SEITZ, Chief Justice:
MAPS Hotel and Resorts One LLC (the "Buyer") agreed to purchase fifteen hotel properties from AB Stable VIII LLC (the "Seller") for $5.8 billion. A closing delay brought an unexpected problem—the novel coronavirus COVID-19 and the damage it inflicted on the hospitality industry. In response to the pandemic and without securing the Buyer's consent, the Seller made drastic changes to its hotel operations. The transaction was also plagued by problems with fraudulent deeds covering some of the hotel properties. The Buyer eventually called off the deal, relying on the Seller's failure to comply with the sale agreement.
The Seller sued in the Court of Chancery to require the Buyer to complete the transaction. The Court of Chancery concluded that the Buyer could terminate the sale agreement because the Seller breached a covenant and a condition in the sale agreement. First, according to the court, the Seller violated the ordinary course covenant by failing to operate in the ordinary course of its business—closing hotels, laying off or furloughing thousands of employees, and implementing other drastic changes to its business—without the Buyer's consent. And second, a condition requiring
On appeal, the Seller argues that it satisfied the Ordinary Course Covenant because the covenant did not preclude it from taking reasonable, industry-standard steps in response to the pandemic; the court's ruling negated the parties' allocation of pandemic risk to the Buyer through the Material Adverse Effect provision; and its breach of the notice requirement in the covenant was immaterial. The Seller also claims that the Court of Chancery gave too expansive a reading to the exception in the title insurance condition, or, alternatively, that the court incorrectly found that the Buyer did not contribute materially to its breach.
We affirm the Court of Chancery's judgment. The court concluded correctly that the Seller's drastic changes to its hotel operations in response to the COVID-19 pandemic without first obtaining the Buyer's consent breached the ordinary course covenant and excused the Buyer from closing. Because the Seller's failure to comply with the ordinary course covenant is dispositive of the appeal, we do not reach whether the Seller also breached the title insurance condition.
Appellee AB Stable VIII LLC is an indirect subsidiary of Dajia Insurance Group, Ltd. ("Dajia").
After leadership changes in 2018 and new regulations restricting Chinese companies from owning overseas investments, Anbang decided to divest itself of its U.S. hotels, and opened bidding for Strategic in April 2019. Anbang received first-round bids from seventeen potential bidders by early May 2019. Mirae Asset Financial Group ("Mirae"), a Korea-based financial services conglomerate with over $400 billion in assets under management, emerged as a potential acquirer. On August 5, 2019, Mirae made its final bid—$5.8 billion to acquire a 100% interest in Strategic. During the sale process, Mirae created a subsidiary, MAPS Hotels and Resorts One LLC, "exclusively for the purpose of acquiring [Strategic]."
Unknown to Mirae at the time of its final bid, Anbang and its legal counsel, Gibson Dunn & Crutcher LLP ("Gibson Dunn"), had become aware of fraudulent deeds linked to six of the hotels owned by Strategic. Anbang had been in litigation with the perpetrator of the fraudulent deeds, Hai Bin Zhou, for over ten years in five different countries, and knew about some of the fraudulent deeds as early as
On August 16, 2019, Anbang's lead real estate attorney from Gibson Dunn called Mirae's lead counsel at Greenberg Traurig, LLP to tell him Gibson Dunn "had recently learned that a twenty-something-year-old Uber driver with a criminal record had recorded deeds against [some of Strategic's] Hotels."
At the same time, a group of corporations associated with Zhou (the "DRAA Petitioners") filed an action in the Court of Chancery against Anbang and affiliated entities. The Court of Chancery referred to this suit as the "DRAA Chancery Action."
Meanwhile, the primary title insurer at the time investigated the fraudulent deeds and "deemed the risk uninsurable."
