Delaware Court Of Chancery Rules Inadequate Disclosure And Pandemic-Driven Changes To Hotel Operations Breached Covenants And Excused Closing
On November 30, 2020, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery found that Mirae Asset Global Investments Co. was contractually entitled to terminate its agreement to purchase 15 U.S. hotels from a subsidiary of Dajia Insurance Group (“Seller”). AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC et al., C.A. No. 2020-0310-JTL (Del. Ch. Nov. 30, 2020). Mirae refused to close the transaction in April, asserting that Seller had suffered an MAE and failed to satisfy closing covenants for the hotel deal worth $5.8 billion. Seller sued to force Mirae to close, but the Court determined that even though there was no MAE, Mirae nevertheless had the right to terminate the sale agreement because Seller breached its title insurance and ordinary course closing covenants.
Mirae asserted that Seller failed to fully and fairly disclose a years-long battle with a “shadowy and elusive figure” who had filed fraudulent deed grants in California (including the hotels to be sold to Mirae) and brought litigation in California and Delaware to enforce fraudulent arbitration awards based on a forged arbitration agreement. Mirae also claimed that Seller made drastic changes to its hotel operations in response to the COVID-19 pandemic. These events, Mirae alleged, made it impossible to secure title insurance—breaching Seller’s covenant to deliver title in a way that allowed for insurance—and constituted a violation of Seller’s ordinary course covenant. Mirae also asserted that Seller violated the bring-down covenant because the impact of the pandemic had caused an MAE. Seller, by contrast, asserted that Mirae’s own conduct vis-à-vis the insurers caused the title insurance to be unavailable and that Mirae was trying to avoid closing because it had waited too long to obtain the necessary financing.
In his 243-page post-trial ruling, Vice Chancellor Laster rejected the assertion that Mirae had intentionally delayed the financing, concluding that Seller’s failure to timely and adequately disclose the breadth of the fraudster’s efforts caused the delay. Further, the Court concluded that regardless of Mirae’s interactions with the insurers, the fraudulent transfers precluded receipt of title insurance and that Seller therefore breached the title insurance covenant. Finally, the Court held that the hotels’ “extraordinary changes” to their operations as a result of the pandemic “significantly altered the operation of the business.” Even though “the pandemic warranted” these changes, the Court nevertheless concluded that existing Delaware law did not permit reasonable departures from the ordinary course of operations where a seller had committed to operate in the ordinary course. The Court found, however, that the bring-down covenant was not violated because the pandemic qualified as a carved-out “natural disaster or calamity” under the MAE provision. The Court ultimately excused Mirae from closing, ordered Seller to return a $581 million deposit, and awarded Mirae attorneys’ fees and expenses and court costs.