May 14, 2020

Busted Deals: Lessons From Covid-19 Litigation

This Winston & Strawn memo reviews the handful of Covid-19 related deal termination lawsuits that have been brought thus far and says that there are lessons that can be drawn from these cases. This excerpt addresses the strategies buyers have used to overcome the obstacles to success with MAE claims under Delaware law:

– Even where the acquisition agreement contains an express MAE provision, buyers are relying on the separate theory that the seller took action in response to COVID-19 that breached the standard covenant to operate the business in the normal course between signing and closing (L Brands and Level 4 Yoga). In the context of government-mandated shutdowns in response to the pandemic, however, there is a clear tension between that obligation and the seller’s obligation to be in compliance with government orders, creating a classic “Catch-22” that the courts will have to resolve.

– In some more recently signed deals, the parties have expressly contemplated the risk of uncertainty stemming from COVID-19 and appeared to allocate it to buyer through a negotiated purchase price reduction or an MAE carve-out. Yet certain buyers are nevertheless attempting to invoke the MAE provision, along with the covenant to operate the target company in the ordinary course, to justify nonperformance (L Brands, KCAKE). Nor is a “pandemic carve-out” in an MAE clause necessarily dispositive; the scope and applicability of any such carve-out will be fiercely debated (L Brands).

– Instead of expressly relying on the MAE provision, one buyer is asserting that sellers failed to provide required pre-closing financial information that takes into account the anticipated effects of COVID-19 on the company’s financial condition (Oberman).

– One buyer has simply refused to close for a self-declared period in order to determine whether an MAE has taken place (Bed Bath & Beyond).

The memo notes that these cases highlight an issue that predated the pandemic – although certain events may be excluded from the MAE definition, they may still affect the seller’s compliance with various reps & warranties and covenants and may implicate closing conditions. It recommends proactive efforts by sellers to comply with these obligations to the extent possible, and to seek buyer consent when taking actions that may be required to respond to the pandemic, but may be inconsistent with obligations imposed by interim operating covenants.

John Jenkins