On September 10, 2019, the Seller and the Buyer executed a Sale and Purchase Agreement (the "Sale Agreement"). In it, the Seller agreed to sell all its member interests in Strategic to the Buyer for $5.8 billion (the "Transaction") at a time to be determined. In light of the fraudulent deeds and lack of debt financing, the Sale Agreement pushed off closing to provide enough time to quiet title and allow the Buyer to obtain financing, added a "Title Insurance Condition" to "enabl[e the] Buyer to obtain title insurance that either did not contain an exception from coverage for the Fraudulent Deeds or which included an exception and then affirmatively provided coverage through an endorsement," and included a "Litigation Plan" for Anbang and Gibson Dunn to address the fraudulent deeds.
In September 2019, Gibson Dunn filed actions in Alameda, California to quiet title to the hotels subject to the fraudulent deeds, hoping to resolve the issues there. But in October and November 2019, attorneys in Delaware, representing the DRAA Petitioners, filed documents in the DRAA Chancery Action purporting to be arbitration awards. These documents entitled the DRAA Petitioners to billions of dollars secured by Anbang properties, including the hotels owned by Strategic. An attorney then commenced an enforcement action in the Delaware Superior Court using these documents, which he called "confirmed final judgment[s]" from the DRAA Chancery Action.
On December 6, 2019, an attorney associated with Zhou requested recognition of the "judgments" in California by using mislabeled copies of the Superior Court filings, which a California clerk of court granted (the "California Judgment"). Gibson Dunn and Anbang became aware of the California Judgment on December 11 and 12, respectively. They did not tell Greenberg Traurig, despite discussions acknowledging the seriousness of these filings and internal questions about whether the matters should be disclosed. Greenberg Traurig and Mirae were kept in the dark about the vast majority of the litigation, as well as information Anbang and Gibson Dunn were accumulating on Zhou. When Gibson Dunn updated Greenberg Traurig about the quiet title actions for the fraudulent deeds, it did not mention the Delaware litigation or the California Judgment. Gibson Dunn did, however, report default judgments in the quiet title actions, appearing to resolve the problems with the hotels and the fraudulent deeds to the best
The Title Insurers—based on their limited information—stated that they were prepared to remove the exceptions to title for the fraudulent deeds if a) the period when the defendants could appeal the quiet title default judgments expired, and b) the Seller confirmed in writing that no additional communication from any of the defendants or their counsel had been received. Greenberg Traurig also believed that, once the time for appeal expired, all title issues would be resolved. Based on this understanding, the parties planned to close at the end of March 2020.
In December 2019, the Buyer told the Seller that it was restarting its search for debt financing, and by mid-February 2020, the Buyer was ready to confirm the financing commitments. Gibson Dunn told Greenberg Traurig that all closing conditions should be met by March 15, 2020. Greenberg Traurig therefore suggested, and Gibson Dunn agreed to, April 1, 2020 as a target closing date. On February 18, 2020, the Buyer received the final versions of the financing documents from Goldman Sachs, Mirae's lead lender.
That same day, however, Goldman Sachs' counsel notified Gibson Dunn that Goldman Sachs had "become aware of a series of Delaware cases filed against Anbang that seem to relate to the Strategic portfolio" and sent Gibson Dunn the TRO application from the Delaware litigation (a TRO application that Gibson Dunn itself had filed).
On February 20, 2020, with committed financing ready to go, Mirae asked Goldman Sachs for the final wiring information and fee amounts. At this eleventh-hour point, Goldman Sachs told Jones Lang Lasalle Americas, Inc. ("Jones Lang")—Mirae's financial advisor—about the Delaware cases. Jones Lang informed Mirae, and the process came to a halt. The commitment letters were not signed, and the signing was tentatively pushed off to February 24 for Mirae and the Lenders to investigate. Goldman Sachs also forwarded the litigation documents in its possession to Greenberg Traurig.
On a February 21, 2020 call with Greenberg Traurig and the Lenders' counsel, Gibson Dunn called the case a fraud based on a "bizarre trademark dispute" and characterized the Delaware proceedings as "insignificant" and "not a big deal."
Meanwhile, the COVID-19 pandemic arrived on the world stage. Market upheaval was setting in and on February 26, 2020, Goldman Sachs informed Mirae that committed financing was "off the table."
