(Reuters) - If you’re involved in a deal that is at risk cratering as a result of the COVID-19 economic disaster, there are two important and intertwined lessons in a ruling Thursday from Vice Chancellor Joseph Slights of Delaware Chancery Court.
After a two-hour phone hearing, the vice chancellor denied a motion by Juweel Investors, an investor group led by the private equity fund Certares, to expedite a trial to determine whether the Carlyle Group and the Singapore sovereign wealth fund GIC must abide by their commitment to purchase Juweel’s stake in American Express Global Business Travel. Juweel’s lawyers at Dontzin Nagy & Fleissig had positioned their request to expedite as the only chance to salvage a $1.5 billion deal, arguing that a crucial and related financing agreement terminates on June 30. Carlyle and GIC, Juweel asserted, were remorseful buyers trying to stall until time runs out. So without a Chancery Court order forcing them to close before June 30, Juweel argued, “the transaction will be scuttled.”
Vice Chancellor Slights said he understood the implications of Juweel’s motion. And he said that even in the midst of the COVID-19 epidemic, Delaware courts take contractual commitments, like the agreement Carlyle and GIC signed last December with Juweel, very seriously. But it would probably not be feasible even in normal times, the judge said, to allot only six weeks to prepare for and conduct a trial raising difficult legal and factual questions about whether economic fallout from COVID-19 constitutes a material adverse event that permits Carlyle and GIC to walk away from the Amex GBT deal. In the midst of a pandemic, with most people confined to their homes, it’s simply impossible – and would even put people’s health at risk – to expect the two sides to collect, review and exchange thousands of documents, hold perhaps dozens of depositions, engage expert witnesses and present their cases at a full-blown trial, Vice Chancellor Slights said.
“I cannot order time to stop, I cannot shrink the amount of work that would be required to get Juweel where it wants to go, and I cannot, obviously, end the COVID-19 pandemic,” the vice chancellor said.
And besides, the judge said, there was another reason to deny Juweel’s motion to rush the trial on the seller’s demand for specific performance: Carlyle first informed Juweel on April 8 that it believed fallout from the COVID-19 epidemic was a material adverse event that would preclude the Amex GBT deal from closing, yet Juweel did not file its suit to compel Carlyle and GIC to complete the deal until May 6. At the hearing, Juweel counsel Tibor Nagy told Vice Chancellor Slights that there was a good reason for the delay. Juweel wanted to show Carlyle that it could still meet all of the closing conditions laid out in the agreement and to persuade Carlyle to complete the transactions. Those negotiations seemed to be progressing, Nagy said, with Carlyle agreeing to a delayed closing date in early May. If Juweel had sued immediately, Nagy said, it would have changed the whole tenor of talks.
The Vice Chancellor was unpersuaded. Juweel knew it was up against a fixed June 30 deadline on financing for the deal, he said. Under that circumstance, Slights said, it should have sued immediately after Carlyle first said it was not going to close the deal. Litigating a specific performance case in just under three months would have been an extraordinary challenge, he said. Litigating it in under two months was impossible – and Juweel, he said, bears “a nontrivial portion of the blame for the court’s inability to grant the relief (it) seeks.”
Juweel said in a statement that it continues to believe that Carlyle and GIC reneged on their contractual commitment to the deal even though language in the transaction agreement precluded them from doing so based on the pandemic. “Juweel will hold them accountable for this breach,” the statement said. “We respect the judge’s decision today that the unique circumstances of the pandemic will not permit for an expedited trial but we are confident in our case and will continue to pursue it vigorously.” A spokesman declined to clarify whether Juweel will now just go after money damages – which its counsel said were contractually capped and would not provide an equitable remedy - or will somehow attempt to renegotiate the separate financing agreement to extend the deadline for the transactions.
Juweel also said that it acted “with the utmost diligence” once Carlyle and GIC made it clear that they would not close the deal. “The law in Delaware requires no less certainty,” it said. It blamed Carlyle and GIC for “jumping the gun” and “secretly drafting lengthy court papers” while engaging in negotiations.
So: What are the two lessons of the Juweel case? The first should be obvious from Vice Chancellor Slights’ admonition of Juweel for not turning to the courts until May: If your deal is imperiled by the fallout from COVID-19, sue now. If you’re a seller, sue to compel specific performance from the buyer. If you’re a buyer, sue to break the deal by claiming contract breaches or a material adverse event. Vice Chancellor Slights made it clear that Delaware courts want to resolve these disputes but they need time to do it, especially now that litigation is hobbled by COVID-19 shutdowns. Keep negotiating. But get your suit on the docket.
The second lesson is a bit more subtle, but it’s actually the underlying reason why Vice Chancellor Slights was willing, if Juweel fairly represented the consequences of its motion to expedite the trial, to let the Amex GBT deal die rather than rush the proceeding: Delaware judges do not believe it’s going to be easy to figure out the M&A implications of the COVID-19 pandemic.
Juweel’s lawyer, Nagy, told the judge that the case isn’t especially complicated. Interpreting the contract’s MAE clause and its carve-outs for changes in economic and regulatory conditions, he said is purely a matter of legal interpretation that Vice Chancellor Slights could conclude even before a trial began in late June. The two sides could restrict depositions to only five apiece. And there might not even be a need for experts.
Carlyle counsel Jonathan Polkes of Weil Gotshal & Manges and GIC counsel Kenneth Nachbar of Morris Nichols Arsht & Tunnell portrayed a much more complex case that will require the exchange of perhaps millions of documents and require the depositions of dozens of witnesses. Polkes reminded Vice Chancellor Slights several times of the 2018 case in which Fresenius Kabi AG invoked a material adverse event clause to escape its deal to buy the generics drugmaker Akorn – the only case in which Delaware Chancery Court has allowed a buyer to claim an MAE to get out of a transaction. There were 59 depositions in that case, Polkes said. The trial lasted 10 days. The judge took months to write his opinion in the Akorn case.
Vice Chancellor Slights agreed that there won’t be easy answers in this dispute. He described the “sheer breadth and complexity of the legal issues … and the multiple factual issues that are attached to the legal issues.” Even the undauntable former Delaware Chief Justice Leo Strine once called material adverse event clauses “dauntingly complex,” Slights noted. And this case implicates not only “the MAE issue and all of its contours,” he said, but other nuanced disputes about the obligations of both the buyers and the seller.
Every deal disrupted by the pandemic is going to have similar legal and factual complexities. Vice Chancellor Slights’ decision is a reminder that Chancery Court does not intend to sidestep those tough issues, even with the economy in a tailspin and big deals on the brink of collapsing.
Litigation should always be a last resort in M&A deals, especially when it comes to almost-never-successful assertions of material adverse events. But if your deal is headed for a brick wall, don’t wait to sue.