AB Stable VIII LLC v. Maps Hotels and Resorts One LLC, No. 71-2021 (Del. Dec. 8, 2021)

This Supreme Court decision affirms the Court of Chancery’s decision below (reported here) that a buyer’s obligation to purchase a $5.8 billion group of hotel properties was excused due to the seller’s failure to comply with a covenant that, between signing and closing, it would operate “only in the ordinary course of business, consistent with past practice in all material respects.” 

As a factual matter, the Court below found that the sellers made significant changes beginning in March 2020 in response to the COVID-19 pandemic. This included closing some hotels, operating others without normal amenities, and slashing headcount, with more than 5,000 employees laid-off or furloughed. Although such pandemic-related changes may have been common in the hospitality industry, the ordinary course covenant here did not include any efforts-based qualifications (e.g., “commercial reasonableness”) or other language suggesting that the seller’s acts should be compared to those of other industry participants. In addition, while the ordinary course covenant here required the buyer to consent to reasonable operational changes, the seller did not seek the buyer’s consent until after certain changes had been made. And then in response to the buyer’s questions, the seller declined to communicate further on the subject.

The Supreme Court also affirmed that this reading of the ordinary course covenant was not inconsistent with the merger agreement’s separate material adverse effect provision, which included carve-out that allocated to the buyer the risk of “natural disasters and calamities” like the pandemic. The Court reasoned, among other things, that material adverse effect provisions and ordinary course covenants serve different purposes. The former allocates the risk of material, durationally-significant changes in the target’s value. The latter ensures that the acquired business continues to be operated as expected pending closing. The provisions at-issue also used different concepts and standards of materiality. The Supreme Court also observed that the merger agreement did not expressly qualify the ordinary course covenant by reference to events that may qualify as material adverse effects, whereas it did with other provisions.