Anbang also already knew about the DLA Letter. It had filed a response in the DRAA Chancery Action, and "[f]or the first time, Anbang began to share [with the court] some of what it knew about Hai Bin Zhou and his associates...."
As the process stretched into March 2020, COVID-19 continued to wreak havoc on the market, and debt funding became unavailable. A bridge loan emerged as the only remaining option, but it was unclear whether one would be available. Some of the Lenders began to back away from negotiations, refusing to bid when Goldman Sachs sent around a term sheet. And market conditions were changing quickly— by the time a lender's internal committee approvals could be attained, terms were already outdated. Strategic's financial performance was also suffering due to decreases in travel, and its ability to refinance its debt in the ordinary course of business became uncertain. On March 24. 2020, Strategic temporarily closed two of the hotels. Other hotels operated in a "closed but open" fashion.
Against this backdrop, Mirae proposed pushing closing by three months. Anbang insisted on closing before April 8, 2020. Alternatively, Anbang would accept a three-month delay on certain conditions: that Mirae (1) double its deposit; (2) agree that all closing conditions were either met or waived; (3) agree that no purchase price adjustments were required; (4) freeze the balance sheet date for calculating the estimated purchase price; and (5) compensate
To Mirae, Anbang's counterproposal was so drastic it served as a rejection, and Mirae rejected Anbang's terms on the day they were proposed. Mirae's response also pointed out that by failing to disclose the Delaware and California litigation, the Seller may have impacted the Title Insurers' willingness to provide title insurance— a closing condition to the Transaction. Mirae again asked for a copy of the DRAA Agreement so that it could assess the risk of the Delaware cases. Anbang replied that it had complied with all disclosure obligations, said it did not possess the DRAA Agreement, and reiterated the threat of litigation. The Seller continued to seek financing through March and early April 2020, but the COVID-19 pandemic rendered the search futile.
Greenberg Traurig kept the Title Insurers informed about the developments as they occurred. One of Mirae's attorneys from Greenberg Traurig later testified that he knew a failure to disclose information about the Delaware and California litigation could risk the Buyer's coverage under a standard exclusion in title insurance policies for knowingly withholding information from an insurer. Gibson Dunn attorneys also communicated with the Title Insurers regularly in March and April 2020.
As the scheduled closing date (April 17, 2020) neared, Anbang and Gibson Dunn pushed to close on schedule while Mirae and Greenberg Traurig requested more time, given the unresolved problems. During this time, the parties' relationship became more adversarial. On April 2, 2020, Anbang informed Mirae of Strategic's actions in response to the COVID-19 pandemic, which included temporarily closing two hotels (one ahead of its normal seasonal closing), operating other hotels at reduced staffing, and pausing all non-essential capital spending.
On April 7, 2020, the Title Insurers informed Gibson Dunn that it was difficult to assess the risk that the DRAA Agreement posed. None of the Title Insurers had seen the document, and the group felt unable to provide an assessment without it. As the Title Insurers said: "We just do not know how to properly underwrite the risk without a copy of the [DRAA Agreement], which we understand is not able to be provided us, apparently pursuant to its terms."
On April 13, 2020, the Title Insurers issued title commitments for the hotels
On April 15, 2020, the Buyer gave formal notice that the Seller's representation that it and its subsidiaries possessed good and marketable title to all owned real property had not been satisfied. This, according to the Buyer, was a failure to satisfy a closing condition and the Seller's failure to cure would give the Buyer the right to terminate the Sale Agreement. On April 16, 2020, Anbang gave the DRAA Agreement to Mirae and the Title Insurers. For the first time, the Buyer and the Title Insurers had the complete DRAA Agreement.
