Cineplex Inc. has been awarded nearly $1.24-billion in damages over a botched deal to sell Canada’s largest movie theatre chain to UK-based Cineworld Group plc last year.
The Toronto-based cinema owner announced on Tuesday that the Ontario Superior Court of Justice had ruled that Cineworld “wrongfully repudiated” the $2.18-billion deal, which fell apart during the pandemic. Both companies had accused the other of acting in “bad faith” and of breaching the terms of the deal; Cineworld filed a $54.8-million counterclaim, which the court has denied.
“We are pleased that the Court found Cineplex acted properly throughout this difficult period in our history,” Cineplex chief executive officer Ellis Jacob wrote in a statement on Tuesday. The company declined to answer further questions about the decision.
Cineworld said in a statement that it intends to appeal the decision.
The decision could set a significant precedent companies’ obligations in merger and acquisition deals that are derailed by disasters such as the COVID-19 global pandemic.
Cineworld first announced the agreement to buy the Canadian company in December of 2019, as COVID-19 was already beginning to spread around the world – and would soon force businesses around the world to close. Movie theatre box offices ground to a halt, and cinemas were faced with a fight for their survival. By June of 2020, the agreement with Cineplex had dissolved after Cineworld walked away.
Cineplex successfully argued to the court that it deserved significant compensation for the cancelled deal. The Canadian company asked for hundreds of millions of dollars in penalties, including $664-million in debt that Cineworld would have repaid or refinanced had the transaction closed, and other costs. Cineplex also asked the court to recoup the losses to its shareholders, amounting to the difference between the $34 a share that Cineworld had agreed to pay to buy the chain, and the diminished value of Cineplex’s shares, as determined by the court.
The court’s decision announced on Tuesday included $1.23-billion for lost synergies and $5.5-million for transaction costs, according to Cineworld’s statement.
At the time the deal was announced, the $34-a-share offer represented a 42-per-cent premium on the value of Cineplex’s stock. But like other cinema operators, Cineplex’s share price fell as the effects of the pandemic became clear, and took another slide when the deal fell apart. By late 2020, Cineplex’s shares were trading below $5, and closed at $11.11 on Tuesday.
A key point in the case was how both companies were obligated to respond to the unprecedented blow to the industry wrought by COVID-19. Like many contracts, the Cineworld-Cineplex agreement had a “material adverse effect” clause that laid out circumstances in which either party could terminate the deal. This deal specified that an “outbreak of illness” was not a justification to do so.
Cineworld pushed back against that detail, by arguing that it had walked away not in response to the pandemic, but because Cineplex had failed to meet another obligation in the contract to operate its business in the “ordinary course.” This raised a question as to what constituted “ordinary” business during a cataclysmic event. Cineworld said that the Canadian firm had violated that obligation by taking actions such as extending payment terms to suppliers and deferring lease payments, which it said damaged crucial business relationships. Cineplex denied this, and said that it had prudently managed capital at a time of uncertainty.
Cineplex argued, for its part, that Cineworld was acting out of “buyer’s remorse,” and did not meet its own obligations under the deal to pursue government approval under the Investment Canada Act in a timely manner – which Cineworld denied.
During the trial, Cineplex argued that Cineworld had intentionally delayed the closing of the deal, hoping that the Canadian firm would be unable to keep its debt below a $725-million ceiling required under the agreement. Cineworld countered that Cineplex had been in danger of tripping that ceiling even before its movie theatres were forced to close, and failed to disclose that to the buyer.
The transaction, which had received shareholder approval from both companies, had been expected to close by the end of June, 2020.
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