A Houston area movie theater owner, Omar Khan (“Khan”), founder of the Star Cinema Grill (the “Business”), filed suit in the Southern District of Texas against Mexican company Cinemex and its U.S. subsidiary (“Cinemex”) claiming that Cinemex is attempting to use the Coronavirus pandemic as an excuse to renege on a deal to acquire the Business. Khan claimed that the parties discussed the pandemic during negotiations and that Cinemex had successfully negotiated a multi-million dollar reduction in the purchase price for fear that the Business would be closed for an indefinite period of time.
Khan and Cinemex entered into two related Equity Purchase Agreements (together, the “Agreement”) on March 10, 2020, while the Coronavirus outbreak was already underway. On March 24, 2020, Khan’s counsel emailed Cinemex’s counsel delivering Khan’s closing deliverables and notifying Cinemex that Khan had satisfied all of the closing conditions as of that date and Closing must take place within two business days to satisfy the Agreement. Cinemex responded claiming that “in the light of the COVID-19 related fallout, Cinemex will not and is not obligated to close the transaction.” Khan alleged that Cinemex suddenly began claiming that the “unforeseen situation caused by the Coronavirus” relived Cinemex’s obligation to close under the Agreement although there is no language in the Agreement to support that position. Because Cinemex is backed by a multi-billionaire and Khan is the sole owner of a local business, Khan sought and successfully negotiated a specific performance clause in the Agreement which states that the aggrieved party “shall be entitled to […] specific performance and other equitable relief to prevent breaches of [the] Agreement and to enforce specifically the terms and provisions of [the] Agreement.” The Agreement also grants the right to cause the transactions contemplated by the Agreement to be consummated, if the closing conditions have been satisfied or waived. Specific performance is the remedy Khan is seeking from the court.
The Agreement contains a detailed definition of a Material Adverse Effect (“MAE”) which contemplates certain changes or events on or after the date of the Agreement, the occurrence of which would result in a failure of a closing condition. Khan specifically negotiated the exclusions to the definition of MAE in the Agreement, including the following exclusions:
“…conditions generally affecting the United States economy, the regulatory environment or credit, securities, currency, financial, banking or capital markets (including any disruption thereof and any decline in the price of any security or any market index or any changes in interest rates or exchange rates) in the United States or elsewhere in the world, . . . any epidemics, pandemics, outbreaks, earthquakes, hurricanes, tornadoes or any other natural disasters (whether or not caused by any Person or any force majeure event) or any other national or international calamity or crisis[,] . . .[or] any change that is generally applicable to the industries or markets in which any member of the Company Group operates or in which products or services of any [Company] are produced, distributed or sold[.]”
As a result of the above exclusions in the definition of MAE, Khan’s complaint asserts that Cinemex has no legal ground to terminate the Agreement or claim that Khan’s closing conditions have not been satisfied.
Khan’s complaint details the hardships that his Business will endure if Cinemex is allowed to walk away from the transaction, many of which stem from the fact that Cinemex had already publicized the deal. Khan fears that other investors will be leery if they believe he will try to sell the Business again in short order. Similarly, Khan claims that lenders will be less likely to extend him credit because any financing would be short-term if the Business were to be sold. According to the complaint, if closing does not occur, it would not only hurt the goodwill and reputation of the Business, but also Khan’s more than 1,000 employees and their families.
On April 23, 2020, Cinemex filed a motion to dismiss Khan’s complaint citing the doctrines of frustration of purpose and impossibility. Cinemex argued that while the COVID-19 pandemic was discussed in negotiations, the parties “plainly did not envision an indefinite, government-enforced shutdown of the theaters” which has frustrated the purpose of the agreement to close the sale of functioning, available movie theaters. The presiding judge did not grant the motion to dismiss and a hearing was set for April 27. Late on the Friday before the hearing, the U.S. subsidiary of Cinemex, CMX, filed Chapter 11 bankruptcy and requested an automatic stay of the Khan lawsuit. The judge stayed the case indefinitely, noting that a bankruptcy petition automatically suspends other suits involving the filer. The judge called the timing of the bankruptcy filing “questionable, at best.”
Plaintiff’s Complaint is available here.
Defendant’s Motion to Dismiss is available here.