In most private equity acquisition agreements, specific performance provisions allow the seller to compel the buyer to close only if the buyer’s debt financing is available. Last week, in Snow Phipps Group v. KCake Acquisition, (Del. Ch.; 4/21), the Chancery Court addressed how a limited specific performance provision will apply when the buyer allegedly caused the deal’s financing conditions to fail. In a 125-page opinion, Vice Chancellor McCormick concluded that the “prevention doctrine” applied in this situation and ordered the buyer to specifically perform its obligations under the purchase agreement.
The dispute arose out of Kohlberg & Co.’s failure to consummate the purchase of Snow Phipps’ DecoPac portfolio company. The buyer asserted now familiar claims that the business had experienced a MAE due to the pandemic, and that it had violated its contractual obligations to operate in the ordinary course. The Vice Chancellor rejected those allegations – check out this Sidley blog for a discussion of that part of the case – and then turned to the issue of specific performance.
The specific performance language in the DecoPac purchase agreement was similar to terms found in other deals with PE buyers. The sellers argued that the unavailability of financing was due to the buyer’s bad faith and breach of its obligations under Section 6.15 of the agreement, which required it to use reasonable efforts to obtain the financing, and that the buyer should be compelled to close the contract. The Vice Chancellor agreed, based on application of Delaware’s “prevention doctrine.” This excerpt explains her reasoning:
The prevention doctrine provides that “where a party’s breach by nonperformance contributes materially to the non-occurrence of a condition of one of his duties, the non-occurrence is excused.”
To establish that a party’s breach contributed materially to the non-occurrence of a condition, it is not necessary to show that the condition would have occurred but for the lack of cooperation. It is only required that the breach have contributed materially to the non-occurrence. A breach “contributed materially” to the non-occurrence of a condition if the conduct made satisfaction of the condition less likely. But if it can be shown that the condition would not have occurred regardless of the lack of cooperation, the failure of performance did not contribute materially to its non-occurrence and the rule does not apply. The burden of showing this is properly thrown on the party in breach.
At trial, Plaintiffs demonstrated that Kohlberg’s breach of Section 6.15(a) contributed materially to Kohlberg’s failure to obtain Debt Funding. Plaintiffs proved that each of the Lenders were willing to execute Debt Financing on the terms of the DCL [debt commitment letter] and that Kohlberg refused to move forward.
The Court concluded that ‘[t]he non-occurrence of Debt Financing, therefore, was due materially to Kohlberg’s failure to move forward toward a final credit agreement on the terms of the DCL,” and that the seller was entitled to an order compelling Kohlberg to close the acquisition. The sellers asked the Court to order the buyer to close within 15 days of the decision, but instead the Court ordered both sides to provide further submissions on what deadline should be imposed, as well as whether the seller was entitled to pre-judgment interest.
– John Jenkins