Monthly Archives: April 2022

In Level 4 Yoga, LLC v. CorePower Yoga, LLC (Mar. 1, 2022), the Delaware Court of Chancery ordered CorePower Yoga, LLC to close the agreement it had entered into, pre-pandemic, to acquire the yoga studios owned by its franchisee, Level 4 Yoga, LLC. CorePower had contended, in March 2020, just before the first of three scheduled closings of the asset purchases, that it was no longer obligated to close the almost $30 million transaction due to the pandemic having emerged in the U.S. and businesses across the country, including Level 4’s studios, having shut down. In this post-trial decision, the court ruled that the pandemic did not constitute a “Material Adverse Effect” and that the closure of the studios did not violate Level 4’s covenant to operate, pending closing, in the ordinary course of business. The court ordered CorePower to close and to pay compensatory damages for the delay in closing.

Key Points

• The decision was based on atypical features of the transaction and the parties’ relationship. Due to the unusual background of the transaction, the parties had structured their asset purchase agreement without conditions or termination rights—suggesting that they had intended that the closing would occur even if a party breached the agreement. In addition, due to the parties’ relationship as franchisor and franchisee, CorePower (as the franchisor) had directed Level 4’s operational responses to the pandemic. Given the unique factual context, in our view the decision offers little predictive value as to future rulings on a buyer’s failure to close based on an extraordinary event occurring between signing and closing.
• The court followed the same analytical framework for determining whether the target breached the ordinary course covenant as it applied in the prior two cases—AB Stable and Snow Phipps—in which it has addressed whether the pandemic excused a buyer from closing. In all three cases, the court has interpreted “ordinary course of business” to mean the ordinary course during “normal times” (rather than ordinary course in light of an extraordinary event having occurred); and has interpreted “consistent with past practice” to mean that the only relevant issue is whether the target’s own post-signing operations changed materially from its pre-signing (pre-pandemic) operations. In AB Stable, the court found that the target’s responses to the pandemic constituted a breach of the covenant and that the buyer therefore was not obligated to close; in both Snow Phipps and Level 4 Yoga, the court found that the target’s pandemic responses did not constitute a breach of the covenant and the court ordered the buyer to close.  These cases underscore the facts-intensive nature of the court’s determination as to breach of an ordinary course covenant.
• The decision continues the Delaware courts’ almost invariable trend in finding that an extraordinary event occurring between signing and closing was not an MAE that excused a buyer from closing. There has only been one Delaware decision ever—Akorn (issued in 2018)—finding that a “Material Adverse Effect” (or “Material Adverse Change”) occurred that excused a buyer from closing. In all three pandemic-related cases, the court has found that the pandemic was not an MAE—based on the parties’ “MAE” definition, the extent of the pandemic’s impact, and/or the lack of “durational significance” of the impact. In Level 4 Yoga, the court found that, at the time CorePower asserted that it had a right not to close, it had no basis to believe that the effects of the pandemic would have durational significance as the closure of the studios was at that time expected to last only a few weeks.
• The court emphasized that it “will not hesitate” to order specific performance by a buyer who improperly refuses to close.

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