Ordinary course in exceptional times
Numerous high-profile M&A deals hit by the COVID-19 pandemic have failed this year, leading to litigation centered on whether buyers were required to close. In these “broken deal” cases, in which the business activity of the acquisition targets changed in response to the pandemic, compliance with the usual rate agreements – a core contractual clause for M&A – by the seller has turned out to be a highly controversial issue. Ordinary rate agreements are designed to ensure that the deal the buyer acquires upon closing is substantially the same as the deal he has contracted. But deal parties have denied what a promise by the seller to operate the target in the “normal course of business” means in the context of an extraordinary event like the pandemic.
On November 30, 2020, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery, the country’s highest commercial court, issued the first Opinion after the trial in one of these COVID-19 cases with a “broken deal” and addressed this problem directly. The court ruled: “The buyer has proven that due to the COVID-19 pandemic [the target] made extensive changes in his business. As a result of these changes, the company’s business activities were not only carried out in the course of normal business operations, which corresponds to previous practice in all essential respects. The covenant compliance condition has therefore failed and releases the buyer from his obligation to conclude. “
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