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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
SNOW PHIPPS GROUP, LLC, and DECOPAC HOLDINGS INC.,
Plaintiffs and Counterclaim Defendants,
v.
KCAKE ACQUISITION, INC., KOHLBERG INVESTORS VIII-B, L.P., KOHLBERG INVESTORS VIII-C, L.P., KOHLBERG TE INVESTORS VIII, L.P., KOHLBERG TE INVESTORS VIII-B, L.P., KOHLBERG INVESTORS VIII, L.P., and KOHLBERG PARTNERS VIII, L.P.,
Defendants and Counterclaim Plaintiffs.
C.A. No. 2020-0282-KSJM
DEFENDANTS-COUNTERCLAIM PLAINTIFFS’ PRE-TRIAL BRIEF
PUBLIC VERSION Filed December 31, 2020
EFiled: Dec 31 2020 03:43PM EST Transaction ID 66220493Case No. 2020-0282-KSJM
i
TABLE OF CONTENTS
PRELIMINARY STATEMENT...............................................................................1
STATEMENT OF FACTS........................................................................................5
I. The Parties.......................................................................................................5
II. DecoPac’s Business ........................................................................................6
III. Early 2020: The Parties Negotiated ...............................................................8
A. Snow Phipps Was Desperate to Sell the Business ................................8
B. COVID-19 Risks Were Almost Entirely Unknown ...........................13
C. The Parties Agreed that Sellers Would Bear Pandemic Risks............15
IV. The Parties Signed the SPA ..........................................................................17
V. The Buyer-Friendly Contractual Framework................................................20
A. Representations and Warranties Regarding Material Adverse Effect...................................................................................................22
B. Representations and Warranties Regarding Top Ten Customers .......23
C. Covenants Regarding Ordinary Course Operations............................24
D. Termination of the SPA, DCL, ECL, and Limited Guarantee............24
E. Express Limitations on Remedies.......................................................25
F. Debt Financing Under the SPA and DCL...........................................26
VII. The COVID-19 Pandemic Devastated DecoPac...........................................30
A. As the Pandemic Wreaked Havoc on the U.S. and DecoPac, Kohlberg Updated Its Projections.......................................................30
B. DecoPac Management’s Projections Ignored Reality ........................36
C. KCAKE Sought to Avert a Covenant Breach.....................................39
ii
1. Antares......................................................................................39
2. Ares...........................................................................................41
3. Owl Rock and Churchill ...........................................................43
D. KCAKE Pursued Alternative Financing, but the Markets Were Frozen .................................................................................................45
E. DecoPac’s Performance Cratered in March and April .......................49
1. Mid-to-Late March: Rapid Declines........................................49
2. April: Free-Fall ........................................................................55
VIII. KCAKE Validly Terminated the SPA on April 20.......................................57
IX. The Pandemic Enters its Darkest Stage ........................................................58
ARGUMENT ..........................................................................................................60
I. KCAKE VALIDLY TERMINATED THE SPA BECAUSE THE CLOSING CONDITIONS WERE NOT MET ........................................60
A. The Company and Sellers Breached Their Representation That There Would Not Be an MAE ............................................................60
1. An MAE Was Reasonably Expected As of April 20................61
2. The Parties Did Not Negotiate Any MAE Carveout for COVID-19 ................................................................................65
3. Plaintiffs Cannot Show That Declines in DecoPac’s Sales Were Caused by Changes in Law.............................................68
4. DecoPac Has Been Disproportionately Impacted Compared to Other Participants in the Grocery Industry .........71
B. Plaintiffs Breached Their Representation Regarding the Company’s Top Ten Customers .........................................................73
C. The Company Breached Its Ordinary Course Covenant ....................75
1. The Revolver Draw ..................................................................77
iii
2. Drastic Cost Cuts in Response to Decreased Demand .............78
II. KCAKE Complied with the SPA in All Respects ........................................79
A. Reasonable Best Efforts Under Delaware Law ..................................80
B. KCAKE Fully Complied with its Financing Obligations...................81
1. KCAKE Acted Reasonably in Negotiating EBITDA Addbacks to Avoid Funding into a Covenant Breach ..............81
2. KCAKE Used Its Reasonable Best Efforts to Search for Alternative Financing ...............................................................85
III. Plaintiffs Are Not Entitled to Specific Performance.....................................88
A. The SPA’s Express Terms Bar Specific Performance........................88
B. The Prevention Doctrine Does Not Help Plaintiffs ............................90
1. KCAKE Did Not Breach the SPA, Otherwise “Prevent” Financing, or Act Without Justification or in Bad Faith ..........91
2. The Prevention Doctrine Should Not Be Extended to a Remedy Limitation ...................................................................95
3. Prevention Is Inapplicable Because the SPA Allocated the Risk of Nonoccurrence to Plaintiffs ...................................96
CONCLUSION .......................................................................................................97
iv
TABLE OF AUTHORITIES
Page(s)CASES
A.I.C. Ltd. v. Mapco Petroleum Inc.,711 F. Supp. 1230 (D. Del. 1989) ......................................................................91
AB Stable VIII LLC v. Maps Hotels & Resorts One LLC,2020 WL 7024929 (Del. Ch. Nov. 30, 2020)..............................................passim
Akanthos Capital Mgmt., LLC v. CompuCredit Holdings Corp.,677 F.3d 1286 (11th Cir. 2012) ..........................................................................96
Akorn, Inc. v. Fresenius Kabi AG,2018 WL 4719347 (Del. Ch. Oct. 1, 2018).................................................passim
All. Data Sys. Corp. v. Blackstone Capital Partners V L.P.,963 A.2d 746 (Del. Ch.), aff’d, 976 A.2d 170 (Del. 2009) ..........................81, 87
Anschutz Corp. v. Brown Robin Capital, LLC,2020 WL 3096744 (Del. Ch. June 11, 2020) .....................................................76
In re Anthem-Cigna Merger Litig.,2020 WL 5106556 (Del. Ch. Aug. 31, 2020) ..................................81, 85, 91, 92
Bobcat N. Am., LLC v. Inland Waste Holdings, LLC,2019 WL 1877400 (Del. Super. Ct. Apr. 26, 2019) ...........................................97
In re Chateaugay,198 B.R. 848 (S.D.N.Y. 1996) .....................................................................81, 87
Draper v. Westwood Dev. Partners, LLC,2010 WL 2432896 (Del. Ch. June 16, 2010) .....................................................89
Flo-Pro Inc. v. 10 Iron Horse Drive, LLC,2011 WL 4527416 (D.N.H. Sept. 28, 2011) ......................................................94
Herremans v. Carrera Designs, Inc.,157 F.3d 1118 (7th Cir. 1998) ............................................................................93
v
Hexion Specialty Chems., Inc. v. Huntsman Corp.,965 A.2d 715 (Del. Ch. 2008) ............................................................................89
Ltd. v. FSAR Holdings, Inc.,2017 WL 5956877 (Del. Ch. Nov. 30, 2017).....................................................98
Mendoza v. COMSAT Corp.,201 F.3d 626 (5th Cir. 2000) ..............................................................................95
Mobile Commc’ns Corp. of Am. v. MCI Commc’ns Corp.,1985 WL 11574 (Del. Ch. Aug. 27, 1985).............................................90, 95, 97
Mrs. Fields Brand, Inc. v. Interbake Foods, LLC,2017 WL 2729860 (Del. Ch. June 26, 2017) .....................................................76
Neurvana Med., LLC v. Balt USA, LLC,2020 WL 949917 (Del. Ch. Feb. 27, 2020)..................................................90, 97
Omaha Pub. Power Dist. v. Employers’ Fire Ins. Co.,327 F.2d 912 (8th Cir. 1964) ..............................................................................95
Osborn v. Kemp,991 A.2d 1153 (Del. 2010)...........................................................................69, 90
Realogy Holdings Corp. v. SIRVA Worldwide, Inc.,C.A. No. 2020-0311-MTZ (Del. Ch. July 17, 2020) (TRANSCRIPT) ..................90
United Rentals, Inc. v. RAM Holdings, Inc.,937 A.2d 810 (Del. Ch. 2007) ............................................................................89
WaveDivision Holdings, LLC v. Millennium Digital Media Sys., LLC,2010 WL 3706624 (Del. Ch. Sept. 17, 2010).....................................................93
Weiss v. Leewards Creative Crafts, Inc.,1993 WL 155493 (Del. Ch. Apr. 29, 1993)........................................................94
OTHER AUTHORITIES
17A AM. JUR. 2D CONTRACTS § 675........................................................................93
8 CORBIN ON CONTRACTS § 40.17 (2020)................................................................96
vi
Kenneth A. Adams, Interpreting and Drafting Efforts Provisions: From Unreason to Reason, 74 Bus. Law. 677 (2019) ........................................81
Lauren Leatherby, et al., “‘There’s No Place for Them to Go’: I.C.U. Beds Near Capacity Across U.S.,” N.Y. Times (Dec. 9, 2020) .........................60
Matthew Jennejohn, Julian Nyarko & Eric Talley, “Coronavirus is Becoming a ‘Majeure’ Headache for Pending Corporate Deals,” Columbia Law School’s Blog on Corporations and the Capital Markets (Mar. 19, 2020).....................................................................................66
Reverse Break-Up Fees and Specific Performance: A Survey of Remedies in Leveraged Public Deals, Practical Law Corporate & Securities (2018 ed.) .....................................................................................89, 90
Reverse Break-Up Fees and Specific Performance, Practical Law Practice Note 8-386-5095 (2020) .......................................................................90
RESTATEMENT (SECOND) OF CONTRACTS § 245 (1981)...........................................93
13 WILLISTON ON CONTRACTS § 39:10 (4th ed.) .....................................................94
1
PRELIMINARY STATEMENT
Eighteen million Americans have contracted COVID-19 and more than
320,000 have died since the parties signed a Stock Purchase Agreement on March
6. The devastation is unprecedented. Principally, this case asks whether, when
KCAKE terminated the proposed transaction on April 20, COVID-19 then had or
was reasonably expected to have a Material Adverse Effect on DecoPac’s business;
and further, whether DecoPac failed to abide its interim covenants under the parties’
contract by deviating from its ordinary course operations. The answer to both
questions is “yes.” After the SPA was signed but before KCAKE terminated,
DecoPac’s historically stable regular sales went into free-fall, down week-by-week
by between and in the four weeks before termination. KCAKE reasonably
believed that the decline would persist as long as the pandemic did. Meanwhile,
DecoPac altered its past custom and practice on multiple fronts, including with an
unprecedented revolver draw and punitive cost-cutting.
