By: Lauren Hartnett

Along with health and safety concerns, the COVID-19 pandemic brought with it a lot of uncertainty nationwide. Business for many industries, including the hospitality industry, was anything but “ordinary.” Since most mergers and acquisitions can take a significant amount of time from inception to conclusion, many deals started prior to the pandemic and then had to navigate through the uncertainty to closing or termination.

In December 2021, the Supreme Court of Delaware affirmed a decision of the Court of Chancery of Delaware that spoke to a seller’s obligation under the Ordinary Course Covenant in the time between signing the Sales Agreement and the deal closing during COVID-19.[1] Over the course of the pandemic, there have been multiple questions in various cases about how to handle Ordinary Course Covenants and terminating contracts due to COVID-19.[2] However, until this case, all disputes regarding these issues settled prior to a substantive ruling. Therefore, this case provides the first judicial guidance on the expectation of Ordinary Course Covenants during COVID-19.[3]

In September 2019, Buyer (MAPS Hotel and Resorts One LLC, a subsidiary of Mirae Asset Financial Group) signed a Sale and Purchase Agreement for fifteen luxury hotel properties in the United States for $5.8 billion from Seller (AB Stable VIII LLC, a subsidiary of Dajia Insurance Group Ltd.) and was due to close in April 2020.[4] However, when the pandemic started to shutdown travel, restaurants, and more in March 2020, the Seller made drastic changes to its hotel operations without the Buyer’s consent, even though the Buyer would not have been able to unreasonably withhold consent to changes.[5] These changes included (but were not limited to) the closure of two hotels, thirteen hotels were considered “closed but still open,” and the layoff or furlough of over 5,200 full-time employees.[6] While the Buyer refused to close and wanted to be released from the contract due to breach, the Seller claimed they did not breach, as the Ordinary Course Covenant allowed them to take reasonable, industry-standard steps in response to the pandemic.[7]

An Ordinary Course Covenant,

“in general prevents sellers from taking any actions that materially change the nature or quality of the business that is being purchased, whether or not those changes were related to misconduct.”[8]

In this case, the Seller argued the operational changes were necessary for the business, as a whole, to survive the pandemic and the changes were ordinary across the industry.[9] However, the Delaware Supreme Court held the Ordinary Course Covenant in this case was breached, even though the changes the Seller made in response to COVID-19 were reasonable and consistent with others in the hospitality industry.[10]

The Ordinary Course Covenant in the Agreement between the Buyer and Seller did not reference what was ordinary in the industry in general; it only referenced what was ordinary and consistent with past practices, in all material respects, for the Seller specifically.[11] Therefore, the Court found the actions taken by the Seller in light of COVID-19 were inconsistent with their historical practices and thus found the Seller had breached.[12] As a result of the Seller’s breach of the Ordinary Course Covenant, the Buyer was released from their obligations to the Sale and Purchase Agreement.[13]

This case provides insight and guidance into how Ordinary Course Covenants should be drafted, as well as how they will be interpreted by the court, even during an unprecedented crisis, in the time between signing of the Sales Agreement and closing the deal. The court will remain true to its focus on the exact language in the contract and how it reflects the parties’ original intent.

Buyers and sellers should make special note of covenants and whether they encompass company-specific or industry-wide language and standards; this will shed light on how much flexibility a seller has in unexpected situations. Sellers should also consider aligning the ordinary course covenant with the Material Adverse Effect clause and tying the two together instead of linking the Ordinary Course Covenant to materiality. Additionally, as a seller, it is important to review the covenants closely and possibly seek a buyer’s approval, especially if they are barred from unreasonably withholding approval, before making operational changes. Furthermore, if a situation arises where a seller needs to make operational changes without the buyer’s approval, it would be pertinent (especially in preparation for litigation) to create a record showing how the changes made align with industry-wide changes and/or the company’s response to similar past crises.

About the Author

Lauren Hartnett is a second-year law student at Widener University’s Delaware Law School. Her background is in biochemistry and biomedical engineering, and she is interested in pursuing a career in intellectual property and corporate law. She has previous work experience in the research, development, and regulation of medical devices at Integra LifeSciences as well as legal research at the NASA Ames Research Center. Lauren has recently accepted a position on the Journal as Volume 48’s Bluebook Editor.

[1] AB Stable VIII LLC v. MAPS Hotels & Resorts One LLC, C.A. No. 2020-0310-JTL, 2020 WL 7024929 (Del. Ch. Nov. 30, 2020) (“AB Stable I”); AB Stable VIII LLC v. MAPS Hotels & Resorts One LLC, No. 71, 2021, 2021 WL 5832875 (Del. Supr. Dec. 8, 2021) (“AB Stable II”).

[2] Delaware Court of Chancery Provides First Guidance on COVID-19 Broken Deal Issues, Jones Day (Dec. 2020), https://www.jonesday.com/en/insights/2020/12/delaware-court-of-chancery-provides-first-guidance-on-covid19-broken-deal-issues.

[3] Id.

[4] See AB Stable I at *1-3.

[5] Id. at *3-5.

[6] Id. at *191-95.

[7] AB Stable II at *12.

[8] Id. at *9.

[9] Id. at *12.

[10] Id.

[11] AB Stable II at *12.

[12] Id.

[13] Id. at *15.