September 20, 2023
Busted Deals: Nevada Weighs In on COVID-19 Interim Operating Covenants
We spent a lot of time blogging about COVID-19 deal terminations during the height of the pandemic. Allegations that a target’s actions in response to the pandemic violated its obligations under interim operating covenants featured prominently in those disputes. Ultimately, in AB Stable, the Chancery Court rejected a buyer’s attempt to terminate a deal based on such actions, and the Delaware Supreme Court affirmed that decision.
Now, Keith Bishop reports that in Lucky Lucy D LLC v. LGS Casino LLC, (Nev.; 8/23), the Nevada Supreme Court rejected similar efforts by the buyer of a Nevada-based target. This excerpt from Keith’s recent blog on the case summarizes the Court’s decision:
When Lucky Lucy D, LLC agreed to sell its hotel and casino to LGS Casino LLC in 2019, the parties included a covenant pursuant to which Lucky Lucy agreed to maintain the property and conduct related business “in a manner generally consistent with the manner in which [Lucky Lucy] has operated and maintained the [p]roperty and [a]ssets prior to the date hereof.” COVID-19 arrived before the sale was consummated and Lucky Lucy temporarily closed the casino and laid off employees in response to gubernatorial directive ordering the closure of non-essential businesses. The buyer then sent a notice of breach, which Lucky Lucy was unable to cure in light of the Governor’s emergency directive. Needless to say, litigation ensued.
The District Court granted summary judgment for the buyer, finding that the seller had breached the “ordinary course” covenant. The Nevada Supreme Court, however, saw things differently. It held that “[i]n closing the casino and hotel pursuant to the emergency directive, the seller was merely following the law so as to maintain its gaming licenses and thus did not materially breach the agreement”.
The blog says that the Court’s opinion suggests that the use of the adverb “generally” in describing the target’s obligations under the covenant was very important, and that its absence may have resulted in a different outcome.
– John Jenkins