Secondarily, the case asks whether KCAKE’s pursuit of EBITDA
addbacks, and efforts to seek alternative financing when the Lenders refused those
addbacks, were so unreasonable that—under this Court’s opinion denying
Defendants’ motion to dismiss—the prevention doctrine allows Plaintiffs to seek
specific performance. The answer to that question is “no.” Faced with the near
certainty of funding into a COVID-19 related financial covenant breach, KCAKE
2
reasonably and rightfully negotiated to avoid buying a company only to hand over
the keys to the Lenders. Likewise, KCAKE’s attempts to secure alternative
financing were thwarted by COVID-19’s impact on the debt markets rather than any
lack of effort by KCAKE. Thus, even if Plaintiffs were right about the merits of
their claim, and even if Plaintiffs had not themselves breached their representations
and warranties, their sole remedy would be the agreed-upon $33 million Termination
Fee.
DecoPac supplies decorations for cakes, typically shared at in-person
celebrations like graduations and children’s birthday parties. As of March 6, when
the SPA was signed, it was unfathomable that all in-person gatherings would have
the potential to become superspreader events. But while the parties did not then
know if or how COVID-19 would impact demand for DecoPac’s products, they
knew enough to agree that Sellers would bear that risk. Indeed, Sellers asked to
specifically carve “epidemics” and “pandemics” out of the definition of a Material
Adverse Effect. KCAKE refused, and threatened to walk. Sellers acquiesced,
agreeing to bear the precise risk that ultimately materialized.
In mid-to-late March, as COVID-19 infections spread across the
country and the pandemic began to impact DecoPac’s sales, KCAKE updated its
financial projections. Those projections showed that DecoPac would breach its
financial covenants to its Lenders at the first post-closing test. Consistent with its
3
obligations under the Debt Commitment Letter, KCAKE shared its updated
projections with the Lenders who had signed the DCL. KCAKE likewise sought, as
the DCL explicitly permitted, EBITDA addbacks to avoid the anticipated post-
closing covenant breach. Among other addback categories, the DCL expressly
allowed: (i) addbacks capped at $15 million for “extraordinary, unusual or non-
recurring” losses and expenses; (ii) uncapped addbacks “as shall be mutually
agreed”—an unusual, catch-all provision affording KCAKE broad protection for
unforeseen circumstances (like an emergent pandemic) requiring EBITDA covenant
relief; and (iii) uncapped addbacks “consistent” with certain guiding principles,
including to “reflect the operational and strategic requirements” of KCAKE and
DecoPac.
The Lenders, however, refused to provide any COVID-19-based
addbacks, regardless of the amount, without altering other financing terms that
would render the debt terms less favorable to KCAKE. KCAKE had no obligation
to accept those less-favorable terms. On the contrary, the SPA contained unusual,
buyer-friendly terms expressly entitling KCAKE to insist on debt financing on terms
acceptable to it and no less favorable than those contained in the DCL. Rebuffed by
the Lenders, KCAKE promptly informed Plaintiffs that the debt financing was
unavailable, and pursued alternative financing at Plaintiffs’ behest. All—including
4
Plaintiffs, their banker, and the Lenders—agree that such alternative financing was
unavailable.
Meanwhile, DecoPac’s sales continued to plummet. For the weeks
ending March 28, April 4, and April 11, DecoPac’s regular sales were down
, respectively, compared to the same weeks in
2019. DecoPac’s sales to nearly all of its top customers also declined substantially
in March and April. By the end of March, DecoPac—fearing serious liquidity
issues—drew down on its revolving line of credit, and also
began to implement dramatic cost-cutting measures. This revolver draw was
unprecedented for DecoPac both in scale and in purpose.
KCAKE validly terminated the SPA on April 20, based in part upon
DecoPac having breached its representations and warranties under the SPA,
including its representations that (1) it had not suffered and was not reasonably likely
to suffer a Material Adverse Effect and (2) its rate of business with its top ten
customers would not materially decline. KCAKE also terminated the SPA based on
DecoPac’s violation of its covenant to operate in the ordinary course of business
consistent with past practice, including by drawing on its revolver in response to its
liquidity concerns. Given DecoPac’s business model—supplying bakeries with cake
decorations intended for celebrations that were scarcely occurring at the time (and
with no prospect of them resuming any time soon)—KCAKE reasonably projected
5
and anticipated, as of April 20, that the pandemic would cause DecoPac’s
performance to decline for a durationally significant period of time.
Trial will establish that KCAKE’s termination on these bases was valid.
Additionally, because acceptable debt financing for the deal proved unavailable, and
because KCAKE did not prevent the debt from being funded, Plaintiffs are not
entitled to specific performance to compel closing.
STATEMENT OF FACTS
I. The Parties
Plaintiff-Counterclaim Defendant Snow Phipps Group, LLC is a
private equity firm that invests in middle-market companies. Plaintiff-Counterclaim
Defendant DecoPac Holdings Inc. is a Delaware corporation and the parent of non-
party DecoPac, Inc., a Minnesota corporation. DecoPac operates through multiple
subsidiaries, chiefly DecoPac U.S., headquartered in Anoka, Minnesota, as well as
Lucks in Tacoma, Washington and Culpitt in the United Kingdom.1 Snow Phipps
has owned DecoPac Holdings since September 2017.2 DecoPac Holdings’s
shareholders were the Sellers in the transaction at issue, where Snow Phipps was
“Seller Representative.”3
1 JX0286 at KOHLBERG00001826. 2 Pre-Trial Order (“PTO”) ¶ 8. 3 JX0001 (“SPA”) at KCAKE00053464.
6
Non-party Kohlberg & Co. is a private equity firm that invests in
middle-market companies. Plaintiffs assert claims against seven entities affiliated
with Kohlberg:
KCAKE Acquisition, Inc. is a special purpose vehicle created for the
DecoPac transaction. KCAKE agreed to purchase the capital stock of DecoPac
Holdings as set forth in the SPA.4
Kohlberg Investors VIII, L.P., Kohlberg Investors VIII-B, L.P.,
Kohlberg Investors VIII-C, L.P., Kohlberg TE Investors VIII, L.P., Kohlberg TE
Investors VIII-B, L.P., and Kohlberg Partners VIII, L.P. (collectively, the “Kohlberg
Funds”) are all Delaware limited partnerships, and parties to the Equity Commitment
Letter executed concurrently with the SPA.5
II. DecoPac’s Business
DecoPac supplies cake-decorating ingredients and products that
supermarkets (through in-store bakeries) use to create decorated cakes for in-person
celebrations like birthday parties and graduations.6 DecoPac offers a variety of
edible and non-edible products, including sprinkles, fondant, pastry bags, and
various non-consumable figurines (“DecoSets,” “DecoPics,” and “DecoRings”).7
4 Id.; PTO at 3. 5 PTO ¶ 7; JX0003 (“ECL”) at KCAKE00053932-33. 6 JX0239 at DEC000069460-64; JX0042 at DECO00293318.7 JX0239 at DEC000069464.
7
DecoPac also offers proprietary tech-enabled platforms like PhotoCake, which allow
supermarkets and bakeries to print edible, customizable images onto baked goods,
and Cakes.com, which allows consumers to personalize and order baked goods from
supermarkets and bakeries.8 DecoPac’s cake decorations include seasonal products
for holiday celebrations.9 DecoPac has licenses with sports and entertainment
entities, allowing DecoPac to focus sales and marketing around key movie releases,
television content, and major sporting events.10
Unlike many of its direct and indirect competitors, DecoPac has a
particularly limited product offering, as most of its products are used to decorate
custom cakes typically ordered at in-store bakery counters.11 DecoPac does not
meaningfully participate in the decoration of “thaw-and-sell” cakes that arrive at
stores pre-finished and ready for sale, nor in the do-it-yourself segment.12
In 2019, DecoPac’s top customers were Walmart, Sam’s Club, The
Kroger Company, Albertsons Companies, Ahold/Delhaize, Publix Bakery, H.E.
