December 28, 2021

Covid-19 Busted Deals: Ontario Court Awards C$1.24 Billion to Jilted Seller

Not surprisingly, it’s been kind of quiet in Delaware this week, but that gives me a chance to blog about an interesting recent busted deal decision from the Ontario Superior Court of Justice.  In Cineplex v. Cineworld, (Ont. Sup. Ct. 12/21) the Court was confronted with the target’s claim for damages arising out of the buyer’s termination of an acquisition agreement.

The buyer in this case claimed that its termination was justified because the target’s actions in response to the onset of the pandemic violated the agreement’s ordinary course covenant. Yeah, I know that sounds familiar, but Delaware and Ontario part company on how to interpret the relationship between an agreement’s ordinary course covenant and its MAE clause. AB Stable says that those provisions involve separate & distinct obligations that should be read independently of each other. In contrast, a late 2020 Ontario Superior Court decision says that they should be read in tandem and in light of the deal’s overall approach to risk allocation.

Ontario’s position is more favorable than Delaware’s if you’re a target that’s negotiated a pandemic carve in a deal’s MAE provision. This excerpt from Blakes’ memo summarizing the Cineplex decision indicates that the Ontario precedent on how to interpret the two provisions was central to the Court’s analysis of the case:

After reviewing the jurisprudence, the Court accepted Cineplex’s argument that the ordinary course covenant must be read in the context of the whole Arrangement Agreement in which systemic risks, including adverse impacts on the business arising from “outbreaks of illness,” were allocated to the purchaser. The Court, thus, interpreted the ordinary course covenant in a way that would not negate the parties’ allocation of the risk of a pandemic to Cineworld.

In interpreting the Arrangement Agreement, the Court held that the operating covenant required Cineplex to both operate in the ordinary course of business and take reasonable steps to maintain and preserve its business. The Court said that Cineworld considered only the first part of the operating covenant and not the second.

The Court concluded that Cineplex’s responses were “temporary” in nature and were consistent with Cineplex’s use of “cash management tools to manage its liquidity in the past.” These reactions by Cineplex, including the deferral and spending reductions to preserve cash, helped preserve the business that Cineworld had purchased.

The Court held that the buyer was not justified in terminating the agreement and had breached its contractual obligation to acquire the target. The Court then turned to the damages claim. Here’s what Blakes had to say about that part of the opinion:

Cineplex submitted that it should be entitled to recover the difference between the value of Cineplex shares on the termination date and the C$34 deal price, a measure of damages that would have resulted in a C$1.32-billion award. The Court rejected this submission on the basis that such losses were those of the shareholders, who were not parties to the Arrangement Agreement. It noted that the shareholders constituted only third-party beneficiaries for purposes of collecting the agreed consideration for a completed transaction, not for purposes of any claims for breach of the Arrangement Agreement if Cineworld failed to close.

However, the Court accepted Cineplex’s alternative submission that damages should be awarded equal to the discounted present value of the expected synergies that Cineplex would realize as a result of the combination with Cineworld.

The buyer argued that the deal’s synergies would have ultimately been for its own benefit as the buyer of the target. The Court rejected that argument, noting the synergies were among the benefits the target would have itself realized, and that evidence submitted by both parties indicated the purchase price reflected the anticipated synergies associated with the deal. It ultimately awarded the target a whopping C$1.24 billion in damages – essentially putting it in about the same place it would have been if the Court had accepted its initial argument on how damages should be calculated.

John Jenkins