Snow Phipps Group v. KCAKE Acquisition: DE addresses MAE based on COVID-19 impact

Corporate / M&A Decisions update series

In Snow Phipps Group, LLC v. KCAKE Acquisition, Inc. (C.A. No. 2020-0282-KSJM), the Delaware Court of Chancery ordered specific performance of a US$550 million acquisition, rejecting the buyer’s argument that the impact of COVID-19 was reasonably expected to constitute a materially adverse event (MAE). The court found specific performance appropriate because the plaintiff failed to use reasonable best efforts to obtain appropriate financing, including making unreasonable demands of the potential lenders. Ultimately, the court characterized its decision as a “victory for deal certainty,” reaffirming that Delaware courts set a high bar for purchasers seeking to terminate an acquisition agreement on the basis of an MAE. The holding demonstrates that while other deal parties recently were able to demonstrate MAEs, including AB Stable VIII LLC and Akorn, the burden to do so remains high and requires a “persistent and sustained” failure in an acquisition target’s business.

On March 6, 2020, at the outset of the COVID-19 pandemic in the United States, an affiliate of Kohlberg & Company, LLC (Kohlberg) entered into an agreement with Snow Phipps Group, LLC (Snow Phipps) to acquire DecoPac Holdings Inc. (DecoPac), a company that sells cake-decorating ingredients and products to supermarket bakeries. Within weeks, following widespread government-mandated shutdowns that caused DecoPac’s sales to plummet, the buyers “lost their appetite for the deal.”

While DecoPac’s executives believed that its sales would rebound, Kohlberg did not. Rejecting the projections it requested from DecoPac – and that DecoPac “painstaking[ly]” prepared as “illogically optimistic,” Kohlberg prepared its own projections forecasting precipitous declines in DecoPac’s performance during the pandemic based on “simplistic assumptions.” Kohlberg then shared its own projections, not the DecoPac projections, with lenders and demanded changes to the financing. The lenders rejected the demands. After Kohlberg told Snow Phipps that it would not proceed to closing, Snow Phipps sued for specific performance, and Kohlberg counterclaimed.

After a five-day trial, the court rejected on multiple bases Kohlberg’s argument that DecoPac’s performance in the early days of the pandemic would reasonably be expected to ripen into an MAE, thereby permitting termination of the share purchase agreement (SPA). First, Kohlberg failed to establish the existence of an MAE, as DecoPac’s steep decline in performance in the early days of the pandemic had begun to rebound in the weeks prior to termination, and the company was projected to continue its recovery. Second, the plaintiffs established that the vast majority of the performance decline was causally linked to government shutdown orders. Therefore, the effects of COVID-19 fell within an enumerated carveout of the SPA. Third, Kohlberg did not show that DecoPac suffered a disproportionate impact relative to its industry peers.

After rejecting Kohlberg’s MAE claim, the court dismissed an alternative argument by Kohlberg that Snow Phipps had breached its covenant to continue operating the DecoPac business in the ordinary course.

Having rejected Kohlberg’s excuses not to close, the court found in favor of Snow Phipps on its counterclaim, concluding that Kohlberg breached its obligation to use reasonable best efforts to obtain financing. The court ordered specific performance of the US$550 million acquisition, as stipulated in the SPA, “[c]halking up a victory for deal certainty.”

In its opinion, the court resolved several fact issues even though it ultimately concluded that those fact issues need not be resolved in light of the clear contract language. Of note, however, was the court’s rejection of Kohlberg’s argument that, because it did not agree to Snow Phipps’ proposals that “epidemics” and “pandemic” be added to the definition of MAE, it conclusively allocated to DecoPac potential unknown risks of the pandemic. Instead, the court found based on documents and testimony that Kohlberg did not want to be the “first private equity firm that plays in the middle market space to have that language in the MAE” and that DecoPac “never would have agreed to the transaction if [it] believed that by sticking to the [Kohlberg] MAE definition, Kohlberg was shifting COVID-19 demand risk to [DecoPac].”


Authored by Ryan M. Philp, Allison M. Wuertz, and Tyler Waywell.

David Michaeli
New York
Allison Wuertz
New York
Jon Talotta
Global Co-Lead
Northern Virginia
William Regan
New York


This website is operated by Hogan Lovells International LLP, whose registered office is at Atlantic House, Holborn Viaduct, London, EC1A 2FG. For further details of Hogan Lovells International LLP and the international legal practice that comprises Hogan Lovells International LLP, Hogan Lovells US LLP and their affiliated businesses ("Hogan Lovells"), please see our Legal Notices page. © 2024 Hogan Lovells.

Attorney advertising. Prior results do not guarantee a similar outcome.