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A lawsuit over the scuppered deal to buy Canada’s largest movie theatre
chain will test the obligations companies must meet in merger and
acquisition agreements that are derailed by disasters – such as a global
pandemic.
On Monday, U.K.-based Cineworld Group PLC and Toronto’s Cineplex Inc. will
square off before the Ontario Superior Court of Justice, in a legal fight
over who is to blame for the dissolution of the $2.18-billion deal. Both
companies are accusing the other of acting in “bad faith” and of breaching
the terms of the deal.
When Cineworld agreed to buy the Canadian company in December, 2019, a
cataclysm was already coming for the industry. Within months, a global
pandemic ground box offices to a halt, forcing cinemas to scramble to stay
afloat. By mid-June, 2020, the agreement was in tatters after Cineworld
walked away.
The extent to which COVID-19 helped to hasten the deal’s demise is a key
question in the case. Like many such contracts, the Cineworld-Cineplex
agreement included a “material adverse effect” clause that provided
justifications for the parties to terminate it. But even though it was
struck before many people had a full appreciation of the coming
public-health storm, this agreement specified that an “outbreak of
illness” was not among those justifications.
Cineplex filed the lawsuit last July, arguing its would-be acquirer had “a
case of buyer’s remorse.” The Canadian company will be arguing that
Cineworld did not meet its obligations to pursue government approval under
the Investment Canada Act in a reasonable amount of time. Cineworld denies
this.
Cineworld, for its part, will be arguing that its cold feet had nothing to
do with the global pandemic and its disastrous impact on the movie theatre
industry. In its statement of defence and counterclaim, Cineworld argued
that Cineplex began reducing spending on capital expenditures, and
extended payment terms to suppliers, before the pandemic began affecting
the business – and that this had damaged crucial business relationships,
which Cineplex denies.
“Cineplex’s strategy was to kick its problems ‘down the road’ covertly so
that they would become Cineworld’s problems,” the Cineworld statement of
defence argued.
Both companies had already received shareholder approval for the
transaction, which had been expected to close by the end of June, 2020.
Another important question in the case will be a clause that required
Cineplex to continue operating within the “ordinary course” of business.
Cineworld argues that in deferring rent payments to landlords, as well as
payments to studios and film distributors during COVID-19-related theatre
closings, Cineplex violated this obligation. The Toronto-based company
will argue that such measures were effectively an ordinary course in
extraordinary times – and were comparable with how others in the retail
and movie theatre industries managed the effects of the pandemic.
“Cineplex’s careful management of its working capital during the uncertain
early days of the COVID-19 pandemic was prudent and was consistent with
the obligations imposed by the arrangement agreement. It was also
consistent with the manner in which Cineworld was managing its own
business,” Cineplex wrote in a court filing in reply to Cineworld’s
claims.
Should the judge decide in Cineplex’s favour, the penalties it is seeking
are significant: The Canadian company is asking for hundreds of millions
of dollars in compensation, including approximately $664-million in debt
that Cineworld would have repaid or refinanced if the deal had closed, and
other costs and damages. Cineplex is also looking to recoup the losses to
its shareholders, amounting to the difference between the $34 a share that
Cineworld agreed to pay and the value of Cineplex’s shares as determined
by the court.
For its part, Cineworld has filed a counterclaim seeking damages, legal
costs and costs incurred before the deal was terminated.
At the time the deal was struck, the $34-a-share offer represented a
42-per-cent premium on the value of Cineplex’s stock. That gap widened
considerably amid the pandemic and the demise of the deal. While
Cineplex’s movie theatres across Canada have reopened, the company’s share
price is still down considerably compared to before the pandemic, closing
on Friday at $12.86.
The future of the movie business is in flux. The pandemic accelerated the
already-changing viewing habits of many movie goers, as Hollywood studios
unable to rely on theatrical releases in some cases opted to take their
blockbusters to streaming services. Movie theatre owners are now focused
on wooing audiences back to the big screen.
The industry received some good news on that front, with the opening of
Disney’s Shang-Chi and the Legend of the Ten Rings starring Canadian actor
Simu Liu: The movie broke records for the biggest Labour Day weekend
opening, drawing US$75.5-million in North America in its first three days.
And Hollywood has a backlog of big-name releases in the hopper in the
coming months, after studios delayed releasing some films during the
pandemic.
Last month, Cineplex launched a subscription service called CineClub,
offering one free movie a month as well as other extras and discounts, for
a monthly fee. Cineworld had initially planned to launch its own
subscription service for Cineplex after the deal closed.
chain will test the obligations companies must meet in merger and
acquisition agreements that are derailed by disasters – such as a global
pandemic.