On April 17, 2020, the scheduled closing date, the Buyer gave formal notice of default based on the inaccurate representation of good and marketable title, the Seller's failure to operate Strategic and its subsidiaries in the ordinary course of business, and five other inaccurate representations. The Seller's failure to satisfy closing conditions, according to the Buyer, meant that the Buyer was not obligated to close. The notice went on to say that, if the Seller did not cure the breaches by May 2, 2020, the Buyer could terminate the Sale Agreement. The Seller sent the Buyer a certificate affirming that its representations were accurate, and all closing conditions were satisfied. The Seller continued to argue that the Buyer was required to close and that failure to do so would constitute a willful breach of the Sale Agreement.
On April 22, 2020, Gibson Dunn sent another copy of the DRAA Agreement to the Title Insurers, pointing out issues with the document indicative of fraud, and sent a similar letter to Greenberg Traurig. Greenberg Traurig continued to ask Anbang and Gibson Dunn for information about the DRAA Agreement. Among other things, Greenberg Traurig noted that the DRAA Agreement seemed to implicate properties covered by the Sale Agreement and asked why the underlying litigation (and years of history with Zhou) was not disclosed when the fraudulent deeds first arose. Greenberg Traurig followed up with another set of questions on April 24, 2020, explaining that the answers would help Mirae evaluate Anbang's position that the DRAA Agreement was not authentic and assess any title claims. Anbang did not respond.
Anbang and the Seller's eventual response, on April 27, 2020, was to file this action in the Court of Chancery. The Seller sought specific performance compelling the Buyer to perform under the Sale Agreement. In addition, the Seller claimed that the Buyer could have locked in financing prior to signing the Sale Agreement, but the Buyer had delayed seeking financing because it believed that it could obtain preferential rates and terms by waiting— despite the fact the Seller knew that the
The Court of Chancery held an expedited trial in August 2020.
The court then turned to what it meant to conduct business "only in the ordinary course of business, consistent with past practice in all material respects."
The Seller claims that the Court of Chancery erred when it concluded that the
The Buyer counters that the changes made to the hotels were far from ordinary or routine. Instead, the changes were a drastic departure from the past practices of its hotel operations, thereby breaching the Ordinary Course Covenant. According to the Buyer, the Ordinary Course Covenant's plain language required the Seller to continue normal and routine operations —as measured by its past practice without regard to the pandemic—or to give notice to the Buyer so the Buyer could decide whether to consent. The Ordinary Course Covenant, according to the Buyer, does not have any efforts-based qualification (e.g., "reasonable efforts" or "commercially reasonable efforts") nor a direction to compare the Seller's actions to those of others in the industry. As such, the Seller was required to act only in the ordinary course of business, as judged by its own historical practices and not in comparison to others in the hotel industry. The Buyer also contends that the Ordinary Course Covenant and the MAE provision are separate contractual provisions, that serve different purposes, and the parties' other references to materiality in the contract indicate that they chose not to import the terms of one into the other.
On appeal, "[w]e defer to the Court of Chancery's factual findings supported by the record, but review the Court of Chancery's contract interpretation de novo."
Section 7.3(a) of the Sale Agreement (the "Covenant Compliance Condition") conditions the Buyer's obligation to
As commonly understood, "ordinary" is defined as "[b]elonging to the regular or usual order or course of things; having a place in a fixed or regulated sequence; occurring the course of regular custom or practice; occurring in the course of regular custom or practice; normal; customary; usual."
On appeal, the Seller tries to limit the Ordinary Course Covenant to the "moral hazard" problem—misconduct by a seller such that what a buyer purchases is not what it gets.
As a factual matter, the Court of Chancery found that although the COVID-19 pandemic "warranted [the Seller's] changes" and the changes were "reasonable" from a financial and practical standpoint, the "extraordinary" changes nevertheless materially deviated from routine business operations.
On appeal, the Seller claims it was justified in taking reasonable, industry-consistent steps to preserve the business in response to the COVID-19 pandemic. There are two problems with this argument. First, the parties did not choose the actions of industry participants as the yardstick to measure the Seller's actions, in a pandemic or outside of one. The covenant in this case required the Seller to operate "only in the ordinary course of business, consistent with past practice in all material respects." As the Court of Chancery correctly found, the requirement that the Seller operate only in the ordinary course and consistent with past practice in all material respects means that its compliance is measured by its operational history, and not that of the industry in which it operates.
