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M&A Risk Allocation: Drafting and Litigation Considerations in the Era of COVID-19

Commercial Litigation Alert | May 1, 2020
By: Marc S. Casarino, Thomas B. Fiddler, Lori S. Smith and Eric B. Porter

Risk allocation between parties is a key consideration in the negotiation of merger and acquisition (M&A) agreements. These contractual provisions are garnering even more attention as deal challenges continue to arise from business disruptions caused by or related to the COVID-19 pandemic. As previously discussed, several lawsuits recently filed in the Delaware Chancery Court reflect key battle lines over whether, and how, pandemic-related operational challenges square with clauses covering material adverse effect (MAE), ordinary course of business covenants, specific performance and other provisions of these agreements. In the past few days, several additional cases have been filed which continue to highlight these issues as well as others, such as failure to provide access to diligence.

Bed Bath & Beyond, Inc. v., Inc.[1]

Between the parties’ February 14, 2020 execution of a purchase agreement and anticipated March 30, 2020 closing, pandemic-related business disruptions began to surface. The buyer unilaterally sought to postpone the closing because of limited resources available to complete documentation and other actions necessary to close and difficulties with integrating the target business in light of the pandemic. The seller challenges that the buyer was using the pandemic as a pretext to “wait and see” if the disruptions would rise to a MAE.

In this instance, the agreement broadly excluded from MAE general market impacts unless they have a disproportionate impact on the seller compared to other participants in the industries or markets in which it operates. The seller accordingly disputes that a MAE has occurred given the global impact of the pandemic. Furthermore, the seller seeks to specifically enforce the agreement pursuant to a contractual provision allowing for such relief where the opposing party breaches or threatens to breach.

Level 4 Yoga, LLC v. CorePower Yoga, LLC[2]

The parties executed their purchase agreement on November 27, 2019, with an amended agreement in January 2020 setting a closing date of April 1, 2020. Shortly before the closing, the buyer sought to back out of the agreement because the seller had temporarily closed its business locations (yoga studios) in response to the COVID-19 outbreak. The buyer cites the MAE clause and contractual requirement that the seller operate in its ordinary course until closing. The seller has invoked a contractual provision for specific performance because of the buyer’s alleged breach of the agreement.

The seller challenges that it is operating in the ordinary course, which includes compliance with temporary pandemic-related orders from local and state authorities. In this regard, the seller notes that the agreement requires that at the time of closing it not be in violation of a legal requirement affecting the operation of the business. The seller further challenges that no MAE has occurred because the temporary closures do not constitute a long-term adverse change in its business as is required to constitute an MAE under Delaware law. Lastly, the seller challenges that the sophisticated buyer failed to negotiate deal protections that could have addressed its concerns, such as a closing condition allowing termination for unexpected market downturn or events, a force majeure clause, or a break-up fee allowing the buyer to walk away for a fixed amount.

Oberman, Tivoli & Pickert, LLC v. Cast & Crew Indie Services, LLC and Camera Holdings, LP [3]

The United States declared a public health emergency over COVID-19 between the February 5, 2020 execution and March 30, 2020 (delayed to April 6, 2020) closing of the parties’ purchase agreement. Following the execution of the agreement, the buyer began requesting “extensive” additional information from the seller. The seller disputed an obligation to provide further information, but did so to facilitate the closing. Included in the production was a sensitivity analysis showing the impact on the business of the COVID-19 pandemic. The buyer demanded further information, and eventually claimed it could not close on the transaction because the seller failed to timely provide what was requested.

The seller argues that there could not be a MAE under the agreement because it is operating in the ordinary course of business, albeit remotely, and has not suffered loss of business from the pandemic. Nevertheless, the pandemic falls within the exceptions to the MAE clause pertaining to general economic downturn or disasters not having a disproportionate impact on the seller’s business. Interestingly, however, the agreement does obligate the seller to afford reasonable access during normal business hours for the buyer’s personnel to review its books and records for the purpose of consummating the transaction – subject to applicable law.

SP VS Buyer LP, v. L Brands, Inc. and L Brands, Inc. v. SP VS Buyer L.P.[4]

In response to state-mandated stay-at-home orders following the COVID-19 outbreak, the seller closed nearly all of its brick and mortar stores, furloughed most of its non-senior employees, reduced its senior employees’ base compensation by 20 percent and deferred annual merit raises for the entire year. The buyer asserts that the seller’s actions violate key terms of the agreement, including a provision requiring continued operations in the ordinary course between execution and closing of the deal. The buyer cites that the MAE clause expressly puts the risk of “pandemics” upon the seller, and thereby seeks a declaratory judgment that it has properly terminated the agreement.

Relying on a specific performance provision in the agreement, the seller countersued to compel the buyer to close because “pandemics” are expressly excluded from the MAE under the agreement. In this regard, the seller notes that the parties negotiated the transaction with full knowledge of the COVID-19 outbreak and purposefully put the risk of a pandemic upon the buyer. The buyer rebuffs this interpretation of the MAE clause because the “pandemic” exclusion is expressly limited in the agreement so as not to apply to that portion of the MAE clause addressing “any state of facts, circumstance, condition, event, change, development, occurrence, result or effect … that would prevent, materially delay or materially impede the performance of [seller] of its obligations under this Agreement or [seller’s] consummation of the transaction contemplated by this Agreement…” The buyer further points to breach of the interim operating covenants requiring operation in the ordinary course of business and prohibiting the taking of various actions without buyer consent.


