Numerous high-profile M&A deals impacted by the COVID-19 pandemic have fallen apart this year, resulting in litigation focused on whether the buyers were obligated to close. In these “broken deal” cases, where the acquisition targets’ way of doing business changed in response to the pandemic, the sellers’ compliance with ordinary course covenants—a core M&A contract term—has emerged as a heavily disputed issue. Ordinary course covenants are designed to ensure that the business the buyer acquires at closing is essentially the same as the one it contracted to buy. But deal parties have disputed what a promise by the seller to operate the target in the “ordinary course of business” means in the context of an extraordinary event like the pandemic.
On Nov. 30, 2020, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery, the nation’s top business court, issued the first post-trial opinion in one of these COVID-19 “broken deal” cases and addressed this issue head on. The court held: “Buyer proved that due to the COVID-19 pandemic, [the target] made extensive changes to its business. Because of those changes, its business was not conducted only in the ordinary course of business, consistent with past practice in all material respects. The Covenant Compliance Condition therefore failed, relieving Buyer of its obligation to close.”
