Can the COVID-19 crisis be considered as an unforeseen circumstance in order to mitigate an abort fee in an M&A transaction?

On 29 April 2020, the Netherlands Commercial Court (NCC) ruled in summary proceedings on the first case whereby an M&A transaction has been aborted due to the current COVID-19 circumstances. The matter concerned a dispute between a New York-based claimant and an Amsterdam-based defendant about whether or not a transaction has been entered into and if not, whether the exit-fee payable by the defendant should be modified or mitigated in the light of the COVID-19 crisis.

The claimant owns an equestrian show-jumping business and intended to sell a 50% stake in the business to the defendant for a purchase price of EUR 169 million. The parties spent several months extensively discussing the terms and conditions of the contemplated transaction. In December 2019, the parties signed a letter of intent reflecting the main terms of the transaction. The letter of intent provided that either party may opt to back out of the deal at any time before 2 March 2020, provided that it pays a fee of EUR 30 million to the other party. The discussions have led to a share purchase agreement that was signed on behalf of the claimant, but not on behalf of the defendant, who refused to sign. The claimant applied to the NCC claiming:

• mainly, specific performance by the defendant of its obligations under the share purchase agreement; and
• alternatively, payment of the EUR 30 million fee agreed in the letter of intent for backing out of the transaction. 

In connection with the first claim, the defendant argued that there is no deal as it did not sign, and if there was a deal, it should be dissolved or its effects must be modified in light of the COVID-19 crisis. In relation to the alternative claim, the defendant insisted that, taking into account the COVID-19 circumstances, which, the defendant argued, qualify as unforeseen circumstances as provided in Section 6:258 of the Dutch Civil Code, the EUR 30 million fee should be set aside, modified or heavily reduced. The defendant argued that the current circumstances caused by the COVID-19 outbreak have not been foreseen by the parties when negotiating the letter of intent and create such an impact on the target’s business and the fundamentals of the transaction that standards of reasonableness and fairness would justify and in fact dictate that the payment obligation is set aside or drastically reduced.

The NCC rejected the first claim by stating that Dutch law requires an offer and an acceptance of that offer for contract formation. The defendant, who mostly communicated through its M&A advisers, did not express any doubts about the deal being done or that its board would say no when being presented the deal, but did not sign the share purchase agreement. Weighing all the relevant circumstances, the NCC ruled that none of these are enough to overcome the fact that the defendant has not signed the share purchase agreement so that no agreement has been formed. 

As to the EUR 30 million fee claim based on the provision in the letter of intent, the NCC is of the opinion that the unforeseen circumstances rule under Dutch law allows the court only to interfere in a contract’s operation if there are unprovided-for circumstances which would lead to an unacceptable impact under the standards of reasonableness and fairness. There is no evidence that the parties discussed (and provided for) the potential impact of COVID-19 on the business during their negotiations. 

However, even in the event that the COVID-19 crisis is to be considered as an unprovided-for circumstance, the NCC does not see a compelling ground to mitigate or modify the fee. As there is no well-established case law on COVID-19, the NCC relies on the guidance of commentators and applies the ‘share the pain’ approach which requires the parties to find a way together and preserves the contractual equilibrium between parties in the agreement. The NCC determined that the nature of the fee is not punishment, but comfort. The fee allocates risk and expresses commitment, with the result that a party would only back out of the deal in circumstances that are so significant that they outweigh the immediate payment of the EUR 30 million fee. The NCC argued that it should craft a solution that is as close as possible to what the parties have bargained for in their initial deal and to the risk allocation that was inherent in that deal.

The risk of the claimant is uncapped, as it ‘gets stuck with the business’ and it is unknown how substantial the COVID-19 crisis will affect the business. The fee caps the exposure on the side of the defendant, as the defendant gets to walk away from the deal and ‘save’ the consideration for a business that is potentially distressed and thus is worth much less than the amount that the defendant has agreed to pay for it, for ‘merely’ EUR 30 million. The NCC determined that the best way to ‘share the pain’ and to preserve the contractual equilibrium of the letter of intent is for the defendant to comply with its contractual obligation to pay the EUR 30 million fee. The purpose of the fee, expressing reassurance and comfort, would not be accomplished if the fee is mitigated. The fee may seem high in the event that the consequences of the COVID-19 crisis for the business appear to be limited, but the fee’s amount represents what the parties considered reasonable when waiving their rights thereto. Despite the COVID-19 circumstances, the NCC ordered the defendant to pay the EUR 30 million fee in full.