First Delaware COVID-19 M&A Decision

Gray Reed

Gray Reed

In AB Stable VIII LLC v. Maps Hotel and Resorts One LLC et al., the Delaware Court of Chancery has published its first ruling regarding whether or not the effects of the COVID-19 pandemic constitute a material adverse effect (“MAE”) that would allow a buyer to terminate an acquisition agreement entered into prior to the COVID-19 outbreak in the U.S.


In early 2019, AB Stable VIII LLC (“Seller”) initiated a sale process for its portfolio of fifteen luxury hotels located in the U.S. The winning bidder was MAPS Hotels and Resorts LLC (“Buyer”). Buyer and Seller entered into a purchase agreement (the “Agreement”) on September 10, 2019. After entering into the Agreement, but before the scheduled closing date, the COVID-19 pandemic dramatically impacted the business and leisure travel industries, and the hotel industry saw its occupancy and revenues plummet.  In response to these changes and to conserve cash, Seller made several changes to its operations including: (a) laying off thousands of employees, (b) eliminating luxury services, such as spa treatments and other recreational activities, (c) shuttering hotel restaurants and lounges, and (d) closing the Four Seasons Hotels in Palo Alto and Jackson Hole.

Buyer first sought to delay the scheduled April 17, 2020 closing, citing the financial effects of the pandemic on the hotel operations, Seller’s changes to its business operations, as well as title issues for some of the hotels to be purchased. Buyer then informed Seller that Buyer was planning to terminate the Agreement.  Seller sued Buyer for specific performance under the Agreement or, in the alternative, to allow Seller to keep Buyer’s deposit of $582 million plus attorneys’ fees and expenses.


At trial, Buyer argued that it was excused from closing the transaction because Seller failed to comply with three separate conditions to closing.

Bring-Down Condition

The Agreement required Seller to certify at closing that Seller had not suffered a contractually defined “Material Adverse Effect.”  Buyer argued that the COVID-19 pandemic and its effects prevented Seller from being able to satisfy this condition.  The definition of Material Adverse Effect specifically excluded “natural disasters and calamities.”  Ruling in favor of Seller, the Court found that the COVID-19 pandemic fit within the plain meaning of the term “calamity.”

Covenant Compliance Condition

The Court then addressed Buyer’s argument that Seller breached its obligation to continue to comply in all material respects with the pre-closing covenants in the Agreement, including a requirement that Seller continue to conduct its operations only in the ordinary course of business consistent with past practices. The Court found “overwhelming” evidence that Seller departed from its normal and customary business routine. An example cited was the unprecedented complete closure of the Four Seasons in Palo Alto. As a result, the Court found that Seller failed to comply with this condition.

Seller argued that it was excused from complying with this covenant because it was required to comply with local laws. In ruling against Seller, the Court noted that Seller made sweeping changes to its operations before official mandates were issued.

Title Condition

The Court also found that Seller breached its representation regarding title to the real property to be sold.


The Court held that the effects of a pandemic did not result in a Material Adverse Effect, based on the definition in the Agreement.  However, the Court held that Seller breached the obligation to continue to operate in the ordinary course of business, and its representation regarding title to its real properties.  As a result, the Court held that Buyer was entitled to terminate the agreement.

Key Takeaways

Parties to transactions should carefully consider the coverage of Material Adverse Effect provisions in transaction agreements, including specifically addressing the effects of pandemics.  Sellers are also cautioned to consult with potential buyers (and obtain written consent when necessary) before implementing changes to operations that deviate from the ordinary course of business, even in response to a pandemic or other calamity.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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