SS M&A Litigation Outlook - Flipbook - Page 10
AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC,
No. 2020-0310-JTL (Del. Ch. Nov. 30, 2020)
Why it is important
Summary
In AB Stable VIII LLC v. MAPS Hotels and
Resorts One LLC, the Delaware Court of Chancery
issued a 242-page opinion that addressed two
issues arising out of the COVID-19 pandemic that
are becoming increasingly prevalent in litigations
related to corporate mergers and acquisitions.
First, the court ruled that the COVID-19
pandemic did not constitute a Material Adverse
Event (MAE) that would excuse the buyer from
closing because the pandemic was a “calamity”
and therefore fell within one of the MAE
exclusions in the parties’ agreement. Second,
the court found that the seller was nonetheless
unable to compel a closing because it had not
operated its hotel business “in the ordinary
course” after making operational changes in
response to the pandemic. The decision offers
important guidance on how the Delaware courts
may apply MAE provisions and ordinary course
covenants in future cases.
On September 10, 2019, a subsidiary of a
Chinese conglomerate (the Seller) agreed to
sell its interests in Strategic Hotels & Resorts
LLC, a company that owns fifteen luxury hotels,
to Mirae Asset Financial Group (the Buyer), a
Korean financial services company, for US$5.8
billion. Closing was to occur on April 17, 2020,
but the Buyer declined to close, asserting that the
pandemic constituted an MAE excusing the Buyer
from performing and that the Seller had not
satisfied its obligation to operate the business in
the ordinary course, including because the Seller
had taken extraordinary steps, such as shutting
down hotels, in response to the pandemic. On
April 27, 2020, the Seller sued in an attempt to
force the sale, and the Buyer responded by filing
for declaratory relief.
The court rejected the Buyer’s MAE argument,
finding that the pandemic fell within a contractual
MAE exclusion for “calamities” even though the
exclusion did not cover pandemics expressly.
Applying principles of contract interpretation, the
court held that a plain reading of the exception
for “calamities” encompassed the effects resulting
from the COVID-19 pandemic with reference
to certain dictionary definitions of the term,
among other things. The court agreed with the
Buyer, however, on the issue of whether the
Seller had operated the target business in the
ordinary course. The court found that the Seller
had operated the business in an extraordinary
manner that was not consistent with the Seller’s
past practice in response to the pandemic, thus
violating the Seller’s ordinary course covenant,
satisfaction of which was a condition to closing.
In so holding, the court rejected the Seller’s
argument that management must be afforded
flexibility to engage in “ordinary responses to
extraordinary events[,]” such that management
should be deemed to have “operated in the
ordinary course of business based on what is
ordinary during a pandemic.”
The court also found that the Seller was not able
to produce clean title insurance, as required in
the contract, after failing to disclose numerous
pending lawsuits.
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