Chancery Court Decision on the “Effect of Termination” Provision

Gail Weinstein is senior counsel, and Amber Banks (Meek) and Maxwell Yim are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Ms. Banks, Mr. Yim, Andrea Gede-Lange, Shant P. Manoukian, and Bret T. Chrisope, and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? by John C. Coates, Darius Palia, and Ge Wu (discussed on the Forum here); and Allocating Risk Through Contract: Evidence from M&A and Policy Implications by John C. Coates, IV (discussed on the Forum here).

The Delaware Court of Chancery’s recent decision in Yatra Online v. Ebix (Aug. 30, 2021) serves as a reminder that, under the “Effect of Termination” provision in most merger agreements, a party’s termination of the agreement extinguishes all liability of both parties for pre-termination breaches of the agreement, except as the parties may have otherwise specifically provided in the agreement. The Ebix case illustrates that, depending on how the parties have drafted the provision, a party can be left with no remedy for the willful breaches and wrongful failure to close of the other party.

Ebix, Inc. allegedly had a change of heart about proceeding with its agreed acquisition of Yatra Online, Inc. after the deal became less attractive to Ebix when the COVID-19 pandemic emerged. Allegedly, Ebix then blatantly breached its representations and covenants in the Merger Agreement and “strung along” Yatra with pretextual delays while in fact Ebix never intended to close. Yatra ultimately became “fed up” with Ebix’s misconduct, and, when several renegotiated end dates had passed with no sign that Ebix intended ever to close, Yatra sued Ebix for damages and exercised its right to terminate the Merger Agreement. The court held, however, that Yatra had no remedy because it had terminated the Merger Agreement and the Effect of Termination provision, as drafted, extinguished liability for pre-termination breaches without any carveout for liability for willful breaches.

The case underscores that, before terminating an agreement, a party should know what the agreement provides with respect to the effect of a termination on its rights and remedies; and, although an “Effect of Termination” provision generally is viewed as mere “boilerplate,” drafters should pay close attention to the language.

Key Points

  • The decision serves as a reminder that an “Effect of Termination” provision may eliminate all liability for pre-termination breaches. The court explained that, under the provision at issue (which, as noted, was drafted without an exclusion for willful breaches), the target company had the choice either (a) to seek damages for the buyer’s breaches and/or seek specific performance of the agreement (in both cases, while not terminating the agreement), or (b) to terminate the merger agreement (in which case neither party would have liability for any pre-termination breaches). We would note that a party generally would choose to terminate the merger agreement, rather than to seek damages or specific performance, when: the party has concerns over its own potential liability (and prefers to terminate the agreement to eliminate that risk); the party has decided that it too would prefer not to proceed with the transaction; or the party is single-focused on moving on to find an alternative deal or strategy—notwithstanding, in each case, having to forego the potential of obtaining damages for the counterparty’s breaches.
  • Drafters should carefully consider the language of the “Effect of Termination” provision. In most cases, drafters exclude from the extinguishment of liability upon termination any liability for fraud or for willful breaches. It also useful (although not typical) to define the concept of “willful breach” in the agreement given the ambiguity as to whether “willfulness” means an intention to commit the act that was committed or an intention to breach the agreement. Finally, although not an issue in Ebix, drafters should be careful to ensure that the Effect of Termination provision is consistent with the related merger agreement provisions with respect to survival, fraud carveouts, termination fees, and the like.

Background. After extensive negotiations, Ebix and Yatra entered into the Merger Agreement on July 16, 2019. The Merger Agreement provided that Ebix would acquire Yatra in a reverse triangular merger pursuant to which Yatra stockholders would receive shares of Ebix convertible preferred stock (the “Preferred Stock”), at a fixed exchange ratio, for each share of Yatra common stock. In addition, Yatra stockholders would be issued a right, exercisable in the 25th month after closing, to require Ebix to exchange any then unconverted shares of Preferred Stock for $5.31 per share in cash (the “Put Right”) (thus providing the Yatra stockholders with a floor under which the merger consideration for their shares could not fall).

