CHAPTER 01 10 Regulatory and Judicial Developments That GCs and Boards Need to Know
The Court followed Fairstone in concluding that Cineplex had not breached its ordinary course covenant, which required Cineplex to operate the business “consistent with past practice.” The Court cited Fairstone for the proposition that “‘consistent’ does not mean identical; it means congruous, compatible and adhering to the same principles of thought and action.” It found that Cineplex operated in the ordinary course when it deferred payments in response to theatre closures, actions that were consistent with the cash management tools that it had used to manage its liquidity in the past. The Court also noted that the exclusion of a pandemic from the definition of MAE effectively allocated the risk of the occurrence of the pandemic to Cineworld, a risk that could not be reallocated to Cineplex by a very narrow interpretation of the ordinary course covenant. The Court concluded that Cineworld had no basis to terminate the agreement and ordered it to pay Cineplex a staggering C$1.24 billion for lost synergies. It remains to be seen whether the Court’s decision, particularly as it pertains to the unprecedented damages award, will withstand appellate scrutiny. MAE provisions, including carve-outs that specify what does not constitute an MAE, and covenants delineating how the business must be managed until closing should not be boilerplate.
KEY TAKEAWAYS
– Caveat emptor generally applies to MAEs. Absent express language to the contrary, an acquirer of a business generally accepts forward-looking systemic risks associated with the business between signing and closing. – Every word in an agreement matters. MAE provisions, including carve-outs that specify what does not constitute an MAE, and covenants delineating how the business must be managed until closing should not be boilerplate. Issuers and their advisers need to ensure that they negotiate these provisions to reflect the parties’ desired risk allocation. These clauses must also be read and understood in the context of the agreement as a whole. If risks are allocated to the acquirer through carve-outs to the definition of MAE, it may be difficult to convince a court to interpret other provisions in a way that effectively reallocates that risk to the target. – Address potential conflicts before they become conflicts. Some MAE provisions allocate the risk of a pandemic to one party and the risk of a change in law, which could include a lockdown order precipitated by a pandemic, to the other. Forward-thinking parties may wish to include language to clarify which party bears the risk when there may be multiple causes for an MAE.
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Davies | dwpv.com
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