On December 8, 2021, the Supreme Court of Delaware sitting en banc
affirmed a Court of Chancery ruling that excused the buyer of a group of high-end hotel properties (the “Buyer”) from closing on the acquisition from AB Stable VIII LLC (the “Seller”)—an indirect subsidiary of Dajia Insurance Group, Ltd. (“Dajia”), formerly Anbang Insurance Group, Ltd. (“Anbang”)—because the Seller breached its covenant to operate the hotels in the ordinary course between signing and closing. AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC
, C.A. No. 2020-0310 (Del. Dec. 8, 2021). Because the Court found this issue dispositive, it did not reach any other issues on appeal.
On September 10, 2019, the Buyer agreed to purchase fifteen hotel properties from the Seller for $5.8 billion. Closing was expected to be delayed in light of a series of challenges arising out of litigation with the Seller and certain affiliates involving purportedly fraudulent deeds on certain of the properties and delays in closing debt financing, but was tentatively set for the end of March 2020. When the COVID-19 pandemic hit barely one month prior to the April 2020 closing target, the hotels that were the subject of the sale made extensive changes to their operations, including unprecedented closures, reduced staffing, and cessation of service in bars and restaurants. The Seller informed the Buyer’s parent about these actions and sought consent, but the Buyer’s parent requested more information, which was not provided, and ultimately did not give consent. On the closing date, the Buyer delivered a notice of default to the Seller and refused to close, alleging inter alia
that (i) the Seller had made inaccurate representations of good and marketable title due to the fraudulent deed litigations, and (ii) the Seller’s failure to operate in the ordinary course of business excused closing. On April 27, 2020, the Seller sued to compel the Buyer to close.
As discussed in our post regarding the Court of Chancery's November 30, 2020 decision, following an expedited trial, the Court of Chancery found that the Seller breached its ordinary-course covenant by making “extraordinary changes to its business” without Mirae’s consent notwithstanding that the changes were driven by the pandemic, consistent with the actions of others in the industry, and proportional to the extraordinary circumstances. (See
Shearman & Sterling LLP, Delaware Court of Chancery Rules Inadequate Disclosure and Pandemic-Driven Changes to Hotel Operations Breached Covenants And Excused Closing
, December 8, 2020 Need-to-Know Litigation Weekly). The Court of Chancery also found that the Seller breached a condition requiring title insurance, and that the Buyer did not materially contribute to or cause such breach.
The Seller appealed, and the Delaware Supreme Court affirmed. In so holding, the Court emphasized that the ordinary-course covenant required the Seller to operate “consistent with past practice in all material respects.” The covenant contained no reasonableness qualifier, made no reference to conduct in the industry, and did not contemplate modification for changed circumstances. The Court therefore declined to measure “the ordinary course of business” by those actions reasonably consistent with industry behavior, even though the Seller’s “actions might have been reasonable in response to a world-wide pandemic.” The Court also declined to import the material adverse effect (or MAE) provision—which the Seller argued allocated pandemic risk to the Buyer—into the covenant. The Court observed that the covenant made no reference to the MAE provision and further concluded that the two provisions had different materiality standards and the different purposes. Finally, the Court determined that the Seller failed to obtain consent from the Buyer to depart from the ordinary course, concluding that the Seller only sought consent after the changes were made, insisted that consent was in any event not required, and did not respond to Mirae’s request for additional information. Thus, the Court found it was not unreasonable for Mirae to withhold consent. Quoting the Court of Chancery, the Court emphasized that “[c]ompliance with a notice requirement is not an empty formality.”