On April 30, 2021, Quinn Emanuel obtained a complete victory in the Delaware Court of Chancery for its clients, Plaintiffs Snow Phipps Group and DecoPac, in Snow Phipps Group, LLC, v. KCAKE Acquisition, Inc., Case No. 2020-0282-KSJM. Describing the decision as a “victory for deal certainty,” the Court resolved all issues in favor of the Plaintiff seller and ordered the buyer, Kohlberg & Co., to close on the $550 million transaction.
This case marked only the second so-called “busted deal” case to go all the way to trial and judgment in Delaware Chancery Court in the COVID-19 era. (Quinn Emanuel also tried and won the other case, AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC, C.A. No. 2020-0310-JTL, for its client Mirae Asset.) This dispute concerned a buyer’s failed efforts to scuttle the sale of leading cake decoration supplier, DecoPac. In March 2020, at the outset of the pandemic, Kohlberg & Co. entered into an agreement with Snow Phipps Group for the purchase of DecoPac and agreed to use its reasonable best efforts to consummate debt financing. Soon after signing, with government stay-at-home orders increasing and DecoPac’s sales declining, Kohlberg & Co. developed a case of buyers’ remorse. Although DecoPac’s sales quickly recovered, Kohlberg sought to terminate the transaction, claiming that its committed debt financing was no longer available; that DecoPac was likely to experience a Material Adverse Effect (MAE); and that DecoPac had been operating outside of the ordinary course of business. This litigation ensued, with Plaintiffs seeking to enforce the specific performance provision of the purchase agreement to close the transaction and Defendants seeking to escape the deal, arguing that the Court could not order specific performance in the absence of fully-funded debt financing.
Following a five-day trial in January 2021, the Delaware Court of Chancery resolved all issues in favor of the Plaintiffs and ordered Kohlberg & Co. to close on the transaction for the agreed purchase price of $550 million. In its 126-page opinion, the Court found in favor of Plaintiffs and concluded that Kohlberg & Co. had “set on a course of conduct predestined to derail Debt Financing and supply a basis for terminating the agreements.” The Court held that Kohlberg & Co. contributed materially to the lack of debt financing by breaching its obligation to use reasonable best efforts to obtain financing and, invoking the prevention doctrine, the Court ordered specific performance. The Court also found that Plaintiffs proved that DecoPac did not suffer an MAE, given the durational insignificance and immateriality of the sales declines, and even if it had, the agreement’s MAE carve-out provision for events “related to” government orders applied and DecoPac had not suffered disproportionately compared to its peers. Finally, the Court soundly rebuffed any arguments that DecoPac had operated outside of the ordinary course of business, noting that many of Defendants’ arguments on ordinary course had been waived.