Butt Company (“HEB”), Cakestuff, BJ’s Wholesale Club, and Hy-Vee.13
8 JX0239 at DEC000069465. 9 JX0239 at DEC000069464.10 JX0286 at KOHLBERG00001826; JX0197 at DECO00147603. 11 JX2408, Amended Expert Report of Joseph Gray Welsh (“Welsh Report”) ¶ 24. 12 Welsh Report ¶¶ 2-3, 20; John Gardner Deposition Transcript (“Gardner”) 59:4-
60:19. 13 SPA at KCAKE00053745.
8
III. Early 2020: The Parties Negotiated
A. Snow Phipps Was Desperate to Sell the Business
Snow Phipps purchased DecoPac in September 2017.14 Although
Snow Phipps normally holds investments for three to seven years,15 and planned to
hold the DecoPac investment for five years,16 within two years of its purchase Snow
Phipps began exploring a sale of the Company.17 Trial will show that, in less than
two years, Snow Phipps had come to believe that DecoPac was a low-growth
company and wanted it gone.
Snow Phipps first considered—and rejected—a strategic
bid by in October 2019, deemed “pathetic” by
Snow Phipps Co-Founding Partner Ogden Phipps.18 Phipps and his partner Alan
Mantel decided to put the Company up for sale on the broader market.19 In
December 2019, Snow Phipps engaged investment bank Piper Sandler to navigate
the bidding and sale process, led by Managing Director Garry Vaynberg.20
14 PTO ¶ 8. 15 Maxwell Wein Deposition Transcript (“Wein”) 61:14-62:3. 16 Id. 61:9-13. 17 See JX0045 at DECO00080300; JX0104 at DECO00084820. 18 JX1705 at DECO00078998-79000.19 JX0178 at DECO0030034-36. 20 JX0192.
9
In January 2020, Piper Sandler approached Kohlberg Partner Seth
Hollander with the opportunity to purchase DecoPac.21 Once word of DecoPac’s
sale effort reached Kohlberg Vice President Alexander Forrey, who had worked on
the DecoPac deal team at Snow Phipps until he left to join Kohlberg in August 2019,
Forrey separately approached Hollander to discuss the opportunity.22 Forrey had
developed relationships with his Snow Phipps colleagues over his six years there,23
and stayed in touch with his friend and former colleague Maxwell Wein.24 With the
consent of Plaintiffs’ senior personnel, Forrey and Wein began communicating to
advance Kohlberg’s potential bid for the Company.25
Trial will show that Snow Phipps sought to offload DecoPac with haste.
On January 29, Vaynberg wrote to a Piper Sandler Vice President that “[t]he timing
unfortunately is what it is given Snow Phipps’ desire to get this over with.”26
Unfortunately for Snow Phipps, the more bidders learned, the less they were
interested; Vaynberg told colleagues “that anyone who has done any deep dive is a
lot more reserved on DecoPac than the initial excitement.”27
21 Seth Hollander Deposition Transcript (“Hollander”) 184:6-13; JX0218.22 JX0245.23 Alexander Forrey Deposition Transcript (“Forrey”) 15:21-22.24 Wein was a Vice President at Snow Phipps until he departed on February 14,
2020. Wein 32:9-10, 64:11-13.25 Alan Mantel Deposition Transcript (“Mantel”) 18:24-19:17; Wein 104:13-22. 26 JX0275; Garry Vaynberg Deposition Transcript (“Vaynberg”) 162:4-16.27 JX0439.
10
On February 3, Kohlberg submitted an initial $580 million bid.28
Kohlberg proposed funding the transaction with equity financing underwritten by
the Kohlberg Funds and debt financing, including from “DecoPac’s key incumbent
lenders, Ares Management, Antares Capital, and Owl Rock Capital Partners.”29
As the process wore on, Snow Phipps faced internal turmoil:
On February 11, Vaynberg told colleagues that “Snow Phipps is a complete sh*t
show.”30 The flight of DecoPac deal team members was not limited to Forrey;
former Partner Sundip Murthy had left in the summer of 2019,31 and Wein left in
mid-February 2020.32 As Vaynberg observed, besides Wein, there was “no-one else
who knows anything about DecoPac at Snow Phipps.”33
On February 18, Kohlberg revised its bid to a purchase price of $600
million.34 The bid warned that the “Purchase Price remains subject to confirmation
of 2019 Pro Forma Adjusted EBITDA of $49.8 million.”35 Snow Phipps also
received two other bids around that time: one from
and another from
28 JX0311.29 JX0311. Churchill Asset Management joined this lender group later in February.
See JX0415 at DECO00089870. 30 JX0372.31 Mantel 7:8-15.32 Vaynberg 197:13-25.33 JX0372; see also JX0348.34 JX0415 at DECO00089868-69.35 JX0415 at DECO00089870.
11
.36 But Snow Phipps was unwilling to engage, as these bids did not
“start with a 6.”37 fell out of contention by February 20, when, according to
Vaynberg, 38 Nevertheless, Vaynberg
sought to provide Kohlberg with “[d]isinformation” to “keep Kohlberg thinking
there are 2 players.”39 Meanwhile, Kohlberg was pulling away in the eyes of Snow
Phipps’s top brass: On February 25, Phipps texted Mantel that “[w]e need to get
Kohlberg done.”40
As Snow Phipps worked to offload the Company, it weighed potential
purchasers’ “concerns,” including issues with DecoPac’s management and the
Company’s scant growth opportunities.41 In late February, Mantel texted Phipps
that “[t]o really get anything done, you need new management.”42 Days later,
Mantel vented to Phipps that one of DecoPac’s “killer[s] is the lack of growth”; at
his deposition, Mantel testified that Snow Phipps was worried about “[t]he long-
term, top-line growth of the business” and “the historical growth trend of the
36 D.I. 235 (Pls.’ Suppl. Resps. & Objs. to Defs.’ First Set of Interrogs.) at 3-4.37 Vaynberg 199:10-200:6; JX0267.38 JX0444 at DECO00296122. 39 JX0444 at DECO00296118-19. 40 JX0497 at DECO00300108. 41 JX0497 at DECO00300124; see also id. at DECO00300111 (text message from
Mantel to Phipps stating, “BTW – the concerns that these guys are having is why we are selling”).
42 JX0497 at DECO00300124; see also JX0248 at DECO00299999, DECO00300004 (text message from Wein to Mantel stating, “[McKinsey has] gotten us further in 2 weeks than the management team has in 2 years.”).
12
business.”43 Although marketing materials touted growth opportunities via
DecoPac’s penetration of “white space”44—the 70% of undecorated cakes sold by
DecoPac’s customers—Mantel viewed the “white space story” as “a bunch of BS.”45
Another glaring issue was the development of Cakes.com, a DecoPac
website that allows consumers to order cakes directly from bakeries. Cakes.com
was marketed to potential purchasers as having “massive upside potential,”46 but
Snow Phipps’s management knew otherwise. Snow Phipps had sunk in
Cakes.com, yet it had not generated a cent of revenue through November 2020.47
Wein testified that he viewed the “ability to roll out Cakes.com effectively and to
drive the necessary marketing required to align with Cakes.com” as one of the
greatest challenges to DecoPac’s ability to execute its growth plan.48 Mantel also
observed a “huge problem” with the Cakes.com concept: if DecoPac “really
enable[s] the small to mid size players to compete more effectively with the large
43 JX0497 at DECO00300121; Mantel 60:23-62:21.44 JX0215 at DECO00151193.45 JX0497 at DECO00300125. 46 JX0215 at DECO00151188.47 JX0215 at DECO00151191; Gardner 204:12-205:6.48 Wein 247:16-252:2.
13
guys, will we piss the large guys off? … If we piss one of them off it’s a disaster.”49
Mantel resolved to ignore this, and “leave that to the next guy to figure out.”50
B. COVID-19 Risks Were Almost Entirely Unknown
After Kohlberg submitted its February 18 bid, it conducted due
diligence on DecoPac. Prior to signing, Kohlberg did not know—and could not
reasonably have known—that COVID-19 would so radically alter our way of life,
and that gathering with people we do not live with would become perilous,
significantly decreasing demand for DecoPac’s products. Rather, the evidence will
show that, prior to signing, the parties determined that the risks related to COVID-
19 were limited to debt, equity, and M&A market risk, and potential impacts to
DecoPac’s supply chain, based largely in China.51
As of February 20, there were 75,077 confirmed COVID-19 cases in
mainland China, compared to just 500 cases outside of China.52 As a result,
Kohlberg asked about the potential impact of COVID-19 on DecoPac’s supply
49 JX0248 at DECO00300007-09. 50 JX0248 at DECO00300009; see also JX0767 at DECO00300159 (text message
from Mantel to Phipps stating that Kohlberg has “no idea that we have one guy trying to develop cakes.com. They probably should have 10.”).
51 Hollander 218:23-219:16. 52 “China: Cumulative confirmed cases: how rapidly have they increased compared
to other countries?”, Our World in Data, https://ourworldindata.org/coronavirus/country/china?country=~CHN; JX1759, Expert Report of William Hanage, Ph.D. (“Hanage Report”) ¶ 25.
14
chain.53 On February 21, Forrey and Kohlberg Associate Chris McKinney held two
diligence calls with Vaynberg and DecoPac management.54 According to
McKinney’s notes, management informed the team that “Wuhan is in a different part
of the country” than DecoPac’s suppliers, and “[a]ll factories are back to work.”55
On February 27, Kohlberg visited DecoPac’s Minnesota headquarters and met with
the management team.56 The COVID-19 discussion was focused on DecoPac’s
Chinese supply chain,57 and Mr. Anderson said he foresaw no demand issues.