The Seller relies heavily on the Court of Chancery's decision in FleetBoston Financial Corp. v. Advanta Corp.
The Court of Chancery rejected the buyer's arguments because the record showed "the volume of relationship management accounts and the APRs applicable to those accounts were consistent with [the company]'s past practices and then current marketing plans."
The Seller claims that FleetBoston means an ordinary course covenant does not "`preclude' the seller from taking action necessary to `be competitive in the marketplace.'"
The closest the court came to finding that the seller's actions were outside the ordinary course of business—what gave the court "the most pause"—was the allegation that the relationship management offers were inherently unprofitable and had lowered the company's credit standards, attracting less creditworthy customers and potentially affecting the long-term profitability of the asset.
The Court of Chancery further observed that the buyer's argument regarding long-term profitability was "far broader than the meager evidence cited to support it[:]" one sentence in a brochure.
The Court of Chancery's interpretation of the Ordinary Course Covenant is consistent with its earlier decision in Cooper Tire & Rubber Co. v. Apollo (Mauritius) Holdings Pvt. Ltd.
As in Cooper Tire, the Seller here agreed to a covenant that required it to operate its hotels in the ordinary course of business consistent with past practice. While the Seller might have been within its rights to respond to the regular ups and downs of the hotel business, the Court of Chancery found as a factual matter that the Seller took drastic actions that were not consistent with its own past responses. Its actions might have been reasonable in response to a world-wide pandemic, but they were inconsistent with past practice and far from ordinary. The Seller could have timely sought the Buyer's approval before making drastic changes to its hotel operations, approval which could not be unreasonably withheld. Having failed to do so, the Seller breached the Ordinary Course Covenant and excused the Buyer from closing.
The Seller argues next that the Court of Chancery's reading of the Ordinary Course Covenant cannot be squared with the Sale Agreement's MAE provision. Because the MAE provision allocated pandemic risk to the Buyer, the Seller contends that business changes in response to the pandemic do not violate the Ordinary Course Covenant because such a violation would improperly shift systemic risks onto the Seller.
We agree, however, with the Court of Chancery's analysis of the two provisions. As an initial matter, the parties could have, but did not, restrict a breach of the Ordinary Course Covenant to events that would qualify as an MAE. They knew how to provide for such a limitation—there are MAE qualifiers included in other provisions.
The parties also chose different materiality standards for the two provisions, which shows that the parties intended the provisions to act independently. The Ordinary Course Covenant's materiality standard requires that "the business of the Company and its Subsidiaries shall be conducted only in the ordinary course of business consistent with past practice in all material respects[.]"
Further, an ordinary course covenant and MAE provision serve different purposes. An ordinary course covenant is "`included to reassure the Buyer that the target company has not materially changed its business or business practices during the pendency of the transaction.'"
To this point, the Buyer claims that it was not required to run the business into the ground by continuing to operate in the ordinary course of business. The Sale Agreement, however, anticipated this dilemma. The Ordinary Course Covenant involves the Buyer in the Seller's response to disruptive events. The Buyer 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. The Seller was not hamstrung by the Ordinary Course Covenant —it was simply required to seek consent before making the changes, and if consent was "unreasonably" denied, the Seller could have challenged the Buyer's unreasonable denial of consent.
The Seller also argues that the Court of Chancery's reliance on Cooper Tire is misplaced, because in that case, "the event at issue was not, in fact, carved out of the MAE definition[,]" as compared to the "natural disasters or calamities" carve-out in the Sale Agreement MAE.
Finally, while the Seller does not contest the materiality of the changes it made in response to the pandemic, it argues that any breach of the Ordinary Course Covenant was immaterial because there was only a two-week delay before Anbang requested Mirae's consent and Mirae "unreasonabl[y]" withheld its consent.
As the Court of Chancery noted, "[c]ompliance with a notice requirement is not an empty formality."
The judgment of the Court of Chancery is affirmed.