The ruling of the Delaware Court of Chancery in Yatra Online v. Ebix highlights the need for M&A practitioners to exercise care when drafting termination and remedies provisions in merger agreements and other contracts and to fully understand the ramifications of terminating a merger agreement or other contract before taking the step of exercising a termination right. Failure to do so left the plaintiff without a remedy in Yatra Online.
In Yatra Online, the plaintiff terminated its Merger Agreement with the defendants and subsequently filed suit against the defendants for breach of contract and breach of the implied covenant of good faith and fair dealing, among other claims. The Delaware Court of Chancery (the Court) granted the defendants’ motions to dismiss, stating that “Under the Merger Agreement’s plain terms, Yatra extinguished its breach of contract claims when it elected to terminate the Merger Agreement. The implied covenant claim fails because there is no gap in the Merger Agreement for the implied covenant to fill.”
On July 16, 2019, Ebix, Inc. (Ebix) (NASDAQ: EBIX) and EbixCash Travels, Inc. entered into a Merger Agreement to acquire 100% of Yatra Online Inc. (NASDAQ: YTRA), an online travel service based in India (Yatra) for $338 million. The Merger Agreement provided that at closing, each share of Yatra would convert into the right to receive shares of Ebix’s convertible preferred stock (CPS) at a fixed exchange ratio. The CPS included a put right exercisable during the 25th month after closing that would allow Yatra stockholders the option to force Ebix to redeem unconverted shares of CPS for $5.31 per share (the Put Right).
When the Merger Agreement was signed, the Put Right implied a Yatra equity value of $257 million, or 17.5% of Ebix’s market capitalization. After signing, the deal became far less attractive to Ebix because the impact of the COVID-19 pandemic depressed its stock price, which in turn ballooned the value of the Put Right relative to Ebix’s market capitalization.
If the deal did not close by the scheduled closing date of April 12, 2020, either party had the right to terminate the Merger Agreement. The Merger Agreement provided that “[i]n the event of any termination of this Agreement . . . the obligations of the parties shall terminate and there shall be no liability on the part of any party with respect thereto . . . .” The parties agreed that termination did not “relieve any party for liability for damages arising out of any fraud occurring prior to such termination.”
Ebix sought to delay the closing through repeated extensions of the closing date and proposals to renegotiate a variety of material deal terms, including an attempt to eliminate the Put Right. On June 5, 2020, one day after the final closing date passed without the merger closing, Yatra terminated the Merger Agreement and filed suit against the defendants, and the defendants moved to dismiss all claims.
The Court’s Findings
The Court noted that the Merger Agreement provided a choice to a party faced with breach by a counterparty: (1) sue for damages or specific performance or (2) terminate the Merger Agreement and extinguish liability for all claims arising from the contract other than those specifically carved out, including fraud. The Court then found that this was a logical way to contractually manage risk, and “[i]t is not for this Court to redline the parties’ bargained-for limitations of liability because one party now regrets the deal it struck.” Finally, the Court dismissed the breach of contract claim, finding that termination of the Merger Agreement terminated liability for breach thereof.
The Court then turned to Yatra’s claim of breach of the covenant of good faith and fair dealing and reasoned that such implied covenant involves inferring contractual terms to handle developments or contractual gaps that were not anticipated by the parties. Finding that the Merger Agreement controlled and left no gap to fill with the implied covenant, the court dismissed the claim.
Yatra’s Merger Agreement carved out claims for pre-termination fraud but not other exceptions for breaches of representations and warranties or covenants prior to termination. The case is a reminder to M&A practitioners to exercise care when drafting provisions which entitle the parties to terminate and to think through the remedies that will be or will not be available to a party as a result of breach or termination.
 Several exceptions to the foregoing were in the Merger Agreement but are not relevant.