On February 28, Kohlberg engaged Maine Pointe, a global supply-
chain consulting firm, to assess the risk of COVID-19 on DecoPac’s supply chain.58
Maine Pointe, Vaynberg, and Anderson spoke on March 2.59 Before and after that
call, Piper Sandler sent Kohlberg various materials related to potential supply-chain
impact, including DecoPac’s Supply Chain Coronavirus Contingency Plan60 and
Chinese SKU Analysis.61 None of these materials or conversations mentioned the
53 Forrey 187:10-14, 206:17-208:25; see also JX0305; JX0215 at DECO00151186.54 JX0457.55 JX0457 at KOHLBERG00055156. 56 Sam Frieder Deposition Transcript (“Frieder”) 78:7-11. 57 Id. 80:5-23. 58 See JX0562.59 See JX0572; JX0626.60 JX0630.61 JX0659; JX0660; JX0678.
15
potential impact of COVID-19 on the Company if COVID-19 were to spread to and
throughout the United States.62
Trial will show that the parties did not discuss the potential impact of
COVID-19 on demand for DecoPac’s products, nor the impact of potential stay-at-
home orders in the United States, at any point prior to signing. Both sides believed
that the risk of parties being cancelled due to COVID-19 was “unfathomable.”63
But, as discussed below, all agreed that Plaintiffs would bear any such unforeseen
risks.
C. The Parties Agreed that Sellers Would Bear Pandemic Risks
On March 4, two days before signing, Plaintiffs sought to carve out
“pandemics” and “epidemics” from the definition of a “Material Adverse Effect.”64
Plaintiffs’ counsel included this edit in their March 4 draft of the SPA:
“Material Adverse Effect” shall not include any adverse event, change, development, effect, condition, circumstance, matter, occurrence or state of facts arising from or related to: … (ii) any epidemics, pandemics, act of terrorism, similar calamity or war (whether or not declared) or any escalation or worsening of any of the foregoing….65
62 See JX0659; JX0660; JX0630; JX0678; John Anderson Deposition Transcript (“Anderson”) 153:25-154:5.
63 Hollander 269:14-21; see also Anderson 180:8-12, 180:25-181:18, 182:3-19, 157:2-11; Vaynberg 230:21-232:10, 253:4-17, 221:10-19; Mantel 109:14-24, 100:5-19; Ryan Brauns Deposition Transcript (“Ares”) 178:4-180:2.
64 JX0669 at KCAKE00024629, KCAKE00024737. 65 Id. (emphasis added to show Plaintiffs’ proposed edit).
16
Kohlberg refused. On March 5, Kohlberg sent Vaynberg a revised $550
million bid, discussed further below, and a revised SPA that rejected Plaintiffs’
proposed addition of “epidemics” and “pandemics” to the MAE carveouts.66
That evening, Plaintiffs’ counsel again asked that pandemics and
epidemics be excluded from the MAE definition.67 Kohlberg’s counsel responded
that Kohlberg “could not accept the epidemic/pandemic risk.”68 Any potential
unknown risks of the pandemic were allocated to Plaintiffs, including the unknown
risk that demand for DecoPac’s products would be decimated as Americans radically
shifted the way they celebrate occasions in response to the pandemic.69
Additionally, when Vaynberg called Hollander that same evening “about the MAE
point” to further pursue a pandemic carveout, Hollander “said we absolutely cannot
give it.”70
Plaintiffs’ counsel accepted the deletion of “pandemics” and
“epidemics” in the next draft of the SPA,71 and thus accepted the pandemic and
epidemic risk allocation on which Kohlberg insisted.
66 JX0746 at KOHLBERG00053964, KOHLBERG00053967, KOHLBERG00053980.
67 JX0749; JX0741. 68 Julie Martinelli Deposition Transcript (“Martinelli”) 144:24-145:4. 69 Id. 307:11-308:10. 70 JX0751; see Vaynberg 250:12-17. 71 JX0702 at KCAKE00032691, KCAKE00032822.
17
IV. The Parties Signed the SPA
On March 5, Kohlberg proposed a price cut from $600 million to $550
million.72 Plaintiffs have asserted that this cut was in exchange for Kohlberg’s
assuming the risks of COVID-19. That is false. Kohlberg had concerns about
DecoPac’s Quality of Earnings analysis and its budget shortfalls. Indeed, Snow
Phipps’s Quality of Earnings EBITDA figures were wildly inconsistent, fluctuating
between approximately and —a spread that would and did affect the
purchase price.73 If, as Plaintiffs now suggest, the price drop had been to allocate
unknown risk from COVID-19 to KCAKE, Kohlberg would have accepted the
“epidemics” and “pandemics” carveouts. It refused to do so.
Meanwhile, Snow Phipps was growing desperate to close the deal.
COVID-19 was causing increased volatility in the global financial markets, and, as
Vaynberg testified, “debt markets were effectively frozen” and “anything related to
M&A” was effectively on hold by March 5.74 Mantel testified that, on March 5,
72 JX0703 at KOHLBERG00005683. 73 See JX0345 (February 8, 2020 first draft of QofE, showing a pro forma
adjusted and run-rate adjusted EBITDA); JX0362 (February 11, 2020 draft sent to Kohlberg, showing a adjusted and pro forma adjusted EBITDA); JX0403 (Snow Phipps’s February 16, 2020 model of DecoPac, sent to Kohlberg, showing a adjusted EBITDA); JX0470 (February 19, 2020 final QofE, sent to Kohlberg, showing a pro forma adjusted and run-rate adjusted EBITDA).
74 Vaynberg 231:24-232:24; see also Mantel 93:22-24, 94:20-24; Hollander 267:3-7. Vaynberg also testified that Snow Phipps would not be able to sell anything in its portfolio “for some time” because the “general thought at the time in the
18
“[t]here was uncertainty that was … impacting the M&A markets, and there was an
uncertain future.”75 With no realistic opportunity to sell other than to Kohlberg,
Phipps emailed his colleague Alec Somers that “[o]bviously given
market/environment we want to get this signed ASAP!”76 The same day, Vaynberg
texted Anderson, “[n]eed to sign tonight given market conditions” and “who knows
when they [Snow Phipps] are able to sell anything in their portfolio next.”77 Snow
Phipps Associate Drew Davala texted Somers that he was “[s]urprised we accepted
so willingly. But I think there are other forces at work here,” to which Somers
responded, “Yeah. Fund dynamics. No one cares about this business. Etc.”78
After signing the SPA on March 6, Plaintiffs expressed relief at
dumping DecoPac. Mantel texted Phipps that “I’ll be glad to have this closed and
behind us,” to which Phipps responded, “I am so relieved!!!”79 Mantel also informed
Phipps that he “really [doesn’t] like this business,” and Phipps concurred, stating
that “I f***ing hated it.”80 On March 9, Peter Shea, Snow Phipps Operating Partner
and Chairman of DecoPac’s Board, told Mantel and Phipps that “[t]iming of sale
M&A world was that M&A would be on pause for quite a long time because of COVID.” JX0754; Vaynberg 236:17-23.
75 Mantel 66:10-15.76 JX0698.77 JX0754.78 JX0699 at DECO00295697-702.79 JX0767 at DECO00300148-49. 80 JX0767 at DECO00300150-51.
19
could not have been better,” to which Mantel responded, “I agree.”81 On March 13,
a Partner at Weil, Gotshal & Manges, Snow Phipps’s outside counsel, told Mantel
that “[b]etween the timing of this and Kele you guys should win an award!”82
Mantel responded, “It’s better to be lucky.”83
Snow Phipps had also ensured that DecoPac’s management was highly
incentivized to sell the business. On March 5, DecoPac’s Board voted to accelerate
DecoPac employees’ options,84 so that they would fully vest as a result of the
transaction. CEO Anderson stood to make from the transaction, and
CFO Steven Twedell .85 On March 7, Anderson emailed Phipps and Ian
Snow (Snow Phipps’s other Co-Founding Partner) “to personally thank both of”
them for vesting Anderson’s “ . It means a lot to all
of us.”86 Kohlberg had been kept in the dark. On March 7, Anderson texted
Vaynberg: “Just talked with Seth [Hollander], Alex [Forrey] and Chris [McKinney]
… they were going to spend time telling me about equity …
... they had no idea [winking, tongue-sticking-out emoji].”87
81 JX0817.82 JX0841.83 Id. 84 JX0737. 85 Anderson 406:24-407:3; Steven Twedell Deposition Transcript (“Twedell”)
301:12-17.86 JX0811. 87 JX0809.