After signing, Ebix’s stock price fell due to the emergence of the COVID-19 pandemic, as a result of which the value of the Put Right ballooned as compared to Ebix’s market capitalization, making the deal far less attractive to Ebix. Allegedly, Ebix then, in an effort to “sabotage” the deal, breached certain of its representations and warranties and certain of its covenants in the Merger Agreement (including an obligation to use its reasonable best efforts to have the conditions satisfied and to close). After Yatra had (reluctantly) agreed to numerous extensions of the “End Date” in the Merger Agreement, and after another in a series of renegotiated End Dates had passed with “no hint” that Ebix intended ever to close, Yatra sued Ebix for damages and exercised its right to terminate the Merger Agreement.

The court, at the pleading stage, dismissed Yatra’s claims against Ebix for breach of the Merger Agreement, ruling that the Effect of Termination provision in the Merger Agreement barred post-termination claims for pre-termination contractual breaches. The court also dismissed Yatra’s claims against Ebix for fraud, as well as its claims against Ebix’s lenders for tortious interference with the Put Right.


Ebix’s alleged misconduct included the following:

  • Repeatedly delaying the filing of a registration statement with the SEC to register the Preferred Stock—notwithstanding its obligation under the Merger Agreement to file promptly;
  • Continually seeking to renegotiate key deal terms post-signing—including elimination of the Put Right even though it was a critical component of the merger consideration;
  • After entering into an Extension Agreement with Yatra to extend the End Date another time, failing to take any of the actions specifically agreed to therein—including, specifically, not providing revised drafts clearly reflecting its requested modified terms; not responding to Yatra’s requests for basic due diligence information; and repeatedly trying to renegotiate additional terms; and
  • Secretly entering into an amendment to its Credit Agreement (the “Credit Agreement Amendment”) such that any implementation of the Put Right would cause an immediate default under the Credit Agreement—notwithstanding its representation and warranty in the Merger Agreement that the contemplated transactions would not violate any of its material agreements.

The court wrote that, notwithstanding Ebix’s alleged misconduct, “Yatra agreed [in the Effect of Termination provision] that termination of the Merger Agreement would terminate liability for breach of that contract.”  Yatra terminated the Merger Agreement, the court wrote, and the court “will not redline the parties’ bargained-for limitations of liability.”

The court rejected Yatra’s alternative interpretation of the “Effect of Termination” provision. The provision read as follows:

Section 8.2. Effect of Termination. In the event of any termination of this Agreement as provided in Section 8.1, the obligations of the parties shall terminate and there shall be no liability on the part of any party with respect thereto, except for [specified provisions relating to confidentiality, disclaimers, expenses, termination fees and miscellaneous provisions], each of which shall survive the termination of this Agreement and remain in full force and effect; provided, however, that…nothing contained herein shall relieve any party from liability for damages arising out of any fraud occurring prior to such termination, in which case the aggrieved party shall be entitled to all rights and remedies available at law or equity.

Ebix argued that Yatra’s decision to terminate the Merger Agreement eliminated any potential liability “with respect to” its obligations under the Merger Agreement (i.e., for Ebix’s alleged breaches of the Merger Agreement). Yatra argued that its termination of the Merger Agreement eliminated potential liability only “with respect to” the termination of the Merger Agreement (i.e., it did not eliminate damages for Ebix’s prior breaches of obligations under the Merger Agreement, but eliminated only damages caused by the act of terminating the Merger Agreement). In other words, Yatra argued that the provision did not extinguish all claims for breach of the Merger Agreement, but, instead, served only to make clear which contractual obligations carried forward after a termination of the Agreement and which did not. Yatra contended that, at best, the provision was “ambiguous” with respect to the effect of termination on a party’s post-termination remedies for pre-termination breaches.

Vice Chancellor Slights disagreed and held that the provision extinguished liability for all claims for pre-termination breaches of the Merger Agreement (other than any liability for fraud). The Vice Chancellor observed that, under the common law, termination of an agreement results in all obligations under the agreement becoming void and of no further force and effect, but that termination does not, standing alone, result in an elimination of liability for pre-termination breaches. However, the Vice Chancellor stated, when parties provide in their agreement that “there shall be no liability on the part of either party” upon termination, they “alter the common law rule and broadly waive contractual liability and all contractual remedies.”

