Sue First, Talk Later: Lessons From Recent Delaware Court of Chancery Decisions on Expediting Proceedings During the COVID-19 Pandemic

A sale agreement is of no use to either party unless it provides some assurance that the deal will get done. Transaction agreements typically contain provisions designed to compel the parties to close reasonably promptly. Buyers generally covenant that they will make reasonable best efforts to bring about the closing. Drop-dead dates impose an outside deadline for concluding the deal. Transaction agreements also may include provisions confirming the buyer’s financing and the duration of those financing commitments. Buyers are likely to be required to acknowledge that any breach of covenants to proceed to close will cause irreparable harm to the seller, and agreements often grant to the parties a right to seek specific performance.

On the other hand, such transaction agreements generally have a Material Adverse Effect (MAE) clause to protect the buyer. An MAE clause permits a buyer to terminate a transaction agreement if, as a result of an event or series of events, a material deterioration in the business, financial condition or results of operations of the target has occurred between the signing of the agreement and the closing of the transaction. The parties, however, may carve out certain events from the definition of an MAE — for example, macroeconomic changes, geopolitical conditions, calamities or acts of God — so that the buyer assumes the risk of these events.

While deadlines in transaction agreements may be meant to encourage swift closing of a deal, they also can be double-edged. Transaction agreements often limit money damages as a remedy and may restrict specific performance cases to where third-party financing commitments remain available. The buyer may be a shell entity against whom remedies other than specific performance, backed by fully financed equity and debt commitments, are not meaningful. Moreover, to be effective, specific performance itself may require prompt process. While the matter is under litigation, the business being sold is in limbo, resulting in potential lost opportunities and harm to the business for which the seller may not have a remedy. Thus, when there is a last-minute case of buyer’s remorse, even if the seller has a solid claim of breach, it is critically important to sellers that they be able to expedite litigation and the resolution of their claims before it becomes difficult to close on the transaction or otherwise obtain an adequate remedy.

The COVID-19 pandemic presents a unique confluence of a surge in buyers seeking to avoid their commitments and unprecedented challenges in litigating expeditiously. Buyers that agreed to their deals before the full impact of the COVID-19 pandemic was felt have been seeking to avoid closing those transactions, generally asserting that an MAE has occurred, or that the seller has failed to operate the business in the ordinary course. In recent weeks, sellers have filed suit in the Delaware Court of Chancery, seeking specific performance of the transaction agreements and expedited proceedings so that the court can grant relief while the deal may still be salvaged, and nearly every member of the court has now considered at least one of these motions. A review of the decisions on these motions to expedite reveals varying approaches among the Delaware Vice Chancellors, and shows that the outbreak of COVID-19 has made it urgent for jilted sellers to file suit and seek an expedited trial as soon as they see the first indication that the buyer wants to break up the deal.

Delaware courts, and the Delaware Court of Chancery in particular, have emphasized that they “are always receptive to expediting any type of litigation in the interests of affording justice to the parties.” Box v. Box, 697 A.2d 395, 399 (Del. 1997). The burden on a plaintiff seeking an expedited proceeding is “not high” and requires the plaintiff to show “a ‘sufficiently colorable claim and … a sufficient possibility of a threatened irreparable injury, as would justify imposing on the defendants and the public the extra (and sometimes substantial) costs of an expedited preliminary injunction proceeding.’” Renco Grp., Inc. v. MacAndrews AMG Holdings LLC, C.A. No. 7668-VCN, 2013 WL 209124, at *1 (Del. Ch. Jan. 18, 2013).

In the past, the Court of Chancery has focused primarily on the strength of the plaintiff’s claim and the possible irreparable harm to the plaintiff, but in light of COVID-19 the court has expressed greater concern about both the economic cost and the feasibility and risk of expedited proceedings. Starting in March, Delaware and other states restricted gatherings and nonessential business activities, and on March 16, Chancellor Bouchard ordered that all hearings and trials shall be conducted by telephone or electronic means. On May 14, that order was extended for an additional 30 days, and the Court of Chancery continues to operate only remotely.