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V. The Buyer-Friendly Contractual Framework
When the parties signed the SPA on March 6, KCAKE also executed
the DCL with Antares Capital LP, Antares Holdings LP, Owl Rock Capital Private
Fund Advisors LLC, Ares Capital Management LLC, and Churchill Asset
Management LLC (collectively, the “Lenders”).88 A debt commitment letter
“outlines the dollar amount and terms for any loans” to be used to fund the
transaction at closing, and “commits the lenders to provide funding at the indicated
terms, subject to the condition that the final loan documents are later negotiated and
ultimately signed.”89 A debt commitment letter (unlike a credit agreement, which is
negotiated after signing) is not the final document for purposes of financing an
acquisition.90 Accordingly, open terms and terms omitted from the DCL were to be
negotiated by the parties at a later date.91 For example, where the DCL uses
“mutually agreeable,” or similar phrases, parties were free to negotiate over the
term.92 To the extent the parties were unable to agree on open terms, then a credit
88 JX0002 (“DCL”) at 1. 89 JX1757, Expert Report of Jonathan Foster (“Foster Report”) ¶¶ 21-22. 90 Lukas Spiss Deposition Transcript (“Owl Rock”) 158:21-159:10. 91 Phillip Smith Deposition Transcript (“Antares”) 231:20-231:25; Owl Rock
160:23-161:6. The DCL contained numerous open terms that required further negotiations, including, for example, interest rate periods, affirmative and negative covenants, and adjustments to EBITDA (as discussed further below). Foster Report ¶ 38 & Exhibit B.
92 Antares 232:1-233:3.
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agreement under which debt would be funded could not be finalized.93 These
negotiations had an outer bound: The DCL would expire by its own terms on May
12,94 when Plaintiffs concede that the debt financing would “vanish.” 95
KCAKE, DecoPac Holdings, and the Kohlberg Funds also executed the
ECL,96 which set forth the conditions under which the Kohlberg Funds were
obligated to provide equity to fund the transaction.97 The Kohlberg Funds and
DecoPac Holdings also executed a Limited Guarantee,98 which set forth the
conditions under which the Kohlberg Funds could be obligated to pay a Termination
Fee to Sellers.99
By the terms of the SPA, the Company and Sellers made a number of
representations, warranties, and covenants, the breach of any of which would, under
certain circumstances, relieve KCAKE of its obligations under the SPA, including
to close the transaction.
93 Jonathan Foster Deposition Transcript (“Foster”) 96:19-97:5 (“[I]f [subsection] A and O aren’t agreed, there is no credit agreement.”); Foster Report ¶¶ 22-24, 31-39 & Ex. B. A corporate representative of Churchill likewise testified that, if the parties could not agree on the terms for EBITDA adjustments, then they “couldn’t finalize the credit agreement.” Carol Loundon Deposition Transcript (“Churchill”) 45:10-47:2.
94 DCL § 15; SPA § 8.1(c). 95 D.I. 1 (Mot.) ¶ 3.96 JX0003 (“ECL”) at 1. 97 Martinelli 197:4-11. 98 JX0004 (“Limited Guarantee”) at 1. 99 See generally Limited Guarantee.
22
A. Representations and Warranties Regarding Material Adverse Effect
KCAKE was not obligated to close under the SPA unless “[e]ach of
the … representations and warranties of the Company set forth in Section 3.9(a)
shall be true and correct in all respects when made as of the date of this Agreement
and … as of the Closing Date as if remade on such date.”100 (Plaintiffs have
conceded that this Closing Date was “no later than May 4, 2020.”101) Under Section
3.9(a) of the SPA, Plaintiffs represented that “since December 28, 2019, there has
not been any event, change, circumstance, occurrence, effect, state of facts,
development or condition that has had, or would reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect.”102
The SPA defined a Material Adverse Effect (“MAE”) as “any event,
change, development, effect, condition, circumstance, matter, occurrence or state of
facts that, individually or in the aggregate, … has had or would reasonably be
expected to have a material adverse effect upon the financial condition, business,
properties or results of operations of the Group Companies,103 taken as a whole.”104
100 SPA § 7.1(a).101 D.I. 34 (Am. Compl.) ¶¶ 89-90.102 SPA § 3.9(a). 103 The “Group Companies” are DecoPac Holdings and its subsidiaries. SPA § 1.1.104 SPA § 1.1.
23
The definition further specified eight carveouts from the definition of a
Material Adverse Effect, including changes “arising from or related to” “(i) general
economic or political conditions in any of the markets or geographical areas where
the Group Companies operate or that affect generally companies in the same or
similar industries,” and “(v) changes in any Laws, rules, regulations, orders,
enforcement policies or other binding directives issued by any Governmental Entity,
after the date hereof.”105 As noted above, the parties agreed that there would be no
carveout for pandemics or epidemics, and there is none.
B. Representations and Warranties Regarding Top Ten Customers
Pursuant to Section 3.21(a) of the SPA, Plaintiffs represented that “no
Top Customer has (i) threatened in writing, or notified any Group Company in
writing, that it intends to stop or materially decrease the rate of business done with
any Group Company or (ii) since December 31, 2019, stopped or materially
decreased the rate of business done with any Group Company.”106
Under Section 7.1(a), KCAKE was not obligated to close the
transaction unless that Top-Ten Customer representation was “true in all respects”
both when made and “at and as of the Closing Date as if remade on such date,” unless
105 SPA § 1.1. 106 SPA § 3.21(a).
24
the failure to be true “would not have or reasonably be expected to have,”
individually or combined with other such failures, “a Material Adverse Effect.”107
C. Covenants Regarding Ordinary Course Operations
Among its covenants in the SPA, the Company was obligated, from
signing through closing, to “operate the Business in the Ordinary Course of
Business.”108 The SPA defined operating in the “Ordinary Course of Business” as
conducting the business “in a manner consistent with the past custom and practice
of the Group Companies (including with respect to quantity and frequency).”109
Section 7.1(b) then relieved KCAKE of any obligation to close unless
“Sellers and the Company shall have performed and complied in all material respects
with all of their respective covenants, obligations and agreements contained in this
Agreement to be performed and complied with by them on or prior to the Closing
Date.”110
D. Termination of the SPA, DCL, ECL, and Limited Guarantee
Section 8.1(d) of the SPA provided KCAKE the right to terminate the
SPA if there was “a breach of any (i) representation or warranty of Sellers or the
Company contained in this Agreement, and the breach of such representation or
107 SPA § 7.1(a).108 SPA § 6.1(a).109 SPA § 1.1 (emphasis added).110 SPA § 7.1(b).
25
warranty would result in a failure of the condition set forth in Section 7.1(a) or
(ii) covenant of Sellers or the Company hereunder that would result in a failure of
the condition set forth in Section 7.1(b).”
The DCL provided that the valid termination of the SPA would result
in the immediate, automatic termination of the DCL and the Lenders’ commitments
and undertakings thereunder.111 The DCL would also expire by its own terms on
May 12.112
The ECL and Limited Guarantee also provided that the valid
termination of the SPA would result in the immediate, automatic termination of the
ECL and Limited Guarantee, and the Kohlberg Funds’ obligations thereunder.113
E. Express Limitations on Remedies
Section 8.3(a) of the SPA precludes the Company and Snow Phipps
from recovering any amount in damages greater than the “Termination Fee” and
“Other Costs” (commitment fees and out-of-pocket costs incurred by Sellers).114
The Termination Fee is capped at $33 million.115
To avoid a situation where KCAKE could be compelled to close
without funded Debt Financing in hand “on terms and conditions acceptable to the
111 DCL § 15.112 See id.; SPA § 8.1. 113 ECL § 3; Limited Guarantee § 8.114 SPA § 8.3(a); see also SPA § 6.16(c).115 SPA § 8.3(a).
26
Buyer” (discussed further below), the SPA precludes Plaintiffs from seeking specific
performance if the full proceeds of the Debt Financing were not funded on the terms
and conditions described in the DCL at closing. Specifically, Section 11.14(b)(iii)
of the SPA provides that “the Company, Sellers and the Seller Representative shall
be entitled to seek specific performance … of Buyer’s obligations to consummate
the transaction contemplated hereby if and only if … the full proceeds of the Debt
Financing have been funded to Buyer on the terms set forth in the [DCL] to fund
the payment of the Estimated Closing Payment at Closing.”116 There are no
carveouts or exceptions to this provision.
The ECL likewise provides that the Kohlberg Funds’ obligation to fund
the equity commitment “is subject to … the Debt Financing having been funded on
terms and conditions described in the [DCL] or will be funded at the Closing if the
Commitment is funded at Closing.”117
F. Debt Financing Under the SPA and DCL
The SPA and DCL worked harmoniously to provide broad protections
to KCAKE in regard to Debt Financing. The SPA provided that KCAKE must “use
its reasonable best efforts to arrange and obtain the Debt Financing on terms and
conditions acceptable to the Buyer, including commercially reasonable efforts to …
116 SPA § 11.14(b) (emphasis added).117 ECL § 2.
27
(iii) enter into definitive agreements with respect to the Debt Financing that are on
terms and conditions no less favorable to Buyer than those contained in the
[DCL].”118 The SPA made clear that Sellers’ consent to any modification to the
DCL would be required only in very limited, specified circumstances, including,
among others, if the contemplated modification would impose “additional
conditions precedent” or otherwise adversely impact KCAKE’s “ability … to
enforce its rights” under the DCL.119
If the Debt Financing were to become unavailable for any reason, the
SPA provided that KCAKE must use its reasonable best efforts to arrange for
“alternative financing.”120 The SPA expressly confirmed, for avoidance of doubt,
that “alternative financing” is a subset of Debt Financing and captured within that
defined term121—accordingly, KCAKE was entitled to insist upon alternative
financing “acceptable to the Buyer” and “on terms and conditions no less favorable
to Buyer than those contained in the [DCL].”122
Additionally, in the course of negotiating the DCL, KCAKE and the
Lenders agreed to leave open the issue of what adjustments could be made to the
definition of EBITDA for the purposes of determining whether the Company would
118 SPA § 6.15(a) (emphasis added).119 Id. § 6.15(b).120 Id. § 6.15(d).121 Id. § 6.15(b).122 Id. § 6.15(a).
28
be in compliance with its financial covenants following closing.123 Indeed, the DCL
included pages of potential EBITDA addback categories that could be negotiated,
including an addback of up to $15 million for “extraordinary, unusual or non-
recurring losses, gains or expenses and transaction expenses.”124 The DCL also
included a commercially unusual catch-all provision for any other additional
addbacks that KCAKE and the Lenders might mutually agree upon: “Consolidated
EBITDA … shall include (which shall not be subject to caps, except as expressly
stated below), among other adjustments, exclusions and add-backs … (o) other
adjustments, exclusions and add-backs as shall be mutually agreed or as otherwise
consistent with the First Lien Documentation Principles[.]”125 This open-ended
term, which was favorable to KCAKE,126 allowed the parties to negotiate for
addbacks in addition to those listed,127 and also provided KCAKE with the right to
obtain addbacks consistent with “the operational and strategic requirements of
[DecoPac], [KCAKE] and their respective subsidiaries … in light of,” among other
123 Foster 93:11-14 (“I think this definition [of EBITDA] is nowhere near complete…. It’s just not a final determination of what EBITDA will be for covenant purposes.”); id. 94:13-95:15.
