Level 4 Yoga v. CorePower Yoga: COVID-19 shutdown not grounds for asset purchase repudiation

Corporate / M&A Decisions update series

In Level 4 Yoga, LLC v. CorePower Yoga, LLC, C.A. No. 2020-0249 (Del. Ch. March 1, 2022), the Delaware Court of Chancery granted Level 4, the owner of franchised yoga studios, an order of specific performance and compelled the buyer, Level 4’s franchisor, to close under an asset purchase agreement after finding that (1) Level 4 had not breached its ordinary course covenant by complying with the franchisor’s directives to temporarily shut down its studios at the outset of the COVID-19 pandemic and (2) no Materially Adverse Effect had occurred. The court found that the parties had intentionally structured their purchase agreement as a “one-way gate” requiring that closing take place, without any conditions to closing, to purposefully account for the fact that Level 4 was not a voluntary seller after the franchisor had invoked a contractual call option. The court therefore awarded Level 4 specific performance, damages, and interest for the franchisor’s unexcused failure to close.

In May 2019, CorePower Yoga exercised a contractual call option that required its franchisee, Level 4 Yoga, to sell all of Level 4’s assets, namely numerous yoga studios, to CorePower. The acquisition of all of Level 4’s studios was memorialized in an Asset Purchase Agreement (APA) later that year. However, shortly before the first scheduled closing approached, the COVID-19 pandemic began. CorePower directed all of its franchisees, including Level 4, to shut down their studios as a result of the pandemic on March 26, 2020, a week before the first scheduled closing was to occur under the parties’ purchase agreement. Level 4 complied. CorePower then tried to use the fact that Level 4 had shut down its studios as evidence that there had been a Materially Adverse Event substantially affecting the seller’s business, and further argued that Level 4 was no longer operating in the Ordinary Course of Business and therefore was in violation of the parties’ purchase agreement. CorePower further argued that Level 4 had repudiated the purchase agreement and sought to delay and/or terminate the scheduled transactions. Level 4 refused to delay the planned series of closings and insisted the transactions go forward. Level 4 brought suit, seeking an order of specific performance compelling CorePower to close under the Asset Purchase Agreement and damages.

After a five day bench trial, the Court of Chancery ruled in Level 4’s favor and granted it specific performance and compensatory damages for CorePower’s delay in closing. The court found that that the parties had intentionally structured their purchase agreement as a “one-way gate” requiring that closing take place, without any conditions to closing, to purposefully account for the fact that Level 4 was not a voluntary seller once CorePower had invoked its call option. The court found that the absence of any conditions to closing or express rights to terminate evidenced the parties’ intention to close even if one party was in breach. In addition to finding no contractual basis for termination, the court further found that CorePower had no common law right to terminate the purchase agreement because Level 4 was not in material breach since the agreement required Level 4 to be in compliance with its franchise agreement and the franchise agreement obligated Level 4 to shut down as directed by CorePower. The court further rejected CorePower’s argument that a Material Adverse Effect had occurred, finding that the timeframe required for measuring a Material Adverse Effect was “years rather than months,” such that Level 4’s shutdown for less than a week at the time of CorePower's repudiation was insufficient. The court also found that Level 4’s temporary shutdown of operations was within the ordinary course of business under the parties’ agreement because CorePower’s franchise agreement required that Level 4 follow CorePower's directions. Following CorePower’s directions, the court found, was Level 4’s ordinary course of business, even if the direction to shut down was not ordinary.

Because Level 4 did not breach the APA, CorePower was in breach by  refusing to go through with the asset purchases. The court awarded Level 4 specific performance requiring CorePower to close the transaction, damages for operating losses incurred after the scheduled closing date, and pre- and post-judgment interest.

 

Authored by Ryan M. Philp, David R. Michaeli, and Elizabeth Cochrane.

Contacts
Ryan Philp
Partner
New York
David Michaeli
Counsel
New York
Allison Wuertz
Senior Associate
New York
Jon Talotta
Global Co-Lead
Northern Virginia
Michael Hefter
Partner
New York
William Regan
Partner
New York

 

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