In one of the first post-COVID-19 cases involving a motion to expedite, The We Co. v. Softbank Grp. Corp., C.A. No. 2020-0258-AGB (Del. Ch. Apr. 17, 2020), Chancellor Bouchard denied The We Co.’s motion to expedite. There, Softbank agreed to purchase up to $3 billion of The We Co.’s shares through a tender offer. On April 1, Softbank told The We Co. that it was terminating the tender offer, citing several conditions to closing it claimed were unfulfilled, and on April 7, The We Co. filed suit and moved to expedite, seeking a trial within 120 days. In denying the motion to expedite, the court noted that although the tender offer nominally expired on Aug. 29, the parties had agreed not to assert the expiration of the tender offer as a defense to specific performance, and that “there does not appear to be any particular magic to holding a trial in August.” The court observed that the “parties do not appear to dispute that litigation of this case will involve extensive discovery from around the world,” and that “even under the best of circumstances — and I mean by that before the COVID-19 pandemic — it would be an extraordinary feat to prepare for trial in this case in five or six months, given the number of potential issues and the international scope.”

The same day, in Snow Phipps Grp., LLC v. KCake Acquisition, Inc., C.A. No. 2020-0282-KSJM (Del. Ch. Apr. 17, 2020), Vice Chancellor McCormick also denied a motion to expedite, citing health risks related to COVID-19. On March 6, entities associated with Kohlberg & Co. agreed to buy a cake-decorating business from Snow Phipps. In early April, the buyers said they would not close, claiming an MAE and a failure to operate the business in the ordinary course. Snow Phipps brought suit on April 14 and sought an expedited trial by May 2, before the expiration of the agreement on May 5 and of a debt commitment on May 12. Vice Chancellor McCormick has experience with such expedited proceedings; for example, in FrontFour Capital Grp. LLC v. Taube, C.A. 2019-0100-KSJM, 2019 WL 1313408, at *1 n.1 (Del. Ch. Mar. 11, 2019), litigation was commenced on Feb. 11, a trial was held on March 6-7 and she issued a decision on March 11, 2019.

In denying the motion to expedite, Vice Chancellor McCormick “assume[d] for the sake of argument” that the seller had established a colorable claim and irreparable harm but found that “the balancing of the hardships [was] dispositive.” The Vice Chancellor noted the many steps the parties would have to take in discovery and through trial, and that the seller’s requested timetable would “match the most aggressive schedule ever imposed by this Court in a case of this magnitude.” The Vice Chancellor added: “Certainly this Court has never entered a schedule along these lines in the midst of a pandemic while much of America is sheltering in place.” The Vice Chancellor expressed particular concern “that the pace of the case would force persons involved in the lawsuit to engage in behavior that might risk their health, making the cost of expedition much greater than usual,” and concluded that the “threatened irreparable harm to [seller] does not outweigh the extraordinary cost of moving forward on the requested schedule.”

In Juweel Investors Ltd. v. Carlyle Roundtrip, L.P., C.A. No. 2020-0338-JRS (Del. Ch. May 14, 2020), Vice Chancellor Slights also denied seller’s motion for expedited proceedings. There, entities sponsored by The Carlyle Group had agreed to purchase shares in a business operating as American Express Global Business Travel. On April 8, the buyers asserted that there had been an MAE. Seller did not file suit until May 11, and then sought expedited proceedings before debt financing commitments would expire on June 30.

In denying the seller’s motion, the court noted that MAE clauses are “dauntingly complex,” and that seller’s proposal would leave only 48 days for discovery, trial, a decision and an appeal. The Vice Chancellor found that even if “the schedule the [seller] has proposed would be workable … in the best of times, it is simply not feasible in the times we are in now, where most of the country remains in lockdown due to a pandemic, where international travel is strongly discouraged, and where the health and safety of our people remains at risk.” The Vice Chancellor observed the seller had “readily” shown a colorable claim and irreparable harm that on a “clear day” would justify expedition, but “[i]n the midst of the COVID-19 crisis … responsible balancing must take into account how potential irreparable harm balances against the cost and, importantly, the risks of moving forward at break-neck pace during a pandemic.”

The Vice Chancellor also stressed that the seller had “waited until May to bring this claim and thereby ha[s] eliminated weeks of time … literally condens[ing] the time almost by half.” The Vice Chancellor cited that delay as “an independent reason to deny the motion,” and concluded by saying that although the seller “has colorable claims and may suffer at least some degree of irreparable harm from the denial of this motion, I cannot order time to stop, I cannot shrink the amount of work that would be required to get Juweel where it wants to go, and I cannot, obviously, end the COVID-19 pandemic.”

