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Appellate M&A Victory

February 2022

In a path-breaking decision of significant importance to M&A parties and practitioners, the Delaware Supreme Court recently affirmed a complete trial victory for firm client Mirae Asset, the largest asset manager in South Korea.  In September 2019, Mirae Asset agreed to buy 15 U.S.-based luxury hotels for $5.8 billion from Anbang, a Chinese financial conglomerate.  The deal was scheduled to close in April 2020.  Then the COVID-19 pandemic hit.  In response, Anbang shuttered some of the hotels, slashed operations in others, and laid off 5200 employees.  Mirae Asset also learned about a defect in title that Anbang had concealed.  Mirae Asset then terminated the deal based on several covenant and condition breaches, including Anbang’s failure to operate the hotels “only in the ordinary course of business consistent with past practice” until closing.  Anbang sued Mirae Asset in the Delaware Court of Chancery to force it to close the terminated deal.  In a trial court victory for Quinn Emanuel and its client, the Court of Chancery ruled in favor of Mirae Asset based on Anbang’s breaches of the ordinary course covenant and a covenant related to title insurance.  The court ruled for Mirae Asset, ordering the return of its $581 million deposit and awarding it all of its attorneys’ fees and costs.

On appeal to the Delaware Supreme Court, Anbang sought to undo those ordinary-course and title insurance rulings.  For Mirae Asset, members of the firm’s appellate practice teamed with the trial team to defend the Court of Chancery’s ruling.  The Delaware Supreme Court, sitting en banc, affirmed.  Chief Justice Seitz’s opinion not only vindicated Mirae Asset’s win but also made new textbook law on ordinary course covenants that will govern future mergers and acquisitions practice in Delaware.

After first faulting Anbang for the failure of the transaction, the court agreed with Mirae Asset’s arguments on the meaning and application of the “ordinary course covenant,” a common term in Delaware contracts.  The covenant requires a seller to act “only in the ordinary course of business” between signing and closing. The court clarified that this term “in general prevents sellers from taking any actions that materially change the nature or quality of the business that is being purchased, whether or not those changes were related to misconduct.”  (Op. 24.)  To be sure, the specific language of the contract term in question will likely control the outcome.  The court noted that Mirae Asset’s agreement with Anbang here contained additional language protecting the buyer:  the seller could act “only” in the ordinary course of business “consistent with past practice.”  Moreover, the agreement lacked any qualifier that seller need make only “commercially reasonable efforts” to act in the ordinary course.  The court therefore concluded that the agreement here imposed an unconditional obligation “measured by [seller’s] operational history, and not that of the industry in which it operates.”  (Op. 27.)  Within this framework, there was “overwhelming evidence supported by a comprehensive factual record that the Seller made changes that were wholly inconsistent with past practice.”  See Op. 32 (cleaned up).

The Delaware Supreme Court also concluded that Anbang “was not hamstrung” by the ordinary course covenant from making reasonable changes to the business in response to the pandemic; it was merely barred from making such changes unilaterally without Mirae Asset’s advance consent.  The court noted that Mirae Asset “might have wanted to respond to the pandemic in different ways, to ensure the long-term profitability of the business or to prioritize one area over another.”  (Op. 37).  If Anbang had sought Mirae Asset’s prior consent and Mirae Asset had “unreasonably” withheld such consent, Anbang could have challenged that and gone forward with reasonable modifications, litigating the reasonableness of those changes later if necessary.

Going forward, this decision will likely cause more awareness among deal practitioners of the importance of  the specific language of ordinary-course covenants and similar clauses, especially in a state like Delaware that enforces contracts as written.  The court’s interpretation of the notice-and-consent provision reminds parties that,  when in doubt, they should seek a counterparty’s consent and treat that process as more than a mere formality.    And the decision also reminds deal lawyers that they may wish to insert “commercially reasonable efforts” qualifiers into any provisions, including notice-and-consent provisions, that a party wishes to be less than absolute unconditional obligations.     

The case is captioned AB Stable VIII v. MAPS Hotels, No. 71, 2021, 2021 WL 5832875 (Del. Dec. 8, 2021).