The Deal 

On December 15, 2019, United Kingdom-based Cineworld Group plc (“Cineworld”), the second largest cinema chain worldwide, entered into an arrangement agreement (the “Arrangement Agreement”) with Cineplex Inc. (“Cineplex”) whereby Cineworld would acquire all of the issued and outstanding shares of Cineplex for $34 per share in cash, representing a premium of 42% to the closing price on the Toronto Stock Exchange (“TSX”) and a premium of 39% to the volume weighted average share price on the TSX for the 30 days ending December 13, 2019. The total transaction value was approximately $2.8 billion including the assumption of net debt.

The transaction was to proceed by way of a statutory plan of arrangement under the Ontario Business Corporations Act, and was expected to close in the first half of this year.

Notably, the Arrangement Agreement contained a definition of Material Adverse Effect that specifically excluded any such change, event, occurrence, effect or circumstance arising out of, relating to, resulting from or attributable to “outbreaks of illness or other acts of God.”

Cineworld Terminates the Arrangement Agreement

As a result of the COVID-19 pandemic, theatres across Europe, the United States and Canada were forced to close in March, causing significant hardship for the industry including Cineplex.

On June 12, 2020, Cineworld announced that it would not be proceeding with the acquisition of Cineplex.  Cineworld stated that it had “become aware of certain breaches” by Cineplex of the Arrangement Agreement, and that “a material adverse effect has occurred with respect to Cineplex.”  Cineworld’s termination notice cited Cineplex’s failure to operate its business in the ordinary course and the occurrence of a material adverse effect on Cinplex’s business.

In response, Cineplex denied that Cineworld had a legal basis to terminate the Arrangement Agreement, and characterized Cineworld’s allegations as “buyer’s remorse” and an attempt to “avoid its obligations under the Arrangement Agreement in light of the COVID-19 pandemic.”  Cineplex promised to “file suit promptly” against Cineworld for damages arising from Cineworld’s refusal to complete the transaction.

Will Canada Finally Have a MAC Case?

If Cineplex follows through on its threat to commence an action for damages against Cineworld, the litigation could result in much-needed judicial consideration of  what constitutes a material adverse effect or change to a business.

In the context of mergers and acquisitions, a material adverse effect or material adverse change (“MAC”) refers to a change in circumstances that reduces the value of a company.  MACs are used as a materiality threshold to measure the negative effect of events on a transaction or on one of the parties to the transaction, and the threshold as to what constitutes a MAC is a high one.

As discussed in our prior blog post titled “COVID-19 and Material Adverse Change Provisions in M&A Agreements”, the Canadian law on material adverse change (“MAC”) is very thin, which means we look to American caselaw for guidance.  And, although there are a number of cases dealing with MAC’s in Delaware, there has only been one case in the state’s courts where a MAC has been found to have occurred:  See our post titled The Big MAC: Affirmed for more information on the 2018 Akorn Inc. v Fresenius Kabi AG case.

It is possible that there will be some Canadian law on MACs before Cineplex’s intended proceeding against Cineworld plays out.  The Court of Queen’s Bench in Alberta recently made a procedural ruling on the final order application for a proposed plan of arrangement involving Rifco Inc., its potential acquirer ACC Holdings Inc. and ACC’s parent company, CapCan Management Inc., as discussed in our post titled MAC Attack: Rifco and CanCap Dispute to be Examined Further. The court’s decision did not determine if the termination of the arrangement agreement on the basis of an alleged MAC was lawful or whether the parties will be required to complete the transaction. We are monitoring that proceeding for further developments.