On March 1, 2022, Vice Chancellor Joseph R. Slights of the Delaware Court of Chancery ruled in favor of plaintiff Level 4 Yoga, LLC in a breach of contract action against CorePower Yoga, LLC and CorePower Yoga Franchising, LLC (together, “defendant”), stemming from the parties’ pre-COVID agreement for defendant to acquire plaintiff’s yoga studios. Level 4 Yoga, LLC v. CorePower Yoga, LLC, CorePower Yoga Franchising, LLC, No. CV 2020-0249-JRS (Del. Ch. Mar. 1, 2022). Plaintiff alleged defendant breached the parties’ asset purchase agreement (“APA”) at the outset of the COVID-19 pandemic when defendant refused to close the transaction, failed to deliver required payments under the APA, and failed to take possession of plaintiff’s yoga studios. The Court found that the APA “unambiguously contain[ed] no conditions to closing and no express right for either party to terminate the contract pre-closing.” The Court further held that plaintiff neither repudiated nor materially breached the APA. Therefore, the Court issued a verdict with a decree of specific performance directing defendant to complete the transaction.

Plaintiff was an operator of yoga studios as a franchisee of defendant. The franchise agreement included a “call option” providing defendant the right—at its election—to purchase plaintiff’s franchised studios upon the occurrence of certain events, including the acquisition of defendant. After defendant was acquired by a private equity firm, defendant elected to exercise the call option. Accordingly, in November 2019, the parties entered into the APA, which provided for the acquisition of plaintiff’s yoga studios in tranches beginning on April 1, 2020.

According to the Court’s decision: On March 15, 2020, at the express direction of defendant and pursuant to the franchise agreement, plaintiff was required to temporarily close its studios in response to the COVID-19 pandemic. On March 26, 2020, defendant notified plaintiff that it believed plaintiff had “disavow[ed]” several representations and warranties in the APA, including that plaintiff was conducting operations in the ordinary course of business, plaintiff had not closed any facility, and no event constituting a material adverse effect (“MAE”) had occurred. Defendant further advised that it considered its contractual performance under the APA to have been discharged because of plaintiff’s “repudiation” of the APA. Defendant did not attend the virtual closing.

After a trial, the Court determined that defendant had no contractual right to avoid closing under the APA. The Court highlighted that there were “no conditions to closing, no express termination provisions” and “not even a force majeure clause.” Instead, the Court noted that the APA provided for recourse for breaches of representations and warranties in the form of a purchase price adjustment clause and a “hearty post-closing indemnification regime.” Thus, the APA was essentially a “one-way gate” to “inevitable closings.”

The Court also concluded there was no common law basis to excuse defendant’s performance. As a threshold matter, the Court determined that plaintiff’s conduct and compliance with the APA must be measured as of the date defendant declared it would not proceed—March 26, 2020—rather than when the last tranche of the transactions was scheduled to close months later. In that context, the Court found that plaintiff neither repudiated nor materially breached the APA. For example, the Court explained that repudiation “requires a voluntary act” and determined that plaintiff’s closure of its yoga studios was not voluntary, as it was directed by defendant (and subsequently by government mandates).

Notably, the Court also evaluated defendant’s contention that plaintiff breached its representation that no MAE had occurred even though there was no corresponding condition to close. The Court explained: “To justify a refusal to close based on a purported breach of an MAE representation . . . in the absence of an express corresponding condition to close, the buyer must demonstrate that the breach of that representation . . . was material.” Therefore, according to the Court, it is not “redundant” to include an MAE condition to close because parties “may define an MAE to mean whatever they want it to mean.” Thus, in instances where it is triggered by events that do not “touch[] the fundamental purpose of the contract,” there “might be an MAE,” but there “would not be a material breach of the MAE representation.”

However, the Court found there was no MAE and thus rejected defendant’s contention that its performance was excused because the effects of the COVID-19 pandemic constituted a material breach of the MAE representation. The Court explained that “[w]hen determining whether an MAE has occurred, the court must find that . . . the effect will substantially threaten the overall earnings potential of the target in a durationally-significant manner.” The Court determined that, “even if the effect ultimately was significant, at the time [defendant] purported to invoke the [MAE] Representation, there was absolutely no basis for [defendant] to conclude that the business effects of COVID-19 were then, or later would be, significant.”