124 DCL at B-38-40. Corporate representatives of Churchill and Owl Rock testified that KCAKE had a right to such addbacks. Churchill 125:9-126:14; Owl Rock 164:4-25.
125 DCL at B-38, 40 (emphasis added).126 Ares 171:1-19; see Churchill 85:2-86:2. 127 Ares 169:12-22; Owl Rock 68:22-70:19, 166:19-168:6; Churchill 45:10-24,
128:12-23; see Antares 232:2-233:2.
29
things, “their size, geographic locations, industries, businesses and practices, [and]
operations.”128
Working in tandem, the SPA and DCL thus expressly authorized
KCAKE to negotiate with the Lenders between signing and closing over the open
item of EBITDA addbacks, and entitled KCAKE to demand acceptable and no less
favorable debt financing terms—so long as KCAKE exerted reasonable best efforts
to reach resolution with the Lenders, including, for example, by not demanding
objectively unreasonable terms. Trial will confirm KCAKE did just that.
128 DCL at B-27.
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VII. The COVID-19 Pandemic Devastated DecoPac
A. As the Pandemic Wreaked Havoc on the U.S. and DecoPac, Kohlberg Updated Its Projections
After March 6, the COVID-19 pandemic began to spread quickly across
the U.S.129
On March 17, DecoPac first informed Kohlberg that COVID-19 was
beginning to impact demand for DecoPac’s products.130 That day, Phipps texted a
129 See Hanage Report at 18. 130 JX0867.
31
contact, “I hope deco closes!!!”131 (Sellers produced this text, and other significant
documents, only after being compelled to do so by the Court’s November 30 ruling.)
As the severity and potential impact of the pandemic became clearer,
and as DecoPac’s management revealed its impact on the Company, Kohlberg
undertook to update the financial projections it had provided to the Lenders for
DecoPac.132 Accordingly, and in light of a macro view forming within Kohlberg
that COVID-19 would get only worse and persist through the year, on March 19
Hollander asked Forrey and McKinney to create a model that showed projections
for DecoPac’s financial performance on a monthly basis.133 On March 22 and 23,
McKinney and Forrey exchanged initial drafts.134 McKinney’s initial draft assumed
sales declines of 50% to 80% through July.135 Forrey revised the model to reflect
sales declines of 25% to 80% through May.136
Hollander, the senior member of the deal team, provided input on
subsequent iterations of the model.137 Based on his assessment that the pandemic
131 JX2400. 132 Forrey 296:3-297:2; see Hollander 489:3-17, 493:25-494:15. The DCL provides
that KCAKE will “promptly supplement” the information and projections it provided the Lenders, “from time to time until the Closing Date,” “so that such representations will be correct in all material respects.” DCL § 4.
133 See Christopher McKinney Deposition Transcript (“McKinney”) 330:22-333:15; Forrey 296:3-297:2.
134 See JX0954; JX0994; Forrey 300:16-22.135 JX0954 at KOHLBERG00024118.136 JX0994 at KOHLBERG00024140.137 Hollander 501:6-15, 546:16-547:7.
32
would continue through the summer, that children’s celebratory parties would be
cancelled as a result, and that approximately 80% of DecoPac’s business was driven
by such parties, Hollander assumed that DecoPac’s revenue would likely be down
80% through September 2020, and down 10 to 15% thereafter, through February
2021.138
On March 23, Hollander discussed his assumptions with Gordon
Woodward, Kohlberg’s Chief Investment Officer.139 Woodward agreed that the
COVID-19 pandemic would last at least 6 months and that Hollander’s assumptions
regarding revenue declines were reasonable.140 Hollander also discussed his
assumptions with Forrey and McKinney.141 After additional iterations, McKinney
sent the draft model to Woodward for his review.142
Hollander’s assumptions were informed by data that Kohlberg received
from DecoPac.143 On March 17, Anderson told Forrey that call volume at DecoPac
was down the previous day and that one of DecoPac’s top customers, HEB, had
138 Hollander 553:21-554:18, 557:8-21; JX0998 at KOHLBERG00051815, KOHLBERG00051817; Woodward 341:3-342:14, 342:20-344:5.
139 Woodward 341:3-15.140 Woodward 341:3-342:14, 342:20-344:5, 344:21-345:18.141 Forrey 377:21-378:17, 391:11-392:17; see JX0996 at KOHLBERG00034288;
JX0997 at KOHLBERG00034304; JX0998 at KOHLBERG00051817. Although referenced as the “GW” case, for Woodward, the assumptions in the “GW” case are Hollander’s. Hollander 544:3-546:25; see Woodward 344:21-355:18.
142 JX0998 at KOHLBERG00051817. 143 Hollander 501:6-21, 557:22-558:5.
33
put all orders on hold (and told DecoPac not to fulfill incoming orders from
individual stores).144 Forrey found this information concerning, because Mondays
and Tuesdays are typically DecoPac’s busiest days for telephone orders.145
On March 24, Anderson, Twedell, Hollander, Forrey, and McKinney
spoke by phone.146 Anderson reported that orders remained down significantly.147
He also advised that consumers are “delaying [parties] until [coronavirus] passes”
and “[d]emand is a mixed bag,”148 and that DecoPac would “[p]robably cut[] hours
starting later this week.”149 Later that day, Kohlberg requested updated weekly sales
and order data and a monthly 2020 reforecast.150
On March 25, Anderson provided DecoPac’s recent weekly sales
data.151 The Company’s regular orders, regular sales, and total sales for the fourth
week of March, fiscal week 12, were down and versus the
prior year.152 (For DecoPac, “regular” sales are everyday sales that do not include
144 JX0879; see also JX0846 (March 13 internal DecoPac email regarding HEB order hold). Anderson then reached out to Mantel to report on Kohlberg’s questions about “slow down” at DecoPac, writing that he and Mantel should consider what DecoPac “needs to” or “wants to” provide on its finances as events continued to unfold. JX0890 at DECO00202979.
145 Forrey 297:3-298:18; see JX0879; JX0878.146 Forrey 394:14-396:2; see JX1003.147 Forrey 396:11-18.148 JX1026; see McKinney 467:5-12.149 JX1026. 150 JX1059 at KOHLBERG00034952.151 JX1058.152 JX1058 at KOHLBERG00006003.
34
preorders or “exclusions,” which are placed up to five months in advance, and thus
do not reflect the current state of customer demand.)153
By March 26, Kohlberg had revised its model to reflect its expectations
that circumstances might improve towards the end of the summer. At the same time,
Kohlberg began to understand the potential for a subsequent second wave of the
pandemic and incorporated those expectations into the model beginning in the fall.154
That same day, Kohlberg emailed its updated model to Antares and
Ares, the administrative agents for the First Lien Term Loan (and Revolver) and
Second Lien Term Loan.155 The updated model projected EBITDA for 2020 at
$10.5 million and net sales at $125.6 million,156 and was considerably more
optimistic than previous cases that Kohlberg had internally projected.157
Even with this optimism, Kohlberg’s revised model predicted that
DecoPac would breach the DCL’s Financial Covenant158 in the very first post-
153 See, e.g., JX0533 at DECO00029063 (February 27 email from Opheim noting that “April is the month we have significant commitments from customers that we expect to drive [the projected sales] number”); see also Anderson 69:16-70:23, 239:23-240:6, 244:25-245:9. Even taking into account the exclusion orders filled during week 12—but placed months prior—DecoPac’s sales were down compared to that week the prior year.
154 Hollander 617:20-619:13. 155 JX1117; JX1065.156 JX1117 at KOHLBERG00035495; JX1065 at KOHLBERG00035527.157 See JX0999 at KOHLBERG00055089 (projecting DecoPac’s 2020 EBITDA at
$3.6 million and 2020 net sales at $101.1 million). 158 Hollander 762:18-24.
