Chancery Declines to Order Specific Performance of $5.8 Billion Luxury Hotel Deal Scuttled by COVID-19 Changes to Hotel Business Operations
AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC, C.A. No. 2020-0310-JTL (Del. Ch. Nov. 30, 2020)
Parties to a sale and purchase agreement (“SPA”) had planned to close a deal to sell fifteen luxury hotels for $5.8 billion. As the COVID-19 pandemic spread across the globe in early 2020 and battered the hotel industry, the buyer terminated the SPA. Seller sought specific performance in the Court of Chancery. After trial, the Court denied seller’s request for relief.
The Court first noted that the buyer did not have the right to terminate the SPA under its provision for a Material Adverse Effect (“MAE”) simply because a pandemic was ravaging the hotel industry. Seller asserted that the consequences of the COVID-19 pandemic fell within an exception to the definition of an MAE for effects resulting from “natural disasters and calamities.” Though the exception did not explicitly include the term “pandemic,” the Court pointed out that pandemics were included in the dictionary definition of “calamity.” The Court rejected buyer’s argument that a “calamity” had to constitute an MAE under the SPA unless—unlike COVID-19—it was similar to a natural disaster that is a sudden, single event that threatens direct damage to physical property. The Court reasoned that the plain meaning of “calamity” encompassed a pandemic. Surveying case law and commentary concerning MAE clauses, the Court reasoned that this result was consistent with the MAE clause in general, which was relatively seller-friendly. The parties’ competing expert witness analyses of MAE clauses in precedent transactions similarly did not show that sophisticated parties likely would have used the more specific word “pandemic,” as buyer contended. Thus COVID-19 fell within the SPA’s exception to an MAE. Consequently, the Court concluded that the business of the seller did not suffer an MAE as defined in the SPA.
The Court subsequently held, however, that the buyer was entitled to terminate the SPA because the seller failed to comply with its covenants between signing and closing. Seller’s covenants included a commitment that the business of seller would be conducted only in the ordinary course of business, consistent with past practices in all material respects. The Court explained that changes in response to a global pandemic and governmental guidelines did not control over the terms of the SPA. Buyer proved that due to the COVID-19 pandemic, the seller had made extensive operational changes to its hotels’ past-routine business practices. The Court reasoned that “[a] reasonable buyer would have found them to have significantly altered the operation of the business.” The test was not what reasonable managers would do in response to a pandemic. Therefore, the Court found that the seller failed to comply with the “ordinary course of business” covenant, relieving buyer of its obligation to close the deal. There were also complex factual issues involving a fraudulent scheme, title insurance, and the Delaware Rapid Arbitration Act, which also relieved buyer of its obligation to close.
Having concluded that the buyer was permitted to terminate the SPA, the Court denied seller’s request for specific performance. Under the plain language of the SPA, the Court awarded the buyer its $582 million transaction deposit with interest, its attorneys’ fees, and $3.685 million in transaction-related expenses.