## Facts

- A private equity seller agreed to sell a cake-decorating products and technology company to a buyer group for $550 million under a stock purchase agreement (SPA) signed March 6, 2020.
- The buyer arranged debt financing via a commitment letter for roughly $365 million, with an outside date in May 2020.
- The SPA included (i) a Material Adverse Effect (MAE) closing framework with carve-outs allocating certain broad market risks to the buyer absent disproportionate impact, (ii) an “ordinary course of business consistent with past practice” interim operating covenant, and (iii) a “reasonable best efforts” covenant requiring the buyer to pursue the committed financing (and alternative financing if needed).
- After signing, COVID-19 and related stay-at-home orders caused a sharp short-term sales decline.
- Management presented data and projections indicating the downturn would be temporary and that performance would recover.
- The buyer developed highly pessimistic forecasts and provided lenders with downside projections, while also failing to proceed constructively toward definitive credit documentation.
- The target implemented operational responses to the pandemic (e.g., production and inventory adjustments) aimed at stabilizing the business.
- The seller sued for specific performance to force closing; the buyer counterclaimed that an MAE occurred, the seller breached the ordinary course covenant, and financing was unavailable.

## Issues

1. Whether the pandemic-related decline constituted an MAE that excused the buyer from closing under the SPA.
2. Whether the target’s operational responses to COVID-19 breached the SPA’s “ordinary course of business consistent with past practice” covenant.
3. Whether the buyer breached its “reasonable best efforts” obligation to obtain the committed debt financing and pursue alternatives if necessary.
4. Whether specific performance could be ordered despite a contractual condition tying specific performance to the availability of debt financing, where the buyer allegedly contributed to the financing failure.

## Decision

- The court held no MAE occurred because the downturn was not durationally significant and the SPA’s risk allocation did not shift broad pandemic effects to the seller absent disproportionate impact.
- The court held the seller did not breach the ordinary course covenant; the company’s pandemic responses were consistent with its past practice and the business context.
- The court held the buyer breached its “reasonable best efforts” financing covenants by actions that undermined the financing process and by not pursuing required steps toward closing and alternative financing.
- Applying the prevention doctrine, the court ruled the buyer could not rely on the failure of the financing-availability condition because the buyer materially contributed to that failure.
- The court ordered specific performance compelling the buyer to close the transaction on the agreed terms.

## Legal Principles

- Under Delaware law, an MAE requires a showing of durationally significant harm; sharp but temporary earnings declines generally do not satisfy that standard.
- MAE provisions are interpreted in light of contractual risk allocation, including carve-outs that assign broad market or economy-wide events to the buyer unless the target suffers a disproportionate effect relative to peers.
- An “ordinary course of business consistent with past practice” covenant is assessed by reference to the company’s historical operations and the nature of the challenged changes; the inquiry is fact-specific.
- A “reasonable best efforts” financing covenant imposes an affirmative obligation to take proactive steps to obtain financing and to avoid conduct that materially impairs financing.
- The prevention doctrine bars a party from invoking the failure of a contractual condition when that party’s conduct materially contributed to the condition’s non-occurrence; a showing of bad faith is not required if material contribution is proven.

## Conclusion

The court enforced the SPA as written, finding that the buyer could not use a temporary pandemic-driven decline or a buyer-influenced financing breakdown to avoid closing, and it granted specific performance requiring completion of the $550 million acquisition.


Snow Phipps Grp., LLC v. KCake Acquisition, Inc., 2021 WL 1714202 (Del. Ch. Apr. 30, 2021)