A US judge on Monday said that South Korean asset manager Mirae had legally terminated a $5.8bn deal with China’s Anbang to buy 15 US luxury hotels, the first ruling in favour of a buyer seeking to pull out of a transaction partly as a result of coronavirus.
Judge Travis Laster said that Anbang had made extensive changes during the pandemic to the way it ran its hotels, which include New York’s JW Marriott Essex House and San Francisco’s Westin St Francis, moves that were in breach of the merger agreement.
The ruling made by the court in Delaware, where most publicly traded US companies are legally registered, could become an important precedent as buyers seek ways out of deals that were agreed at much higher valuations before the Covid-19 crisis.
Sellers have a contractual obligation to run the business in an “ordinary” manner during the time between when a deal is agreed and closing. The so-called ordinary course covenant forces sellers to seek the consent of the buyer to make any significant changes to the way the business is run, regardless of any external events.
Mr Laster said Anbang failed to seek consent from Mirae before taking drastic actions in response to the pandemic, such as furloughing staff and closing properties included in its Strategic Hotels & Resorts portfolio.
“Buyer proved that due to the Covid-19 pandemic, Strategic made extensive changes to its business. Because of those changes, its business was not conducted only in the ordinary course of business, consistent with past practice in all material respects . . . relieving buyer of its obligation to close,” the judge said on Monday.
Mr Laster also said Anbang, which was placed under the control of Chinese regulators in 2018 and whose founder Wu Xiaohui was jailed for 18 years on fraud and embezzlement charges, failed to clearly inform Mirae about disputes related to the titles of the hotels.
As a result of these disputes, Mirae was unable to obtain so-called title insurance necessary to access the financing to pay for the deal. This was a further reason, the judge said, to allow the South Korean group to walk away.
Mirae said in a statement that it was pleased with the court’s finding. Anbang’s legal representative at Gibson Dunn and public relations adviser at Edelman in New York did not return requests for comment.
The decision was a rare instance of the Delaware court allowing a buyer to escape a merger agreement.
In several transactions struck before the pandemic, buyers have sued to terminate merger agreements, arguing that sellers’ businesses had been irreparably damaged and that those companies had not lived up to deal contracts before closing deals.
Such transactions included LVMH’s $16bn deal to acquire Tiffany and Simon Property Group’s $3.6bn purchase of Taubman Centers. But in each of those deals, the sides eventually agreed to slightly lower respective purchase prices in order to pre-empt the risk of an unfavourable ruling at trial.
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