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M&A Journal: The Pandemic’s Impact on Interim Operating Covenants

August 1, 2020

O’Melveny partners Jonathan Rosenberg, Daniel Cantor, David Schultz, and Katrina Robson co-authored this article discussing the now-resolved Sycamore-L Brands dispute, a case they say “provides a window on issues that will be at the forefront of deal negotiation—and related litigation—for the foreseeable future.”

The authors offer an analysis of the underlying transaction agreement, discuss how the parties leveraged the terms and circumstances to argue for their respective positions, and provide recommendations for navigating the complexity of deal negotiations during the pandemic.

“The issues raised in the Sycamore-L Brands dispute are likely to recur in the numerous deal-related disputes that will inevitably arise in the COVID-19 pandemic’s wake, requiring courts to grapple with what constitutes ‘ordinary course’ or an ‘MAE’ during a global economic crisis,” they write. “As is true for much M&A litigation, these disputes will largely turn on two key sets of factors. First, the transaction agreement’s terms, including whether the parties’ obligations are subject to ‘commercially reasonable efforts’ or materiality qualifiers, or whether the agreement has a two-clause MAE definition like the Sycamore-L Brands agreement. Second, the equities, including whether one party appears to be using the pandemic to take unfair advantage of the other, whether the parties’ respective responses are deemed reasonable, fair, and transparent, and the extent to which each side appeared to be reserving or waiving contract rights.”