September 2, 2021

Target’s Termination of Deal Results in Loss of Breach and Fraud Claims

Merger agreements are like puzzles, and figuring out exactly how all of their moving parts fit together can be a real challenge, particularly if a dispute develops. That’s why I think most M&A lawyers will have at least a little sympathy for the plaintiff in Yatra Online v. Ebix, (Del. Ch.; 8/21), which paid a big price for its misinterpretation of the terms of the agreement.

The case involved a dispute arising out of a July 2019 merger agreement providing for the acquisition of the target in a stock-for-stock deal. Stop me if you’ve heard this before, but the buyer’s appetite for the deal allegedly cooled after the onset of the pandemic and its impact on the target’s business. The target contended that the buyer dragged its feet on a number of contractual obligations, engaged in negotiations and signed extensions that were intended to buy it time to figure out a way out of the deal. Along the way, the buyer also surreptitiously negotiated a “Tenth Amendment” to its credit agreement with its lenders that made it impossible to honor its obligation to extend the target’s shareholders a put right for the shares they were to receive in a deal.

The target ultimately became fed up with the buyer’s dilatory tactics, and after the final outside closing date lapsed, the target terminated the merger agreement and filed a lawsuit alleging a breach of contract in the Chancery Court in June 2020.  The defendants immediately moved to dismiss, alleging that the target’s decision to terminate triggered the agreement’s “Effect of Termination” provision, which precluded any post-termination claims except fraud.

The target subsequently amended its complaint to add a fraud claim and a breach of the implied covenant of good faith and fair dealing. The target also sued the buyer’s lenders for tortious interference with its contractual put right.  Vice Chancellor Slights determined that the target’s decision to terminate the merger agreement was fatal to all of its claims:

For reasons explained below, Defendants’ motions must be granted in full. Under the Merger Agreement’s plain terms, Yatra extinguished its breach of contract claims when it elected to terminate the Merger Agreement. The implied covenant claim fails because there is no gap in the Merger Agreement for the implied covenant to fill. And the fraud and tortious interference claims fail because each relies on the false premise that the Tenth Amendment frustrated Yatra’s remedy for specific performance. As Yatra affirmatively pleads, it could not have sued for specific performance until the S-4 filing was approved, and it elected to terminate the Merger Agreement before that condition to closing occurred. Consequently, Yatra has failed to plead reasonably conceivable loss causation for either fraud or tortious interference.

Ann Lipton  flagged this case on Twitter, and her comment was that the opinion “was almost painful to read.” I couldn’t agree more. Given the factual allegations here, it’s hard to think of a tougher situation than this one.

John Jenkins