June 04, 2020 |
Courts in the Netherlands have been asked to consider whether the COVID-19 pandemic justifies walking away from a deal. So far, the courts have upheld the terms of the transaction. In other words, it’s business as usual. This newsflash discusses two recent decisions.
Private equity firm ordered to sign share purchase agreement
In one of the first COVID-19-related cases, the Amsterdam District Court ordered a private equity firm (the buyer) to proceed with the signing of a share purchase agreement (SPA) and rejected their argument that they could not be expected to sign in view of COVID-19. NautaDutilh’s Paul Olden and Marieke Faber successfully represented the sellers. The decision in summary proceedings can be read here.
Nordian Capital (Nordian) was selected in a controlled auction, after the firm submitted a binding offer with fully committed financing. Nordian and the sellers of target J-Club entered into a signing protocol on February 28, 2020, which provided for the signing of an SPA in agreed form. At that time, the first case of COVID-19 in the Netherlands had already been reported. The signing of the SPA was made subject only to Nordian taking out Representations and Warranties (R&W) insurance.
On March 19, 2020, Nordian tried to walk away from the signing, claiming that they had not been able to obtain R&W insurance and that they wished to first obtain clarity with respect to the effects of the COVID-19 outbreak on J-Club. The sellers lodged summary proceedings to secure the signing of the SPA.
The court ruled in favor of the sellers, finding that Nordian had not honored its best effort obligation to obtain R&W insurance and that the condition must be deemed fulfilled (Article 6:23(1) Dutch Civil Code (DCC)). Nordian relied on Article 6:258 DCC, citing “unforeseen circumstances” and argued that the sellers could not expect the SPA to be signed in its agreed form in view of the circumstances resulting from the COVID-19 outbreak. The court dismissed this defense. The potential consequences of COVID-19 for J-Club had been discussed prior to execution of the signing protocol, and Nordian had not opted to include a material adverse change clause after this possibility was discussed.
Contractual risk allocation upheld despite COVID-19
The second decision is from the Netherlands Commercial Court (NCC). A letter of intent (LOI) was signed with respect to the acquisition of a 50% stake in an equestrian show-jumping business. The LOI contained a EUR 30 million break fee. The buyer decided not to pursue the transaction and argued that the break fee should be reduced in light of the COVID-19 crisis. The NCC rejected the buyer’s arguments, upheld the risk allocation laid down in the LOI and ordered the prospective buyer to pay the EUR 30 million break fee. The decision can be read here.
“The fee allocates risk and expresses commitment. The fee caps the defendant’s exposure. The harm to the business may be substantial and structural (as the defendant contends), or it may be short-term and minimal (as the claimant insists). Either way, the best “share the pain” solution, to preserve the contractual equilibrium in the agreement, is for the defendant to pay the fee as written. This allocates a defined risk to the defendant, but substantial actual or potential risks are borne by the claimant. If the fee were to be reduced in any business downturn, the fee’s purpose – comfort and confidence to get the deal done – would not be accomplished. The fee would be eviscerated in precisely the circumstances in which the parties intended it to be robust. The Court therefore allows the alternative claim, and orders the defendant to pay the EUR 30 million fee.”
Compliments of NautaDutilh – a member of the EACCNY.