Court case16 Nov 2021 15:06
Just started a new thread for the benefit of others as it is a great post from BreakfastBuffett -
The court case swings on a number of points, the main ones are:
- did a Material Adverse Effect take place, or was this excluded by a carve out in the contract?
- did Cineplex breach the ordinary course - or were the actions they took excused by the pandemic?
- did Cineworld stick by the terms of the arrangement agreement?
- Did Cineplex breach the debt limit set in the contract?
The Material Adverse Effect argument seems to say that a MAF in the terms of the contract cant be caused by an outbreak of illness - so in effect cannot have taken place. Cineplex want the MAF definition to be applied so that Cineworld take this risk - but that seems against the wording of the contract
Cineplex (even according to the judge) strayed from the ordinary course, in some areas a lot and in others not so much - but other cinema companies did too, however they were not under a sale agreement at the time. Both sides claim that the other should have raised concerns or asked permission to change course - which neither did. The jury is out here.
Cineplex says that even if they did deviate from the ordinary course that Cineworld did not fulfil their side of the agreement - which they must do to invoke the Ordinary Course Covenant. For example by delaying the government approval process. Cineworld say that they did fulfil this, that this part of the agreement needed additional conditions because of the pandemic, and that the Canadian government were concerned about the deal. Cineplex say they should have forced this through as fast as possible without any additional clauses. Again the jury is out.
As for the debt limit - the limit on the Revolving Credit Facility (RCF) is £725M CAD. Cineplex were very close to this, and by march were right on the limit. This left them no room to manoeuvre so they stopped paying landlords and film studios thus increasing the debt. This did not however increase the RCF above $725, but did deviate from the ordinary course. The company clearly had a lot more debt than it said
It could go either way, but thats not the whole story either. The damages cineplex claim are for the entire deal and would leave them in a much better position than if the deal actually took place. They get the money without selling the company. Most of this is the difference in share price - but shareholder claims are carved out of the contract so these should not be granted. Then CP claim for everything else they can think of - a lot of which is unreasonable (like post-deal synergies). Cineworld only claim for expenses
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