AB Stable VIII LLC v MAPS Hotels And Resorts One LLC – Litigation, Mediation and Arbitration
The COVID-19 pandemic has fundamentally reshaped the M&A landscape. Suddenly important concepts in the field have been turned upside down – especially what we mean when we say “Normal course of business”. In an age when nothing could be described as “ordinary” and companies were forced to adapt quickly to changing government protocols, loss of business and extended absences of key employees, determining what constitutes conduct in the normal course of business for the purposes of complying with the covenants of the transaction has become incredibly difficult. The Delaware Supreme Court recently addressed directly the issue of violations of ordinary course clauses due to the COVID-19 pandemic.
On December 8, 2021, the Delaware Supreme Court issued a bench decision confirming the decision of the Court of Chancery in AB Stable VIII LLC v MAPS Hotels and Resorts One LLCwhich found that a seller had breached a “common course covenant” in a sales agreement for a pending transaction when the seller undertook drastic business changes in response to the COVID-19 pandemic, without first obtaining the consent of (or even inform) the buyer.1 The Supreme Court found that the actions taken by the seller, AB Stable VIII LLC (“AB Stable”) enabled the buyer, MAPS Hotel and Resorts One LLC (“MAPS”) to terminate the sales contract between the two parties (the “Agreement of Sale Agreement”) and refuse to enter into the transaction because AB Stable had breached a covenant requiring it to operate “only in the ordinary course, consistent with past practice in all material respects”.2 The Supreme Court endorsed the Court of Chancery’s reading of the material adverse effect (MAE) clause of sales agreements, finding that the terms “disasters or natural calamities” included the COVID-19 pandemic.3
On September 10, 2019, AB Stable and MAPS entered into the Sale Agreement, under which MAPS would purchase all of AB Stables’ interests in Strategic Hotels & Resorts LLC (“Strategic”), for $5.8 billion. Strategic’s main assets were fifteen luxury hotels located in the United States.4 The transaction languished for a while, and by the end of March 2020, as the COVID-19 pandemic had come into full force, Strategic had made major changes to its operations, temporarily closing two of its hotels and operating others in a “closed but open mode”.5 At no time was MAPS notified of these actions, nor was its consent sought.
After learning of these actions, MAPS issued a formal notice based on AB Stable’s inability to operate Strategic and its subsidiaries in the ordinary course of business, among other misrepresentations. In its notice, MAPS threatened to terminate the sales contract if the breaches were not corrected by May 2, 2020.7 AB Stable responded by filing an action in the Court of Chancery, asking for specific performance to compel MAPS to perform the sales contract.8 The Court of Chancery ruled against AB Stable, finding that the impact of COVID-19 fell under an exception to the MAE clause of the Sales Contract and therefore did not excuse its non-compliance with the commitment to operate in the normal course of business between signing and closing.9
The Supreme Court decision
On December 7, 2021, the Delaware Supreme Court upheld the Court of Chancery’s decision and affirmed the Court of Chancery’s finding that AB Stable breached the normal course covenant of the sales agreement. The sale agreement included a covenant that the business of AB Stable and its subsidiaries (including Strategic) would be conducted in the “ordinary course of business”. consistent with past practice in all material respects“.ten This commitment did not include the qualifier “commercially reasonable efforts”, which meant that strict compliance was required.11
The Supreme Court agreed with the Court of Chancery’s finding that the Strategic had made extraordinary changes that “departed materially from normal business operations” by, among other things:12
- Closure of several hotels;
- Operate other hotels in a “closed but open” manner with limited services and amenities; and
- Termination or dismissal of more than 5,200 full-time equivalent employees.
AB Stable argued that these changes were necessary and that the Supreme Court should look to the actions of other hotels to judge their conduct.13 The Supreme Court concluded that such a comparison would amount to interpreting a commercially reasonable efforts provision where none existed.14 The Supreme Court explored this issue in more detail, comparing the wording of the common course covenant found in the contract of sale to those at issue in other Delaware cases, in particular Akorn, Inc. v. Fresenius Kabi AGwhere the Court of Chancery “looked to a generic pharmaceutical company” to determine which actions fell within the “ordinary course of business”, noting that this case differed due to the explicit inclusion of a commercially reasonable efforts clause .15
Further, the Supreme Court found that AB Stable only notified MAPS of the changes after the fact, rather than seeking MAPS’s consent (or even notifying MAPS) before implementing the changes, and further did not provide additional information to MAPS upon request. be problematic. In particular, the Supreme Court noted that AB Stable “was not crippled by the Ordinary Course Covenant” and could have implemented the changes had it received consent from MAPS, and that MAPS might have wanted react differently “to ensure the long-term profitability of the company”.16
Finally, the Supreme Court concluded that the EAW provision served a different purpose than the normal course undertaking and did not protect AB Stable’s actions. While the two provisions certainly work in tandem, the Supreme Court found that the EAW provision assures the buyer that a business is worth “about the same amount” at the end of the transaction, whereas a d Commitment in the ordinary course promises that a seller will continue to operate in the same way.17 Specifically, the Supreme Court held that the purpose of an EAW provision is to spread “the risk of change in the valuation of a target company”, whereas a normal course undertaking provides that “the target company has not materially altered its operations or business practices”. 18
The Delaware Supreme Court upheld the decision of the Court of Chancery, which found that MAPS had an affirmative right to terminate the contract of sale due to AB Stable’s breach of the ordinary course covenant.
This case is important because it demonstrates the need to carefully draft ordinary course clauses, as well as EAW clauses. These provisions are found in almost all deferred closing sales contracts and, as AB stable shows, the lawyers representing the seller must consider all possible scenarios when drafting and negotiating these clauses, as well as the limitations on the seller’s activity during the period of performance. Further, sellers should be properly informed of these limitations and should exercise caution, even when emergency action is required, to ensure that they comply with the normal course clauses.
1. AB Stable VIII LLC v MAPS Hotels & Resorts One LLC, et al., 2021 WL 5832875 (Del. 8 Dec. 2021); to see
also AB Stable VIII LLC v MAPS Hotels and Resorts One LLC, et al., 2020 WL 7024929 (Del. Ch. 30 November 2020).
2. AB Stable VIII LLC2021 WL 5832875, at *216, 217.
3. AB Stable VIII LLC2020 WL 7024929, at *48, *53.
4. AB Stable VIII LLC2021 WL 5832875, at *201.
9. AB Stable VIII LLC2020 WL 7024929, at *75, *76.
AB Stable VIII LLC2021 WL 5832875, at *210.
AB Stable VIII LLC2021 WL 5832875, at *211, 212.
Identifier. at *212, *213.
ID. at *211 (citing Akorn, Inc. c. Fresenius Kabi AG, 2018 WL 4719347, at *83 (Del. Ch. 1 Oct. 2018).
ID. at 217.
ID. at 216, 217.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.