On Monday, U.K.-based Cineworld Group PLC and Toronto’s Cineplex Inc. will
square off before the Ontario Superior Court of Justice, in a legal fight
over who is to blame for the dissolution of the $2.18-billion deal. Both
companies are accusing the other of acting in “bad faith” and of breaching
the terms of the deal.
When Cineworld agreed to buy the Canadian company in December, 2019, a
cataclysm was already coming for the industry. Within months, a global
pandemic ground box offices to a halt, forcing cinemas to scramble to stay
afloat. By mid-June, 2020, the agreement was in tatters after Cineworld
walked away.
The extent to which COVID-19 helped to hasten the deal’s demise is a key
question in the case. Like many such contracts, the Cineworld-Cineplex
agreement included a “material adverse effect” clause that provided
justifications for the parties to terminate it. But even though it was
struck before many people had a full appreciation of the coming
public-health storm, this agreement specified that an “outbreak of
illness” was not among those justifications.
Cineplex filed the lawsuit last July, arguing its would-be acquirer had “a
case of buyer’s remorse.” The Canadian company will be arguing that
Cineworld did not meet its obligations to pursue government approval under
the Investment Canada Act in a reasonable amount of time. Cineworld denies
this.
Cineworld, for its part, will be arguing that its cold feet had nothing to
do with the global pandemic and its disastrous impact on the movie theatre
industry. In its statement of defence and counterclaim, Cineworld argued
that Cineplex began reducing spending on capital expenditures, and
extended payment terms to suppliers, before the pandemic began affecting
the business – and that this had damaged crucial business relationships,
which Cineplex denies.
“Cineplex’s strategy was to kick its problems ‘down the road’ covertly so
that they would become Cineworld’s problems,” the Cineworld statement of
defence argued.
Both companies had already received shareholder approval for the
transaction, which had been expected to close by the end of June, 2020.
Another important question in the case will be a clause that required
Cineplex to continue operating within the “ordinary course” of business.
Cineworld argues that in deferring rent payments to landlords, as well as
payments to studios and film distributors during COVID-19-related theatre
closings, Cineplex violated this obligation. The Toronto-based company
will argue that such measures were effectively an ordinary course in
extraordinary times – and were comparable with how others in the retail
and movie theatre industries managed the effects of the pandemic.
“Cineplex’s careful management of its working capital during the uncertain
early days of the COVID-19 pandemic was prudent and was consistent with
the obligations imposed by the arrangement agreement. It was also
consistent with the manner in which Cineworld was managing its own
business,” Cineplex wrote in a court filing in reply to Cineworld’s
claims.
Should the judge decide in Cineplex’s favour, the penalties it is seeking
are significant: The Canadian company is asking for hundreds of millions
of dollars in compensation, including approximately $664-million in debt
that Cineworld would have repaid or refinanced if the deal had closed, and
other costs and damages. Cineplex is also looking to recoup the losses to
its shareholders, amounting to the difference between the $34 a share that
Cineworld agreed to pay and the value of Cineplex’s shares as determined
by the court.
For its part, Cineworld has filed a counterclaim seeking damages, legal
costs and costs incurred before the deal was terminated.
At the time the deal was struck, the $34-a-share offer represented a
42-per-cent premium on the value of Cineplex’s stock. That gap widened
considerably amid the pandemic and the demise of the deal. While
Cineplex’s movie theatres across Canada have reopened, the company’s share
price is still down considerably compared to before the pandemic, closing
on Friday at $12.86.
The future of the movie business is in flux. The pandemic accelerated the
already-changing viewing habits of many movie goers, as Hollywood studios
unable to rely on theatrical releases in some cases opted to take their
blockbusters to streaming services. Movie theatre owners are now focused
on wooing audiences back to the big screen.
The industry received some good news on that front, with the opening of
Disney’s Shang-Chi and the Legend of the Ten Rings starring Canadian actor
Simu Liu: The movie broke records for the biggest Labour Day weekend
opening, drawing US$75.5-million in North America in its first three days.
And Hollywood has a backlog of big-name releases in the hopper in the
coming months, after studios delayed releasing some films during the
pandemic.
Last month, Cineplex launched a subscription service called CineClub,
offering one free movie a month as well as other extras and discounts, for
a monthly fee. Cineworld had initially planned to launch its own
subscription service for Cineplex after the deal closed.
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