolute and unqualified
contractual obligation. The court held that breach of contract
under common law is based on strict liability, but this can be
modified by efforts-based language in the contract. The court held
that there was no such language applicable here, even though
efforts-based language appeared elsewhere in the contract.

Seller argued that the interim operating covenant incorporated a
material adverse effect (MAE) overlay. Elsewhere in its opinion,
the court held that pandemics were the kind of systematic risk that
fit within the MAE carve-out for “calamities.” Therefore,
an MAE overlay to the interim operating covenant would mean that
the covenant had not been breached. Seller argued that a contrary
interpretation would negate the risk allocation under the
Agreement. Rejecting this argument, the court held that the interim
operating covenant could have included language providing for an
MAE overlay, but did not.

The court held that Seller breached the interim operating
covenant because “[o]verwhelming evidence demonstrates that
Strategic departed form the normal and customary routine of its
business as established by past practice. In response to the
COVID-19 pandemic, Strategic closed two of the hotels entirely and
limited operations at the other thirteen severely.”

Seller argued that there was no breach because Seller was
contractually obligated to depart from ordinary course operations,
given its representations that operations were in compliance with
law. The court noted the public policy considerations and
associated Delaware law that does not permit a court to enforce a
contract prohibited by law. Rejecting Seller’s argument, the
court noted that a contractual condition operates differently from
a covenant. It allocates the risk associated with operating outside
the ordinary course to Seller, but does not force anyone to violate
law. The court noted that had Seller argued that Strategic deviated
from operating in the ordinary course because it was required to do
so by government order, and that discharged its obligation to
operate in the ordinary course in all material respects, and thus
satisfied the condition, that would have been a credible argument.
However, Seller did not describe any such government orders or
otherwise prove any such illegality. The court noted that many of
the changes in Strategic’s business were implemented before
states imposed stay-at-home orders, and there was also no evidence
that stay-at-home orders required hotels to close.

The court also rejected Seller’s argument that no breach
occurred because Seller could deviate from the interim operating
covenant with Buyer’s consent, which “shall not be
unreasonably withheld,” and so had Seller requested consent,
Buyer would have had to have given it. While the court’s
rejection was based on Seller having merely raised the argument in
a footnote and not have properly briefed it, the court made clear
its skepticism that such an argument was legally supportable.


Before this decision, most deal practitioners assumed that the
pandemic was the type of systematic risk that would be picked up in
the typical carve-outs form the MAE definition, so the court’s
confirmation of that is unsurprising. But many practitioners did
not also focus on the need to carve out the pandemic-related
business changes from the interim operating covenants. This
decision makes clear that sellers who want to shift the pandemic
risk (or other systematic risk) to buyers need to include language
to that effect in the purchase agreement.

The decision also contains an important reminder of the
pro-contractarian nature of Delaware law, and that if an agreement
provides for notice in order to trigger certain consequences under
the agreement, the notice provisions are not immaterial formalities
and need to be complied with.

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Private Company M&A

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