In contrast, in AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC, C.A. No. 2020-0310-JTL (Del. Ch. May 8, 2020), a case involving foreign parties and the prospect of far-flung discovery, Vice Chancellor Laster granted a motion to expedite. On Sept. 10, 2019, MAPS agreed to purchase 15 hotels in a deal set to close on April 17, 2020, with a drop-dead date that was extended to Sept. 10, 2020. On April 17, the buyers asserted a failure of closing conditions, including that the seller no longer was operating the business in the ordinary course. The seller sued for specific performance and sought an expedited trial in August — allowing three months for discovery and trial preparation. In granting the motion to expedite, Vice Chancellor Laster noted that he did not “think that a lot of discovery is going to be needed,” he “d[id] not see this being a seriously fact-heavy case,” and his “preliminary sense is that this is more of a case about the law and the contract rather than a case about the facts.” The court acknowledged that “it’s all going to be a little more complicated” and that this is a “difficult time that we all find ourselves in.” But the Vice Chancellor concluded, “I think you all have ample time to do it” and “given the nature of the case … I think that … this is something that people can get done.” The court scheduled a trial for the last week of August.

In Realogy Holdings Corp. v. SIRVA Worldwide, Inc., C.A. No. 2020-0311-MTZ (Del. Ch. May 8, 2020), Vice Chancellor Zurn granted a motion to expedite but denied a requested trial date in September. On Nov. 6, 2019, SIRVA agreed to acquire a business from Realogy, but in late April 2020, SIRVA informed the seller that an MAE had occurred and that the closing conditions had not been met. Seller sued and moved to expedite, but a debt financing commitment for the transaction expired before the court held a hearing on the motion. The court granted the motion, holding that seller had shown “a colorable claim” for breach of contract and specific performance, even though the financing commitment had expired, but that there was “nothing special about September to support having a trial that month or that soon,” and that the parties should “plan for trial in November or early December.”

Most recently, in Forescout Technologies, Inc. v. Ferrari Grp. Holdings, L.P., C.A. No. 2020-0385-SG (Del. Ch. May 22, 2020), Vice Chancellor Glasscock expressed a willingness to hold an expedited trial remotely. On Feb. 6, entities sponsored by Advent International agreed to acquire Forescout, a publicly listed company in the security industry. On April 23, Forescout’s shareholders approved the proposed transaction, which triggered a deadline of May 18 to close on the transaction. On May 15, Advent informed Forescout that it would not close because, among other things, an MAE had occurred, even though the transaction agreement had a carve-out for pandemics.

Seller filed suit on May 19, moving to expedite and seeking to temporarily restrain buyer from terminating the transaction agreement or asserting the passing of the termination date as an affirmative defense to specific performance. At a May 22 conference, the Vice Chancellor suggested holding at least an evidentiary hearing with “some type of trial Zoom presentation” in the first week of June. The Vice Chancellor acknowledged that buyer still could convince him “that the best we can do here is a later-in-the-summer damages trial, but I’m loath to reach that conclusion because it seems to me equity ought to be able to act … I am extremely loath to just say, ‘Well, this is a damages case[,] that’s all I can do.’ That doesn’t seem equitable to me.” Subsequently, on May 26, the parties stipulated to a temporary restraining order extending the termination date and setting a trial date of July 20.

Key takeaways from these recent Delaware Court of Chancery opinions include:

• Despite COVID-19, the Delaware Court of Chancery continues to be receptive to expedited proceedings, but may not be willing to order the sort of aggressive schedules that it has in the past. Even if a plaintiff can establish a colorable claim and irreparable harm, the court may balance that harm against the risks and challenges of an expedited schedule in light of the pandemic, particularly when the assertion of an MAE may involve complex fact questions. Individual vice chancellors may have different views on how to weigh a plaintiff’s irreparable harm against the challenges of litigating in a pandemic. In recent weeks, however, as the court and litigants have adjusted to remote litigation and as restrictions on businesses and travel in Delaware and across the country are gradually easing, the court may be becoming more willing to entertain expedited proceedings.
  
  
• When a transaction agreement or contingent financing is at risk of expiring, sellers would be well advised to file suit at the earliest concrete indication that the buyer is not likely to close on the transaction, even if certain closing conditions may not yet have been met. The decisions in Juweel Investors Ltd. and Snow Phipps Grp., LLC indicate that the Court of Chancery may not impose a schedule it deems unsafe or unrealistic in order to save a transaction, and that the court may hold the seller accountable for not filing earlier if it was already on notice of the buyer’s expected breach. A difference between two and three months’ time until trial may be significant in the court’s analysis.
  
  
• The Court of Chancery may be more likely to grant a motion to expedite when there is an imminent drop-dead date. In Forescout Technologies, Inc., where a financing commitment was set to expire, the court entertained the possibility of an evidentiary hearing in as little as two weeks. Similarly, in AB Stable VIII LLC, the court noted that it was “influenced by the drop-dead date” to grant the motion to expedite and schedule a trial in August.