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Chancery Orders Specific Performance of Deal, Despite Lack of Debt Financing, Finding that COVID-Related Business Decline Was Not an MAE and Seller’s Cost-Cutting Efforts Were Not Breaches of the “Ordinary Course” Covenant

Snow Phipps Grp., LLC v. KCake Acquisition, Inc., 2020-0282-KSJM (Del. Ch. Apr. 30, 2021)
In Snow Phipps, the Court of Chancery refused to allow a private equity buyer with pandemic-related cold feet to back out of its bargained for agreement to purchase DecoPac, a cake decorating company. In ordering specific performance, the Court found: (1) the durationally insignificant COVID-related business decline did not constitute a material adverse effect (“MAE”); (2) the seller had not violated any of its covenants to operate in the ordinary course by attempting to mitigate business losses; and (3) the condition to closing that the buyer secure debt financing was excused under the prevention doctrine, because the buyer’s actions caused the condition not to be satisfied.

The case involved an agreement, signed shortly before the COVID-19 pandemic began to take hold throughout the United States, to acquire DecoPac. After government-imposed lockdown orders went into effect, the buyer took measures designed to provide itself with a basis to renege. Those measures included daily meetings with litigation counsel, after which the buyer furnished potential lenders with a “shock case” forecast, contradicting the forecasts provided by DecoPac management, to deter such lenders from funding the acquisition. In this post-trial opinion, the Court refused to permit the buyer to back out of the deal that it had struck. 

First, the Court noted that while DecoPac’s business was adversely effected in the early months following the pandemic, its business performance quickly began to recover, and its projections demonstrated that it would soon be reaching its pre-pandemic performance. Thus, the decline in DecoPac’s business was not “durationally significant” and could not constitute an MAE.

Second, the Court found that the seller had not violated any of its covenants to operate in the ordinary course. While the buyer claimed that, by drawing $15 million down on its revolver and effecting cost-cutting measures, the seller had breached its “ordinary course” covenant, the Court found that DecoPac had a history of borrowing from its credit facility and cutting spending in response to sales declines. Therefore, such actions were taken in the “ordinary course.”

Third, the Court found that the lack of debt financing did not justify the buyer’s refusal to close, because the absence of such financing was a problem created by the Buyer’s own deliberate conduct. Applying the “prevention doctrine,” which 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,” the Court deemed the condition that debt financing was available to be excused. 

While the parties’ agreement stipulated to an order of specific performance, which the Court enforced, it also provided that the seller could either seek an award of specific performance or monetary damages (subject to a cap), but never both. Thus, the seller argued that the Buyer could not receive both specific performance and pre-judgment interest from the originally intended closing date. The Court ordered supplemental briefing on that issue.



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