Buyer can dodge $5.8 bln hotel deal after seller’s 'drastic’ COVID response: Dela. Supreme Court

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The judge's bench is seen in a courtroom at the Delaware Supreme Court in Dover, Delaware, U.S., June 10, 2021. REUTERS/Andrew Kelly

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(Reuters) - M&A lawyers who draft contracts and litigate over busted deals will need to pay more heed to ordinary course covenants after the Delaware Supreme Court’s decision on Wednesday in AB Stable VII LLC v. MAPS Hotels and Resorts One LLC.

The Delaware justices ruled that MAPS, a subsidiary of South Korea’s Mirae Asset Financial Group, was entitled to walk away from a $5.8 billion deal to acquire 15 U.S. luxury hotels from AB Stable, an indirect subsidiary of China’s Anbang Insurance Group Ltd, because Anbang’s drastic response to the COVID-19 pandemic breached the ordinary course covenant in their M&A contract.

The provision required Anbang to run its hotels “only in the ordinary course of business, consistent with past practice in all material respects.” Anbang’s appellate lawyers at Wachtell, Lipton, Rosen & Katz argued that the company – like other luxury hotel operators, including Mirae – closed hotels, cut services and laid off workers to preserve its business in the face of a precipitous decline in travel. It would not make any sense, Anbang said, to interpret the ordinary course provision to require the company to run its business into oblivion by operating as if there were no global pandemic.

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But the Delaware justices, in an opinion written by Chief Justice Collins Seitz, ruled that Anbang was bound by the covenant it agreed to. The parties could have negotiated different language for the ordinary course provision, such as an exception for commercially reasonable actions or for action in accord with industry standards. The clause, however, didn’t include those qualifiers, the justices said. It required Anbang’s actions to be measured against the company’s own operational history.

Anbang still had a way to respond to COVID without breaching the ordinary course covenant, the decision said: The seller could have sought Mirae’s consent before shutting down two hotels and laying off thousands of workers.

The ordinary course clause in their deal contract included a provision that might have given the seller leeway to make dramatic changes as long as the buyer agreed to them. But Anbang, the justices said, acted before seeking Mirae’s consent, then failed to respond to Mirae’s questions when Anbang finally told its M&A partner about the shutdowns and layoffs.

Anbang “was not required to run its hotels into the ground to comply with the sale agreement,” the court wrote. “But the seller had a contractual obligation to secure [Mirae’s] consent … before making drastic changes to its hotel operations. Having failed to do so, it breached the sale agreement.”

The Supreme Court ruling, which affirmed a November 2020 decision from Vice Chancellor Travis Laster of Delaware Chancery Court, means Mirae will get back its $582 million deposit, plus interest of more than 5%. Anbang is also on the hook for more than $33.5 million in legal fees to Mirae, under the judgment Laster entered in February.

Mirae counsel Michael Carlinsky of Quinn Emanuel Urquhart & Sullivan told me that the Supreme Court’s ruling will heighten the attention paid to ordinary course clauses.

Material adverse event provisions have long dominated busted-deal litigation, Carlinksy said, while ordinary course covenants have been “the forgotten child.” But now sellers are on notice that buyers will scrutinize the actions they take between deal signings and closings, said Carlinsky, who led Mirae’s case in the trial court. (His partner Kathleen Sullivan argued at the Delaware Supreme Court.)

The decision is also a warning to sellers that they should talk to buyers about dramatic business decisions, Carlinsky said: “The obligation to give notice is not an empty formality. The ruling forces a dialogue. The buyer has to have a say.”

Anbang counsel William Savitt of Wachtell emailed that he was not available for comment.

The Delaware Supreme Court decision includes a longer-than-usual recitation of the bizarre atmospherics surrounding Anbang’s sale to Mirae, even though the odd backstory is mostly incidental to the court’s analysis of the ordinary course clause.

As I’ve reported, a copyright troll who had previously tangled with Anbang concocted a sophisticated, multi-jurisdictional scheme to cast doubt on Anbang’s title to some of the hotels in the Mirae deal. Anbang’s deal lawyers at Gibson, Dunn & Crutcher were intimately familiar with the troll’s scheme, but consistently minimized the issue in communications with Mirae’s deal lawyers from Greenberg Traurig, Mirae’s financiers and the title insurers Mirae needed to execute the acquisition.

In Chancery Court, Laster was so incensed by Gibson Dunn’s conduct that he said the firm and its client had “committed fraud about fraud.” The vice chancellor blamed Anbang and Gibson Dunn for the deal’s collapse, writing that if they had fully and timely disclosed the troll’s plot to obtain fraudulent deeds, the transaction might have concluded before COVID struck.

On appeal, Anbang’s Wachtell lawyers attempted to lay blame for the deal’s demise on Greenberg Traurig, not Gibson Dunn.

There was no need for Gibson Dunn to keep Mirae and other deal participants advised of every wrinkle in Anbang’s campaign to squelch the troll’s fake deed scheme, Wachtell said, since there was no real risk from deeds so overtly fraudulent that they “might as well have been drafted in crayon.” But Greenberg, according to Wachtell, used the excuse of the fake deeds to lobby title insurers to drop coverage, giving its remorseful client a justification for ditching the acquisition.

The Delaware justices were not as harsh as Laster about Gibson Dunn’s conduct – but they also did not excuse the firm’s limited disclosures to Mirae and other deal participants. The decision cited many instances in which Gibson Dunn chose not to reveal relevant information, once describing the firm as “obfuscating.” By contrast, the Delaware Supreme Court portrayed Mirae’s lawyers as keeping title insurers informed as information emerged, in part to assure that insurers could not someday deny coverage based on withheld information.

A spokesperson for Gibson Dunn did not provide a response to the Delaware justices’ ruling.

Read more:

In appeal over busted $5.8 bln hotel deal, Anbang throws shade at Greenberg Traurig

Delaware judge excoriates Gibson Dunn in Anbang/Mirae busted deal ruling

Chancery's DecoPac opinion shows 'ordinary course' breaches will remain extraordinary

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Alison Frankel has covered high-stakes commercial litigation as a columnist for Reuters since 2011. A Dartmouth college graduate, she has worked as a journalist in New York covering the legal industry and the law for more than three decades. Before joining Reuters, she was a writer and editor at The American Lawyer. Frankel is the author of Double Eagle: The Epic Story of the World’s Most Valuable Coin.