Further, the Vice Chancellor found that the language and structure of the parties’ Effect of Termination provision supported an interpretation that, if the Agreement were terminated, the parties intended that all liability for pre-termination breaches (other than fraud) would be extinguished. For example, he found that Yatra’s position that the provision only extinguished liability arising from a termination of the Agreement was inconsistent with the language immediately following “with respect thereto,” which refers to exceptions for certain specified obligations under the Merger Agreement from the effects of the contractual limitation of liability. He also found that Yatra’s contention that a termination left claims for pre-termination breaches of contract unaffected was inconsistent with the express carveout of liability for “fraud occurring prior to such termination” (which carveout, in the court’s view, implied that liability for all other claims for acts “occurring prior” to termination would not survive post-termination).

The court also held as follows:

  • There was no separate remedy available for breach of the Extension Agreement, as the Extension Agreement was intended to modify the terms of the Merger Agreement and nothing suggested that it was not subject to the Effect of Termination provision in the Merger Agreement.
  • The implied covenant of good faith was not applicable, as the best efforts clause in the Merger Agreement left no “gap” for the implied covenant to fill with respect to Ebix’s obligations to act to satisfy the closing conditions.
  • Yatra did not establish that Ebix’s alleged fraud, or the lenders’ alleged tortious interference, caused Yatra’s loss. First, Yatra asserted that Ebix’s secretly entering into the Credit Agreement Amendment and making fraudulent extra-contractual promises about proceeding to closing harmed Yatra by precluding it from pursuing specific performance. The court emphasized, however, that specific performance was not an option that would have been available to Yatra in any event given that the registration statement for the Preferred Stock had not yet been declared effective by the SEC (and without out an effective registration statement, the Preferred Stock could not be issued and the Put Right could not be implemented). Second, Yarget asserted that Ebix’s lenders tortiously interfered with the Put Right by negotiating and entering into the Credit Agreement Amendment. Again, the court found that, since there was not an effective registration statement, Yatra in any event could not have obtained specific performance. Yatra could have sued for specific performance once the registration statement was approved, but the court stated, instead Yatra “elected to terminate the Merger Agreement before that condition to closing occurred.” Therefore, the lenders’ actions “did not stand alone as an impediment to Yatra’s ability to pursue specific performance of the Merger Agreement.”

Practice Points

  • Drafters of “Effect of Termination” provisions should consider whether to carve out both fraud and willful breaches from the general extinguishment of liability upon a termination of the agreement–and also should consider defining “willful breaches.” In its Hexion decision (2008), the Court of Chancery stated that, under the common law, a “knowing and intentional” breach of a merger agreement occurs when a party knowingly (in other words, consciously rather than by accident) takes an action that results in a breach, with no requirement that the breaching party knew or intended that the action would breach the agreement. Since then, many merger agreements have defined the phrase to avoid that interpretation. For example, the merger agreement at issue in the Cigna-Anthem litigation (2020), defined “willful breach” to mean “a material breach of [the] Agreement that is the consequence of an act or omission by a party with the actual knowledge that the taking of such act or failure to take such action would be a material breach of [the] Agreement.”
  • The timing of termination of a merger agreement generally would not change the result under a standard “Effect of Termination” provision. In Ebix, Yatra argued that the provision’s extinguishment of liability was inapplicable because Yatra had not yet terminated the Merger Agreement when it filed suit against Ebix for its breaches (although it sued and terminated on the same day). The court found the timing of the termination irrelevant given that the provision (as is typical) stated that liability would be extinguished upon “any termination” of the agreement.
  • Counsel should advise parties to merger agreements not to terminate the agreement before considering the effect of termination on the parties’ respective rights and remedies. It is useful to counsel to provide its client with a summary of its obligations, rights, and remedies that apply pre- and post- closing or termination.
  • Any exclusion from the extinguishment of liability under an Effect of Termination provision should be consistent with other relevant contractual provisions. For example (although not an issue in Ebix), if a party has a right to receive a termination fee (or reverse termination fee) after termination of the agreement under specified circumstances, the  agreement should clearly provide that that liability continues post-termination and is (or is not) an exclusive remedy if the counterparty has breached (or willfully breached) the agreement.
Both comments and trackbacks are currently closed.