A consistent issue across these cases appears to be reliance on attempts to interpret express contract provisions in light of anticipated changes in the business or need to take actions out of the ordinary course of business in reaction to the pandemic in order to preserve and sustain the business for the short term. These analyses will be very fact and circumstances specific and will depend on the express language of the agreement. MAE is very difficult to prove in Delaware because it requires a material, significantly long, and disproportionate adverse effect on the business. Parties seeking to terminate M&A agreements therefore will likely need to rely on breach of other provisions which result in failure to satisfy the conditions to closing.

One of these noted above is the usual covenant for the period between signing and closing that requires that the seller continue to operate the business in the ordinary course to preserve the business and assets being sold. Most M&A agreements that have a period between signing and closing require that the target company operates in the ordinary course of business and does not take specific material actions such as changing compensation, incurring material expenses, incurring additional indebtedness for borrowed money, shutting down facilities, accelerating collections of receivables or delaying payment of payables and other similar material changes inconsistent with past practices. In many cases, taking any such actions would violate these covenants without consent of the buyer. How these types of provisions interact with other provisions in the agreement such as the MAE clause requires careful drafting.

Prime examples of how the ordinary course of business covenant operates under Delaware law are expressed in Cooper Tire & Rubber Company v. Apollo Holdings and Akorn, Inc. V. Fresenius Kabi. Each of these failed acquisition cases involved changed circumstances affecting the seller’s business operations between the sale agreement and closing. In Cooper Tire, following the announcement of the Cooper Tire acquisition, the company’s majority-owned Chinese subsidiary went on strike, halted production, and prevented access to its facilities and records. Cooper Tire in turn suspended payments to its subsidiary’s vendors. Simultaneously, Cooper Tire’s domestic union claimed that the acquisition violated its collective bargaining rights. The ordinary course of business covenant in the Cooper Tire’s agreement provided in pertinent part that:

(i) between signing and closing, except as otherwise expressly contemplated by the agreement, Cooper Tire “shall, and shall cause each of its Subsidiaries to, conduct its business in the ordinary course of business consistent with past practice;” and

(ii) “shall, and shall cause each of its Subsidiaries to, use its commercially reasonable efforts to preserve intact its business organization, keep available the services of its directors, officers and employees and maintain existing relations and goodwill with customers, distributors, lenders, partners, suppliers and others having material business associates with it or its Subsidiaries.”

The Chancery Court held that within the first clause of the ordinary course covenant Cooper Tire had undertaken to cause its subsidiaries to operate in the normal course consistent with past practice, not qualified by the “efforts” standard in the second clause of that covenant. In this context, “ordinary course” was deemed to mean “[t]he normal and ordinary routine of conducting business” – and the subsidiary’s production stoppage and refusal of access to facilities and records violated this provision so as to alleviate the buyer of its obligation to close.

In Akorn, shortly after Akorn executed the agreement, its financial performance “fell off a cliff” and continued rapid deterioration. At the same time, the buyer received letters from an anonymous whistleblower questioning Akorn’s failure to comply with regulatory requirements and quality programs, suggesting that Akorn’s representations regarding ordinary course operations were inaccurate. The buyer’s independent investigation revealed that following signing Akorn had canceled regular audits of known problems, failed to maintain its data integrity system and submitted inaccurate regulatory filings. The ordinary course of business covenant in the Akorn agreement contained a “commercially reasonable efforts” qualifier. The Chancery Court held that because the ordinary course of business covenant did not define Akorn’s conduct to be consistent with its past practices, it was interpreted to mean that of a generic company in Akorn’s line of business. Akorn’s conduct between signing and closing reflected a conscious departure from how a generic company in its line of business would operate, thereby enabling the buyer to terminate the agreement.


Some unique circumstances from the Cooper Tire and Akorn decisions are perhaps important to consider when applying their principles to business operations disrupted by COVID-19. For example, the Cooper Tire decision highlighted that the seller had made “a conscious effort to disrupt the operations of the [subsidiary’s] facility” when it suspended payments to the subsidiary’s vendors. The Akorn decision held that the destruction of one of the seller’s databases was not in the ordinary course, but because the destruction was due to an unexpected event out of the seller’s control, the commercially reasonable efforts modifier prevented a finding of a breach related to that destruction. In other words, these decisions suggest that there is a colorable argument that a seller is not in violation of an ordinary course of business covenant where extreme circumstances occasioned by COVID-19 have disrupted business operations – particularly where there is a commercially reasonable efforts modifier and/or the seller has not exacerbated the business interruption.

