268 A.3d 198
Del.2021Background
- AB Stable VIII LLC (Seller), an Anbang affiliate, agreed to sell 15 U.S. luxury hotels (via Strategic) to MAPS Hotels and Resorts One LLC (Buyer/Mirae) for $5.8 billion; closing was scheduled for April 2020 but delayed pending title cure and financing.
- Seller and its counsel were long aware of fraudulent deeds and extensive related litigation (the DRAA matter and a California judgment) but provided limited disclosure to Buyer and prospective title insurers.
- Title insurers initially required quiet-title resolution and a copy of the DRAA Agreement; after limited information they issued title commitments with a broad “DRAA Exception” excluding coverage for matters tied to the DRAA Agreement.
- Before closing, COVID-19 struck. Seller unilaterally implemented drastic operational changes at the hotels (closures, severe staffing cuts, suspension of amenities and capital spend), but did not obtain Buyer’s prior written consent under the Sale Agreement’s Ordinary Course Covenant.
- Buyer declined to close, citing breaches including failure to operate in the ordinary course and unsatisfied title condition; Seller sued for specific performance in the Court of Chancery. The Chancery Court found Seller breached the Ordinary Course Covenant (and also concluded the Title Insurance Condition failed); on appeal the Delaware Supreme Court affirmed based on the Ordinary Course breach and did not reach the title-insurance issue.
Issues
| Issue | Plaintiff's Argument (Seller) | Defendant's Argument (Buyer) | Held |
|---|---|---|---|
| Did Seller breach the Ordinary Course Covenant by making pandemic-related operational changes without Buyer consent? | Actions were reasonable, industry-standard pandemic responses and therefore within ordinary course. | Covenant measures Seller’s conduct against its own past practice; Seller’s drastic, unprecedented changes departed materially from past practice and required consent. | Held for Buyer: Seller materially breached the covenant by departing radically from its historical hotel operations without prior consent. |
| Should the Ordinary Course Covenant yield to the MAE carve-out for pandemics? | The MAE allocation of pandemic risk to Buyer means reasonable pandemic responses cannot violate the Ordinary Course Covenant. | Ordinary Course Covenant and MAE serve distinct functions and use different materiality standards; parties could have tied them but did not. | Held for Buyer: Provisions are independent; the covenant requires conformity with past practice regardless of MAE carve-out. |
| Was Seller’s failure to give prompt notice / obtain consent immaterial or excused because Buyer acted similarly at its own properties? | Any breach was immaterial; Seller sought consent within two weeks and Buyer unreasonably withheld consent; Buyer’s own pandemic measures show inconsistent treatment. | Seller never obtained consent and failed to provide requested detail; notice requirement is substantive, not a formality. | Held for Buyer: Lack of timely, adequate notice and failure to obtain consent were material; Buyer reasonably withheld consent pending information. |
| Did the Title Insurance Condition permit Buyer to terminate (exception scope / Buyer causation)? | The DRAA Exception was not broad enough to cover the fraudulent deeds, or Buyer materially contributed to any failure. | Title commitments included a broad DRAA Exception excluding coverage for the fraudulent deeds; Buyer did not cause the failure. | Not reached by Delaware Supreme Court (Ordinary Course breach dispositive). The Chancery Court had found the Title Insurance Condition unsatisfied. |
Key Cases Cited
- Akorn, Inc. v. Fresenius Kabi AG, 198 A.3d 724 (Del. 2018) (distinguishing ordinary-course covenants from MAE analysis and discussing buyer protections at signing-to-closing)
- Cede & Co. v. Technicolor, Inc., 758 A.2d 485 (Del. 2000) (deference to Chancery factual findings; standard of appellate review)
- Heartland Payment Sys., LLC v. InTEAM Assocs., LLC, 171 A.3d 544 (Del. 2017) (review standards for Chancery factual findings and contract interpretation)
- Hexion Specialty Chemicals, Inc. v. Huntsman Corp., 965 A.2d 715 (Del. Ch. 2008) (analysis of MAE concept and its role in allocation of transactional risk)