First Post COVID-19 Judicial Ruling Holding No Obligation to Close a Previously Agreed Upon Transaction
In this widely publicized case, MAPS Hotels and Mirae Asset (“MAPS”) represented by Quinn Emanuel Urquhart & Sullivan, LLP (“Quinn Emanuel”) obtained the first successful post-COVID-19 judicial ruling allowing a buyer to avoid closing a previously agreed upon transaction.
The case involved MAPS’ September 2019 agreement to acquire Strategic Hotels & Resorts (“Strategic”) and its 15 U.S.-based luxury hotels for $5.8 billion from AB Stable. MAPS alleged that subsequent to signing, with the spread and increasing effects of COVID-19, Strategic took actions, such as closing two hotels, limiting operations at others, and laying off thousands of employees without MAPS’ consent. MAPS claimed that these actions were inconsistent with the covenant in the Sale and Purchase Agreement (“SPA”) to operate in the ordinary course. MAPS also claimed that their ability to secure title insurance, a condition to closing, was impeded by AB Stable’s inability to transfer clear title to the properties. Further, MAPS claimed that Strategic had suffered a material adverse effect (“MAE”) between signing and closing. As a result, on May 3, 2020, MAPS notified the AB Stable that they were terminating the agreement.
In response, AB Stable filed a lawsuit in Delaware Chancery Court seeking specific performance and compelling MAPS to close based on its allegation that MAPS’ attempts to terminate the sale and purchase agreement were invalid and that the true reason for their actions was buyer’s remorse. MAPS filed counterclaims seeking a declaration that the AB Stable had breached multiple provisions of the SPA and validating its termination.
Compass Lexecon and its President Professor Daniel Fischel were retained by MAPS through their counsel Quinn Emanuel to assess the performance of Strategic after the signing and the resultant decline in value. Professor Fischel filed two expert reports and testified at trial, opining that the segment of the hotel industry in which Strategic operated suffered disproportionate declines and was not expected to recover for many years. Professor Fischel also responded to AB Stable’s expert’s claims that the 15 hotels had experienced similar or better performance than its closest competitors.
Compass Lexecon also supported the work of MAPS’ contract language expert, Professor John Coates IV of Harvard University, who submitted an expert report and testified at deposition about the language of the ordinary course covenant and the material adverse effect definition.
On November 30, 2020, Vice Chancellor J. Travis Laster found that AB Stable (and its subsidiaries) had failed to operate only in the ordinary course consistent with past practice in all material respects between the signing and closing, and that MAPS had shown that the AB Stable had failed to comply with other necessary closing conditions related to contested title to the hotel properties. As a result, the Court held that MAPS was not legally obligated to close the previously agreed upon transaction. On the MAE issue, Vice Chancellor Laster ruled that, because the pandemic could reasonably have been encompassed in one of the MAE exclusions and there was no disproportionate impact clause, he did not need to assess whether the company had suffered a MAE. In addition, the Court ruled that MAPS should be refunded their deposit of $581.7 million plus interest, awarded their transaction expenses of approximately $3.7 million, and in addition awarded millions of dollars of fees as the prevailing party.
Compass Lexecon worked closely with counsel from Quinn Emanuel including Michael B. Carlinsky, Andrew J. Rossman, and Kimberly E. Carson, who successfully represented MAPS. We also work closely with Michael A. Barlow of MAPS’ Delaware counsel Abrams & Bayliss LLP.
In addition to Professor Fischel, the Compass Lexecon team included Rajiv Gokhale, Jessica Mandel, Pavithra Kumar, Kevin Hartt, Heather Freilich-Farby, Monica Xie, Noah Mathews and Nikita Tourani, among others.
This case is one of the many similar acquisition-related disputes that have emerged from the COVID-19 pandemic. Compass Lexecon has been retained on either the buyer or seller side in virtually all of these cases and also in multiple other engagements as consultants where litigation was avoided. The MAPS victory follows the historic victory of Compass Lexecon’s client Fresenius in the Akorn v. Fresenius case, where the Delaware Chancery Court (later affirmed by the Delaware Supreme Court) held for the first time that a buyer was excused from closing its transaction because the target had suffered an MAE. Fresenius was successfully represented in that case by Paul, Weiss, Rifkind, Wharton & Garrison LLP.