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.