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Victoria's Secret, Embraer, WeWork, 1-800-Flowers, the number of deals wrecked by covid and now generating litigation over ordinary course operating covenants and MAC clauses continues to mount. 1/11
Cases will turn on specific contracts, of course, as well as background contract doctrines of frustration of purpose, impractability/impossibility, and good faith. 2/11
MACs are notoriously hard to invoke successfully, although one buyer litigated successfully (Fresenius) and others have renegotiated or got targets to agree to terminate in the shadow of a likely MAC. 3/11
For my views on MACs post-Fresenius, see: https://www.reuters.com/article/us-otc-akorn/the-mac-wall-has-been-breached-should-deal-lawyers-worry-idUSKCN1MC2U3
For my views on MACs post-Fresenius, see: https://www.reuters.com/article/us-otc-akorn/the-mac-wall-has-been-breached-should-deal-lawyers-worry-idUSKCN1MC2U3
Here, many MACs contain explicit exceptions for pandemics. But then they sometimes have exceptions to the exception if the pandemic causes disproportionate harm. 4/11
But MACs are not the only important clause to review. If the target has had to take unusual actions in response to covid, the ordinary course covenant may come into play, although again, those often have deal-specific exceptions. 5/11
"Ordinary course" might mean what it sounds like, in which covid may mean it's been violated. But it might encompass ordinary responses to extraordinary events, in which case maybe not. And such covenants may not provide an out unless they also cause a MAC. 6/11
Some contracts may contain ongoing or forward-looking reps that have to be true at closing, again possibly subject to a MAC exception. 7/11
At issue, too, will be the buyer's actions and motives. Is it just trying to get out of a deal that is no longer a good one, given the economic depression we're entering? Did it act in good faith to pursue the deal up to the point that the alleged target breach occurred? 8/11
Most deals have a duration of 3-6 months, so we are entering the likely peak of deal-related covid disputes. Deal lawyers sidelined by covid might help their litigation colleagues review pending contracts with more care than perhaps is usually possible. 9/11
Beyond typical pending deals, longer-term contracts that create options, rights of first refusal, buyouts, and the like may also generate disputes, given the massive effective repricing down of most but not all business assets. 10/11
Useful coverage and analysis:
https://www.nytimes.com/2020/04/25/business/boeing-embraer-acquisition-coronavirus.html?action=click&module=Latest&pgtype=Homepage
https://www.reuters.com/article/us-otc-mae/sycamore-partners-invokes-mae-clause-in-bid-to-escape-victorias-secret-deal-idUSKCN2243CK
http://chanceryblog.com/court-procedure/ (scroll down past litigation material)
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https://www.nytimes.com/2020/04/25/business/boeing-embraer-acquisition-coronavirus.html?action=click&module=Latest&pgtype=Homepage
https://www.reuters.com/article/us-otc-mae/sycamore-partners-invokes-mae-clause-in-bid-to-escape-victorias-secret-deal-idUSKCN2243CK
http://chanceryblog.com/court-procedure/ (scroll down past litigation material)
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