35
closing test on December 31, 2020.159 Under the Financial Covenant, DecoPac was
required to maintain a Net Leverage Ratio160 below 10.25x for the first 24 months
after closing, and less than 9.50x thereafter.161 Kohlberg’s projection of $125.6
million for 2020 net sales was approximately 41% lower than its projection had been
at signing, which was $211.9 million. Kohlberg’s projection of $10.5 million for
2020 EBITDA was approximately 80% lower than its projection of $51.8 million at
signing.162 Without addbacks, the Net Leverage Ratio on December 31, 2020 would
be 33.1x, far exceeding the DCL’s 10.25x allowable maximum.163 Kohlberg’s pre-
signing “shock case” analysis indicated that covenants would be breached if
DecoPac’s sales declined even 17.5%,164 far lower than the roughly 40% projected.
In its emails to Antares and Ares attaching the revised model, Kohlberg
initially requested uncapped addbacks related to lost revenue from COVID-19, as
well as an increase in the revolver from $40 million to $55 million.165 As Hollander
will testify, Kohlberg requested these addbacks to avoid breaching DecoPac’s
financial covenants. A covenant breach would mean that DecoPac would be in
159 See DCL at B-38.160 The Net Leverage Ratio is defined in the DCL as the ratio of net debt (less
unrestricted cash and cash equivalents) to EBITDA for the most recent four fiscal quarters. DCL at B12-13.
161 DCL at B-38.162 JX1117 at cells s12, s26; Foster Report ¶¶ 68, 72, 74.163 Foster Report ¶ 74.164 JX0802. 165 JX1117; JX1065.
36
default to its Lenders, thereby allowing the Lenders to accelerate all loan payments
such that they become immediately payable, and then, if the payments are not made,
to foreclose or take control of the collateral underlying the loans.166
B. DecoPac Management’s Projections Ignored Reality
On March 26, after sending its updated model to Antares and Ares,
Kohlberg received DecoPac’s reforecast.167 DecoPac’s reforecast adjusted sales
projections for March, April, May, and June down by and 168
yet left the rest of 2020, beginning in July, entirely unchanged.169 That is, DecoPac
management assumed that COVID-19’s impact would entirely and miraculously
cease in June, and that performance would increase year-over-year thereafter. From
these baseless assumptions, the reforecast projected that net sales would be down
compared to the original 2020 budget (an adjustment from to
), and EBITDA would be down (an adjustment from
to ).170 Hollander regarded DecoPac’s projections as illogically
optimistic and contrary to the recent declines in DecoPac’s orders and sales and the
worsening pandemic.171 As discussed below, the Lenders felt similarly.
166 Foster Report ¶ 80.167 JX1120.168 JX1120 at KOHLBERG00067975-76; JX1071 at DECO00060310-13. 169 JX1120 at KOHLBERG00067975-76.170 Id. 171 JX1118; Hollander 697:19-698:19.
37
DecoPac management’s assumptions were based on their
unsubstantiated belief that “stay-at-home orders” would be lifted starting “the
Monday after Easter,”172 which would have been Monday, April 13. John Gardner,
DecoPac’s Vice President of Sales, was not at all involved in the preparation of the
forecast,173 even though he and his team are normally involved in the budgeting
process for sales.174
On March 27, Hollander, Forrey, and McKinney spoke by phone with
Twedell, Anderson, and Tobin Opheim, DecoPac’s Controller, about the
assumptions underlying DecoPac’s reforecast.175 As Hollander will testify,
DecoPac’s management assumed Q2 revenue for DecoPac U.S. would decline by
only , despite the previous week’s decline of more than in regular call-in
orders, because management believed its exclusion sales would partially offset
declines in regular sales.176 Hollander believed this assumption was flawed because
the exclusion sales had been ordered at least a month prior.177 As to DecoPac’s
macro assumptions, which had DecoPac back to its original budget by July,
Hollander expressed his view on the call that children in large areas of the country
172 Anderson 224:10-14, 232:8-233:5; Twedell 197:5-24. 173 Gardner 164:18-166:5.174 Gardner 16:7-19, 25:5-27:22.175 JX1144; Hollander 694:21-702:20. 176 JX1150. 177 Id.
38
would not attend birthday parties for “months, months, and months” due to COVID-
19, and that he expected some form of second wave of COVID-19 after September,
which would impact DecoPac’s business into 2021.178 DecoPac’s management
responded that, while juvenile birthday parties may not return for a while, people
would pivot to smaller celebrations, and that they were working on products to
capitalize on this trend.179 Following this discussion, Hollander—who believed this
would be an entirely untested new business model for DecoPac—continued to
believe the reforecast was overly optimistic and unreliable.180
Hollander told DecoPac’s management that Kohlberg had prepared a
more conservative model than DecoPac’s and had sent it to the Lenders.181 None of
Twedell, Anderson, or Opheim objected or asked to see Kohlberg’s projections.182
Indeed, both Anderson and Twedell believed that it was “good” that Kohlberg’s
model was more conservative than management’s.183 Anderson testified that more
conservative projections mean that “you’re not so constrained from a covenant
standpoint.”184 Twedell also believed that, if Kohlberg’s projections were more
178 Id. 179 Id. 180 Id. 181 Hollander 696:2-16; Twedell 208:4-9; Anderson 253:23-254:4.182 Twedell 209:10-14; Opheim 311:10-24; Anderson 255:19-256:16.183 JX1144; Twedell 209:10-14.184 Anderson 254:5-23.
39
conservative, “no one would be disappointed with our results.”185 As Vaynberg
testified, from a buyer perspective, it is better to be more conservative in covenant
analyses shared with lenders “[t]o give yourself room if performance is worse than
expected.”186
C. KCAKE Sought to Avert a Covenant Breach
At the end of March and beginning of April, KCAKE negotiated with
the Lenders to try to obtain EBITDA addbacks under the DCL that would prevent a
covenant breach after closing. The Lenders, however, refused to grant any COVID-
19-related addbacks without also altering the basic terms of the DCL to make them
materially less favorable to KCAKE.
1. Antares
On March 30, Vince Di Grande, Senior Vice President at Antares,
called Hollander and told him that Antares was unwilling to accept the uncapped
EBITDA addbacks requested by Kohlberg unless there were other changes in the
financing terms that, Di Grande stated, would “get ugly,” including a higher interest
rate and additional equity to support higher liquidity requirements.187
185 Twedell 209:10-20.186 Vaynberg 299:8-299:21; see also Foster Report ¶ 30. 187 Hollander 650:9-651:22, 652:16-653:6; JX1552 at KOHLBERG00068165;
JX1218.
40
The next morning, Hollander—in an effort to work towards a closing—
emailed Di Grande that Kohlberg “would be willing to allow the COVID addback
to be capped at $35 million, as opposed to uncapped.”188 Less than two hours later,
Di Grande responded that “unfortunately a COVID addback for lost revenue (even
with a cap) would yield the same results,” including “a need for additional equity to
support liquidity, rate and other doc changes.”189 Antares’s policy at the time was
to reject all COVID-19 addbacks, regardless of size.190
Given Antares’s no-addbacks policy, the details of Kohlberg’s model
were “not important” to Antares “as far as making a decision about providing an
adjustment for [COVID-19].”191 Yet Antares, recognizing that Kohlberg’s model
projected “severe declines,”192 believed that the assumptions underlying Kohlberg’s
model were reasonable and had no doubt about Kohlberg’s good faith in preparing
its revised model.193
Indeed, as a lender to DecoPac itself, given the sales data from March
to May, Antares was “very concerned about [the] business.”194 DecoPac was “one
of the companies in [Antares’s] portfolio that’s had a more dramatic impact from the
188 JX1218; Hollander 653:12-656:14.189 JX1218; Hollander 653:12-656:14.190 Antares 239:24-241:8.191 Antares 286:14-19.192 Antares 165:17-166:2. 193 Antares 246:18-247:3, 283:19-22.194 Antares 270:6-271:11.
41
[COVID-19] situation.”195 Indeed, in April or May, when it became “clear that
[COVID-19] was impacting demand in the severity that it was,” Antares marked
DecoPac as “high” risk on its “COVID tracker.”196 As of November 2020, Antares
continued to designate DecoPac as high risk.197
2. Ares
On March 30, Hollander spoke with Ryan Brauns, Managing Director
of Ares.198 Brauns acknowledged that EBITDA addbacks were an open area in the
DCL, but conveyed that Ares would consider them only with an alternative deal
structure and with changes to key terms in the DCL, including a higher interest
rate.199 Brauns believed this would not be attractive to Kohlberg, and therefore did
not finalize the proposal with Ares’s Investment Committee.200 As with Antares,
Ares’s position was that it would not agree to any addbacks, regardless of size, for
lost revenue due to COVID-19.201
Ares understood that Kohlberg was asking for addbacks because
Kohlberg’s model showed that “from a COVID and compliance perspective … they
195 Antares 270:6-271:11.196 Antares 217:11-24. 197 Antares 217:25-218:3. 198 JX1191.199 JX1191; Hollander 664:7-21. A corporate representative for Ares testified that
these terms were less favorable to KCAKE than those in the DCL. Ares 171:2-19.
200 JX1191.201 Ares 168:25-169:11, 170:18-25.
42
would have a [covenant] breach under their first testing period.”202 Ares did not
believe that Kohlberg’s request was unreasonable.203 Internally, Ares personnel
mused contemporaneously that Kohlberg would “be in default after their first
compliance certificate,” which meant Ares would “accelerate [loan payments]
and … get free cakes every friday,”204 alluding to Ares taking control of the
collateral underlying its loans.
