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Appellate Litigation

In a court decision cited by some as the most significant Canadian decision to date with respect to COVID-19 business fallout, Cineworld Group PLC (“Cineworld”) has been ordered to pay over $1.2 billion for failure to follow through with a deal to acquire Cineplex Inc. (“Cineplex”). In December 2019, the companies entered into an agreement in which Cineworld, a company based in the UK, agreed to acquire the Canadian company Cineplex’s shares in a deal valued at $2.8 billion by June 30, 2020. When COVID-19 restrictions began in Canada in March 2020, there was a major impact on businesses across the globe. This included movie theatres, which were largely shuttered for the better part of a year due to safety precautions.

Cineworld Terminates Agreement for Breach of Covenant

In mid-June of last year, Cineworld terminated the agreement, citing a breach of Cineplex’s covenant to continue to operate in the ordinary course of business until the deal closed. Further, Cineworld cited the pandemic as a “material adverse event”, which enabled it to invoke a condition set out in the agreement. Cineplex then brought a claim against Cineworld seeking $1 billion for breach of contract, and Cineworld counterclaimed, seeking to recover its transaction costs against Cineplex.

Court Found Cineplex Continued to Operate in the “Ordinary Course”

The contract between Cineworld and Cineplex contained a clause that limited Cineplex’s debt ceiling to $725 million. If Cineplex acquired debt in excess of this amount prior to the deal closing, it could threaten the viability of the transaction. In order to keep its debt under this amount in the face of widespread closures due to the pandemic, Cineplex made decisions to save costs in other ways. For example, the company delayed payments to some vendors.

Cineworld claimed that these tactics amounted to Cineplex operating outside of the “ordinary course” of business in violation of the clause, which required Cineplex to:

[C]onduct its business in the Ordinary Course and in accordance with Laws, and the Company shall, in good faith, use commercially reasonable efforts to maintain and preserve its and its Subsidiaries business organization, assets, properties, employees, goodwill and business relationships with customers, suppliers, partners and other Persons with which the Company or any of its Subsidiaries has material business relations.

However, the Court held that Cineplex’s actions were to be viewed in the context of the situation at the time. Given the continuing pandemic, Cineplex had taken reasonable steps and made decisions that could be viewed as being in the “ordinary course” given the economic situation.

Cineworld Could Not Rely on “Material Adverse Event” Clause in Contract

In one clause of the acquisition agreement, there were conditions set out which exclusively benefited Cineworld. One condition specifically stated that the transaction would proceed so long as “no Company Material Adverse Effect” had occurred since the date of the original agreement. The term “Material Adverse Effect” was defined in the agreement as:

[A]ny change, event, occurrence, effect or circumstance that, individually or in the aggregate, with other such changes, events, occurrences, effects or circumstances, is or would reasonably be expected to have a material and adverse effect on the business, affairs, operations, assets, liabilities, financial condition or results of operations of the Company and its Subsidiaries taken as a whole, except any such change, event, occurrence, effect or circumstance arising out of, relating to, resulting from or attributable to…any earthquake, flood or other natural disaster or outbreaks of illness or other acts of God. [Emphasis added]

Given that the conditions of the agreement were in favour of Cineworld, Cineworld had to assume the risk of the exclusions to the Material Adverse Effect clause. Under the wording of the clause, the COVID-19 pandemic was clearly excluded as an “outbreak of illness”. As a result, Cineworld could not rely on the pandemic as an adverse effect that would allow it to terminate the contract.

Decision Most Significant COVID-19-Related Contract Case to Date in Canada

The court examined other evidence, including communications between executives at Cineworld and some of the company’s largest shareholders. It concluded that Cineworld was actively seeking a way to extricate itself from the deal. The judge noted that Cineworld was under pressure from shareholders to abandon the deal given the sharp decline in the company’s share prices, from 220 pounds per share in early January 2020 to just over 21 pounds per share in mid-March.

The Court was clear that Cineworld’s attempts to justify its failure to follow through with the transaction were not defensible, finding the company in breach of contract. Ultimately, the Court found in favour of Cineplex and dismissed Cineworld’s counterclaim to recover its transactional costs.

Breach of Contract Damages Calculated Based on the Loss of Financial Benefits

The damages were measured in the loss of synergies, or financial benefits, which would have been enjoyed by Cineplex had the deal been completed as planned. Under the agreement, Cineplex stood to maintain operational control of the company following the acquisition, and it would have accrued a number of financial benefits. A report commissioned by Cineplex put the value of these benefits at $1.24 billion with interest. The Court awarded damages for breach of contract in this amount in an attempt to put Cineplex in the financial position it would have enjoyed had the transaction completed.

Cineworld has indicated that it plans to appeal the decision and will hold off on paying damages until the appeal is resolved.

Contact Milosevic & Associates in Toronto for Representation in Pandemic-Related Contract Disputes

The lawyers at Milosevic & Associates in Toronto are skilled at providing strategic litigation advice across complex commercial matters, including breach of contract claims related to the COVID-19 pandemic. Our team has extensive experience advocating for our clients’ rights. To learn how we can help you call us at 416-916-1387 or contact us online to schedule a consultation.