Breaking NCC judgment on break-up fees in times of Corona

A couple of days ago the Netherlands Commercial Court (NCC) rendered an interesting judgment about a break-up fee in a recently stranded M&A transaction. It regarded the envisaged sale of 50% of the shares in Global Champions Tour, a tournament of equestrian show-jumpers that normally travels the world. As for all other big sports events, its business is currently on hold, due to government restrictions in connection with COVID-19. This judgement is the first in the current pandemic dealing with the consequences of a terminated deal.

The Global Champions Tour is owned by two parties, one of them being an American company. This American party intended to sell its 50% stake to a Dutch buyer. The parties signed a letter of intent last December stipulating a purchase price of EUR 169 million, but at the same time also the right for either party to walk away from the deal before 2 March 2020 with payment of a break-up fee of EUR 30 million. The US seller signed all paperwork for the transaction, the Dutch buyer did not and walked away.

In (Dutch) M&A transactions break-up fees are not uncommon. The amount of the break-up fee agreed upon here however was higher than usual for a transaction of this type and size. The reason for this was that the parties really wanted to be sure that the deal would be consummated. They allowed walking away therefore only at a fairly high price.

In summary proceedings before the NCC, the American seller sued the Dutch buyer for payment of the purchase price and, alternatively, payment of the break-up fee.

Not surprisingly, the first claim was dismissed, as the buyer had not yet signed the final purchase agreement. Most interesting however is the alternative claim for the break-up fee. Is a break-up fee still justified in the current turmoil? Or should it be modified, mitigated or reduced in some way, or should the entire fee agreement be dissolved.

The NCC ruled that contracts should generally be abided by as agreed upon between parties, as the parties’ autonomy is paramount. Interference by the courts in the contract’s operation is under Dutch law allowed only to avoid an “unacceptable” (onaanvaardbaar) impact, as assessed under standards of “reasonableness and fairness” (redelijkheid en billijkheid).

Obviously, there is no well-established case law on COVID-19 yet. As for the breakup fee, the NCC adopted a “share the pain” approach, preserving the parties’ original contractual equilibrium in the current, new circumstances. Parties explicitly agreed on the break-up fee, so this cannot be set aside easily.

The NCC thus ruled that the break-up fee needed to be paid in full for the following reasons:

1. The breakup fee allocates risks, it’s not a punishment. And the court continues in great alliterations that we wish to cite here: “Instead, it’s an incentive. It’s an option. It expresses commitment. It reassures. It comforts. It engenders confidence. It restores trust.” It’s each party’s own free will to close the deal, or to walk away and pay the fee.
2. The breakup fee limits the potential buyer’s exposure to EUR 30 million, while the potential seller’s loss is much higher as it would have received a significantly higher amount of EUR 169 million if it could have sold and transferred the shares.
3. The COVID-19 circumstances are so exceptional and disruptive that it is hard to say they were provided for by a contract or in this case the LOI.
4. The COVID-19 circumstances are in this case not such that it would be unacceptable, under standards of reasonableness and fairness, to request payment of the full amount of the breakup fee. The reason is that it was the parties’ own will to agree on such a high break-up fee in order to allocate and mitigate the risk of not consummating the transaction.

A couple of additional circumstances also played a role here, including the fact that the parties were experienced in M&A transactions and were counseled by expert advisors. In addition, the NCC considered that the potential seller had not only lost the opportunity to sell the shares but also now had to deal with the difficult circumstances around the company that it intended to sell.

Although this judgment is strongly dependent on the circumstances of this case, it confirms that a break-up fee can be a sound contractual instrument under Dutch law. But this does not mean that such contractual stipulations will always be enforceable. In other situations, COVID-19 could make it unreasonable to do so. The NCC has given some hints and pointers now. Whether these are applicable in an individual case, will need to be assessed on a case by case basis.

Apart from the fact that this is the first Dutch case law regarding COVID-19, this judgment is an excellent example of the fast and clear but thorough way of working of the NCC, the new Dutch international commercial court, providing English-language dispute resolution in a civil-law jurisdiction.

If you want more information on this subject, please contact the authors.