NCC issues judgment on enforcement break-up fee in COVID-19 circumstances
On 29 April 2020, the relatively new Netherlands Commercial Court (NCC) ruled – in its fifth judgment – on the question whether the current COVID-19 outbreak affects a contractual break-up fee in case of a collapsed M&A transaction.
This decision revolves around Tennor Holding B.V.’s (Defendant) intention to acquire a 50% stake in McCourt Global Sports & Media LLC (Claimant). Parties signed a letter of intent including a strict break option, which entails that (i) either party may back out of the deal before 2 March 2020, however (ii) that such electing party consequently is obliged to pay a EUR 30 million ‘break-up fee’ to the other party.
Claimant executed all the paperwork for the deal of EUR 169 million. Despite several statements made by Defendant’s (legal) advisors indicating otherwise, Defendant did not sign the required paperwork and walked away from the deal.
As a result thereof, Claimant started summary proceedings before the NCC, seeking the following orders:
- Defendant to take the 50% stake and pay the EUR 169 million, or, in the alternative;
- Defendant to pay the EUR 30 million break-up fee.
In its defence, Defendant mainly invoked its inability to get the deal done due to unforeseen circumstances based on the COVID-19 outbreak.
No final agreement between parties
The first question is whether parties came to a final agreement. The NCC finds that this is not the case, as Defendant ultimately did not sign the relevant transaction documentation and therefore no consensus was reached. Interestingly, the NCC elaborates on its awareness of the potential impact of this analysis for Claimant, as it will face “unprecedented uncertainty and navigating the rocky shoals of the COVID-19 crisis for the foreseeable future”. However, according to the NCC, the same would apply to Defendant in case it would be enforced to acquire the 50% stake in Claimant. Taking all the above into consideration, the NCC finds that there is not a sufficient likelihood of success on the merits so as to justify an interim measure as claimed. As a result the NCC denies the primary claim.
COVID-19 outbreak and break-up fee
Alternatively, the Claimant claims payment of the full break-up fee. At stake is whether the NCC should enforce the fee against Defendant, or whether the fee’s effects should be modified, mitigated or reduced in some way, amongst others based on the COVID-19 outbreak being an unforeseen circumstance. Defendant argues that it had no other choice than to walk away and the break-up fee is extremely onerous due to the business being in distress.
The NCC noted that no well-established case law on the COVID-19 outbreak exists yet, which is why the NCC took into account the views of legal scholars on this subject. In particular, the NCC brings forward scholars who argue that parties should in principle share the pain of the COVID-19 outbreak, focusing on preserving the parties’ contractual equilibrium, whereby risk allocation provisions should be taken into account.
Amongst others, the NCC states that:
- the key concept of this break-up fee clause is that it allocates risk;
- parties are free to walk away, in which case its exposure is capped at the amount of the fee; and
- the break-up fee is considered to be the contractual equilibrium as such.
Parties explicitly agreed upon a break-up fee in the letter of intent to allocate risk. Therefore, according to the NCC, the “share the pain” approach is considered the right way to look at the contractual agreements under the specific circumstances in these summary proceedings. Defendant’s defense based on (amongst others) unforeseen circumstances is therefore denied and the alternative claim of EUR 30 million is awarded.
This judgment is one of the first published COVID-19 related commercial cases. It is deemed likely that cases that deal with similar questions will follow. Our firm has extensive experience with M&A-related litigation and closely monitors legal developments regarding both the NCC and the COVID-19 outbreak. For more information, please contact Mijke Sinninghe Damsté or Harmen Holtrop.