Cooper Tire and Akorn additionally determined that ordinary course of business covenants stand alone in the absence of express language to the contrary. Therefore, parties to agreements need to carefully craft MAE provisions to make sure qualifications apply as intended to all applicable clauses of the MAE definition as well as to applicable interim operating covenants. Parties should also consider whether to clearly define ordinary course of business. Further, interim operating covenants often have standards for performance such as reasonable commercial efforts or may qualify buyers' consent rights by language such as “not to be unreasonably withheld,” as further discussed in this alert. All of these provisions need to be looked at through a new lens when considering extraordinary events such as a pandemic or natural disaster.

Also, whether or not a contract contains a specific performance clause or time is of the essence clause could be material to the ability to terminate. Parties seeking to protect against termination will have one view of how to address these provisions and whether they should be included. These provisions may come in conflict with other provisions in the agreement relating to drop dead dates for closing and timing and standards for performance relating to matters such as third party and governmental consents required for closing. Will parties seeking to protect against terminations look for more lenient standards for interim operating covenants and protections for extensions of time to close or ability to take emergency actions for events such as pandemics and other types of force majeure provisions that have not customarily been included in M&A contracts? Will interim covenants be qualified so as to allow flexibility to address extraordinary events by tying such covenants to business continuity plans and similar reactions taken in response to unanticipated interruptions in the “ordinary course” that are beyond the control of the seller? Will buyers be more open to allowing for the taking of extraordinary actions to preserve value? How will buyers be judged in terms of the reasonableness of their actions in withholding consent to needed protective maneuvers by sellers to preserve value and continuity of their business? Will the parties build in requirements to renegotiate in good faith purchase price adjustments and adjustments to earn-outs rather than simply force an unfair deal on one party?

We would expect that in the upcoming expected recession and a market involving valuation volatility and uncertainty we will see a rise in deals with earn-outs. How will parties navigate protections around these earn-outs for material changes in circumstances that cause or require material changes in the operation of the business between signing and closing or during the earn-out period? Will courts apply any kind of good faith and fair dealing standard or hold the parties to the express terms of the contract as written? Traditionally, Delaware law has simply looked to the four corners of the document absent ambiguity so we would expect agreements to try to pro-actively address any protections that the parties wish to include to carry out the true intent of the parties while protecting flexibility to make sure the deal continues to make sense to both sides. After all, litigation is never the intent or desire of the parties when entering into a merger agreement.


While the cases decided above relate to deals negotiated and executed before the pandemic was in full force in the United States, deal lawyers will now have to look at M&A agreements in a new light and we expect to see increased thought to inclusion of reasonable safeguards on both sides of the table. It remains to be seen where the balance will land in terms of what is market and in large part may depend on the negotiating leverage of the buyer and seller in each individual transaction.

As the interruptions to normal business operations from the COVID-19 pandemic continue to reverberate through the national and global economy, further challenges to M&A transactions are expected. There is accordingly a need for renewed focus on the language chosen by the parties to allocate risk within their agreements. What constitutes a MAE, operations in the ordinary course, commercially reasonable efforts, reasonableness of withholding consent and reasonable access to diligence information, among other provisions where language had become standard and in some cases used without definition, takes on new meaning as businesses adapt to the new normal of teleworking, social distancing and governmental restrictions on operations as well as the pandemic’s ripple effects on supply chain disruptions and other matters that alter the ability to operate a business in the ordinary course consistent with past practice.

Delaware law has historically focused upon the words chosen by the parties in their agreements and the circumstances at hand to address challenges to M&A transactions. While these core principles are likely to remain at the heart of such court decisions, it is perhaps naïve to think that the unprecedented influence of the COVID-19 pandemic will not shade judicial consideration of these disputes. To the extent possible, parties should endeavor to self-order their risk allocation by incorporating terms specific to this, and future pandemics and other unforeseen or uncontrollable events, into their contracts. For those agreements that are already documented, experienced litigation counsel can best address positioning to minimize risk exposure.

If you have questions or would like more information, please contact Marc S. Casarino (; 302.467.4520), Thomas B. Fiddler (; 215.864.7081), Lori S. Smith (; 212.714.3075) or Eric B. Porter (; 212.714.3078).

As we continue to monitor the novel coronavirus (COVID-19), White and Williams lawyers are working collaboratively to stay current on developments and counsel clients through the various legal and business issues that may arise across a variety of sectors. Read all of the updates here.

[1] Bed Bath & Beyond, Inc. v., Inc. (Del. Ch. Apr. 1, 2020)

[2] Level 4 Yoga, LLC v. CorePower Yoga, LLC, et al. (Del. Ch. Apr. 2, 2020)

[3] Oberman, Tivoli & Pickert, Inc. v. Cast & Crew Indie Services, LLC and Camera Holdings, LP (Del. Ch. Apr. 6. 2020)

[4] SP VS Buyer LP, v. L Brands, Inc., (Del. Ch. Apr. 22, 2020) and L Brands, Inc. v. SP VS Buyer L.P., Sycamore Partners III, L.P., and Sycamore Partners III-A, L.P., (Del. Ch. Apr. 23, 2020)

This correspondence should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult a lawyer concerning your own situation and legal questions.
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