Delaware Chancery Court Requires Buyers To Close On Pre-Coronavirus Deal Notwithstanding Impact Of Pandemic On Cake-Decorating Business
M&A and Corporate Governance Litigation
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  • Delaware Chancery Court Requires Buyers To Close On Pre-Coronavirus Deal Notwithstanding Impact Of Pandemic On Cake-Decorating Business

    On April 30, 2021, then-Vice Chancellor Kathaleen S. McCormick of the Delaware Court of Chancery granted sellers specific performance in a breach of contract action against buyers KCAKE and Kohlberg Funds, arising out of the sale of DecoPac Holdings Inc. (“DecoPac”).  Snow Phipps Group, LLC., et al. v. KCake Acquisition, Inc., et al., 2020-0282-KSJM (Del. Ch. Apr. 30, 2021).  The Court found that DecoPac had not suffered a Material Adverse Event (“MAE”) and had complied with its ordinary course of business covenant, but that the buyers breached the purchase agreement because they had not used reasonable best efforts to secure the debt financing necessary to close the deal and their actions had caused the debt financing to become unavailable.

    Defendants executed a Stock Purchase Agreement in March 2020 to buy DecoPac, a company that sells cake decorations and technology to supermarkets for their in-store bakeries.  DecoPac’s sales dropped sharply as quarantine orders were issued around the country.  Both DecoPac and defendants prepared reforecasts and defendants’ “draconian” reforecast and “pessimistic” refinancing plan projected significant losses.  Defendants shared their revised forecast with the Debt Commitment Letter (“DCL”) lenders and included financing demands for changes to the DCL.  The lenders rejected the refinancing plan.  Defendants then told the seller that DecoPac was likely to experience an MAE, had failed to operate in the ordinary course of business and was unlikely to meet the debt financing condition.  Plaintiffs sued for specific performance on April 14, 2020 and six days later, defendants purported to terminate the purchase agreement.

    The Court found that defendants lacked the authority to terminate the DCL because DecoPac had not suffered an MAE.  In so holding, the Court concluded that DecoPac’s dip in performance was nowhere near the 50% decline in earnings threshold that would likely constitute an MAE and was not durationally significant.  The Court also found DecoPac did not breach its ordinary course covenant by drawing on its revolver and implementing cost-cutting procedures because (i) it had drawn on its revolver before, (ii) disclosed the request to defendants within a day of making it, (iii) offered to repay it within two days of defendants’ objection, and (iv) never used the funds.  Even if a breach had occurred, the Court pointed out that it was easily cured and the purchase agreement required that buyers provide notice of such breach and DecoPac have the opportunity to cure such breach.

    Finally, the Court determined that defendants breached their financing obligations by demanding more favorable terms and refusing to close when the lenders refused to agree.  Defendants argued that the DCL entitled them to make the demands, but the Court disagreed.  The Court also found that defendants exclusively relied on their own “pessimistic” projections—which they never shared with DecoPac—in discussion with the lenders and were uncooperative.  Accordingly, the Court held that the prevention doctrine precluded defendants from avoiding specific performance due to the absence of debt financing, holding that no showing of bad faith was required and that the DCL expired only because defendants “ran down the clock.”  As such, the Court ordered defendants to close on the purchase agreement.