While Ares believed Kohlberg’s model seemed “draconian,”205 Ares
never took the position that Kohlberg’s model was not prepared in good faith.206 To
the contrary, Ares believed the model “definitely seemed directionally accurate.”207
Ares viewed Kohlberg, in providing the model, as being “very transparent” with
Ares.208
As a lender to DecoPac, Ares too was “becoming concerned about what
was happening at [DecoPac’s] business and what we should be thinking about …
the sustainability of historic earnings potential.”209 In particular, Ares had learned
that DecoPac’s weekly sales had declined as compared with the same week the
202 Ares 220:5-24. 203 Ares 221:12-20. 204 JX1131 (emphasis added). 205 Ares 213:4-18. 206 Ares 159:20-160:4. 207 Ares 204:19-205:10.208 JX1158 at ARES_SP_00008538; Ares 236:4-13.209 Ares 111:13-112:3.
43
prior year and was concerned “[b]ecause it could be an ongoing trend.”210 Ares
believed that DecoPac management’s reforecast was “too rosy” for Q3 and Q4, and
“didn’t accurately represent data that we thought would be reflective of how the
business would perform based on what we knew at this time.”211 Further, Ares did
not believe that management’s projected EBITDA was achievable.212
3. Owl Rock and Churchill
On March 31, Kohlberg emailed the updated model to the other two
lenders under the DCL, Churchill and Owl Rock.213 Hollander spoke with both
lenders later that afternoon and requested uncapped EBITDA addbacks related to
COVID-19.214
On April 1, a representative from Churchill emailed Hollander and
Forrey and advised that “our team feels like the risk profile of the transaction []
increased under this construct and thus the economics on which we could move
forward would need to be adjusted.”215 Churchill acknowledged that its proposal
was one that Kohlberg would “not be willing to accommodate,”216 given the
materially inferior terms that would be involved. Owl Rock also concluded that it
210 Ares 212:9-213:3.211 Ares 158:25-159:19.212 Ares 157:19-158:24. 213 JX1192; JX1224.214 Hollander 751:17-752:4.215 JX1261. 216 Id.
44
would not be able to agree to Kohlberg’s proposal without reopening the DCL and
changing the deal terms.217
Churchill believed that it was reasonable for Kohlberg to ask for
covenant relief or addbacks to avoid a covenant breach.218 It was clear to Churchill
that, based on Kohlberg’s model, if Kohlberg closed without securing EBITDA
addbacks or other covenant relief, the financial covenants would be breached by the
end of the year.219
Around mid-March, Owl Rock was concerned about DecoPac’s
business because it was tied to parties and graduations.220 At the time it received
Kohlberg’s model, Owl Rock believed that “there was a significant risk of funding
into a covenant breach.”221
Owl Rock has not provided addbacks related to COVID-19 in any of
its deals, except in one deal that was led by another lender, in which Owl Rock did
not have sufficient control to refuse them.222 Churchill has not provided addbacks
related to COVID-19 in any other deals.223
217 Hollander 664:15-665:4. 218 Churchill 119:9-19.219 Churchill 117:22-118:3.220 Owl Rock 174:9-176:3.221 Owl Rock 204:2-205:8.222 Owl Rock 178:3-11.223 Churchill 104:14-24.
45
D. KCAKE Pursued Alternative Financing, but the Markets Were Frozen
On April 1, after having been refused by all of the Lenders, Hollander
spoke twice to Mantel.224 On the first call, Hollander advised Mantel that financing
on terms no less favorable than those in the DCL was unavailable and asked whether
Kohlberg should seek alternative financing.225 On the second call, Mantel instructed
Kohlberg to do so.226
That same day, Hollander contacted Houlihan Lokey to research the
debt market and assess the availability of alternative debt financing.227 Hollander
knew that Houlihan Lokey is in the business of arranging debt and talks to lenders
on a daily basis, and he believed it would be a reliable, knowledgeable source to
assess the market.228
On April 2, Hollander contacted Madison Capital, which had sought to
be part of the original group of lenders,229 to ask if it would be willing to provide
financing for the transaction, and whether it would provide EBITDA addbacks
related to COVID-19.230 Madison Capital responded that it would not provide
224 Hollander 757:9-12; Mantel 195:10-22.225 Hollander 745:4-746:3; Mantel 195:10-22.226 Mantel 199:2-11; Hollander 745:4-746:3.227 Hollander 738:9-739:11; JX1265 at HL_00000124. 228 Hollander 738:9-739:11. 229 Marcus Meyer Deposition Transcript (“Madison Capital”) 27:7-29:13.230 Hollander 739:12-740:12, 744:19-746:16; Madison Capital 34:10-15.
46
financing on terms no less favorable than those in the DCL, and would not entertain
addbacks related to COVID-19.231 In fact, the firm had hit the pause button on new
deals entirely.232
On April 3, Houlihan Lokey sent its market assessment to Hollander.233
Houlihan Lokey concluded that “there is a high degree of execution uncertainty.”234
Among other things, Houlihan Lokey determined that to secure financing, KCAKE
would have to provide more equity than under the DCL; its revolving line of credit
would be limited to $20 million instead of the $40 million in the DCL; the interest
rate on the loan would be between 62.2% and 93.2% higher than in the DCL;
KCAKE would be required to amortize between 3% and 5% of the principal amount
of its debt in each year, which was not required under the DCL; and KCAKE would
be required to place in escrow four quarters of interest and mandatory amortization
expense, which was not required under the DCL.235
Consistent with Houlihan Lokey’s conclusions, each lender observed
that market conditions had worsened substantially by late March and early April
2020, and that, to the extent credit was available at all, the terms would be materially
worse than those in the DCL. Ares observed that “the market had moved materially
231 Hollander 750:9-751:16; Madison Capital 38:24-39:18.232 Hollander 751:10-16; Madison Capital 34:16-20, 38:14-23; JX1273.233 JX1282.234 JX1282 at KOHLBERG00064592.235 JX1282 at KOHLBERG00064593; DCL at A-1; Foster Report ¶ 100.
47
from an economic standpoint” and did not believe that Kohlberg could have obtained
the same terms as in the DCL given market conditions in late March and April.236
Antares did not “believe that during that time period that we or anybody else were
signing new commitment papers.”237 Churchill testified that Kohlberg would not
have been able to get financing on the same terms as those in the DCL during that
time, and Churchill did not recall signing any new deals in Q2 2020.238 Owl Rock
observed that, after COVID-19 hit, “the financing market dried up,” and it is unlikely
that, at the end of March, Owl Rock would have agreed to a deal on the same terms
as it had on March 6.239
Madison Capital’s corporate representative likewise testified that, as of
early April, there was “severe dislocation” and “major pullback” in the credit
markets, as well as “shortage of transactions” and “increased pricing,” which was
“very, very disruptive.”240 According to Madison Capital, in light of this
dislocation, Kohlberg would not have been able to obtain financing on terms no less
favorable than those in the DCL from any lender.241
236 Ares 224:20-226:3.237 Antares 263:6-264:8. 238 Churchill 137:19-24, 167:4-23. 239 Owl Rock 170:3-5, 187:9-15, 188:4-189:11. 240 Madison Capital 34:21-35:5.241 Madison Capital 39:19-40:14.
48
It is undisputed that alternative financing was unavailable on terms no
less favorable than those of the DCL. Plaintiffs’ banker, Vaynberg, testified that, as
of April 1, “lenders were not lending, period,” and Kohlberg would not have been
able to find alternative financing on terms no less favorable than those in the DCL.242
According to Vaynberg, the debt markets remained frozen until August or
September 2020.243 Plaintiffs recognized this in their submissions to this Court:
Snow Phipps represented in its initial Verified Complaint that “[g]iven the current
volatility in the debt financing market, the loss of the loans available under the
[DCL] may effectively mean the loss of the ability to sell DecoPac Holdings Inc. at
all, let alone at the agreed purchase price of $550 million.”244
On April 5, Hollander called Mantel and told him that alternative
financing was not available on terms no less favorable than in the DCL.245 Mantel
was not surprised to hear that Kohlberg was unable to find alternative debt financing
given his understanding of the debt markets at that time.246 During the call,
Hollander also told Mantel that DecoPac had suffered an MAE and breached its
Ordinary Course covenant.247
242 Vaynberg 272:4-6, 296:4-15.243 Vaynberg 262:24-263:3. 244 D.I. 1 (Compl.) ¶ 92; see also D.I. 1 (Mot.) ¶ 4 (stating that the expiration of the
DCL on May 12 “may make it impossible for KCAKE to close the SPA”). 245 Mantel 209:4-23.246 Mantel 210:12-211:3.247 Hollander 795:22-796:10; Mantel 211:13-24.
49
E. DecoPac’s Performance Cratered in March and April
1. Mid-to-Late March: Rapid Declines
Trial will show that the data and information that DecoPac shared with
Kohlberg in mid-to-late March offered only a glimpse into the dramatic impact of
COVID-19. The true extent was revealed only through discovery in this action.
On March 18, a representative of Kroger, DecoPac’s third-largest
customer in 2019,248 informed DecoPac that Kroger was “not taking special orders,
it’s all about thaw and sell /retail ready where ever possible,” and that “par-baked
breads” were “the one stand out that is showing good demand through all of this.”249
The Kroger representative added that “as it stands now I cannot imagine graduation
celebrations being [a] significant event this year.”250
On March 19, DecoPac began preparing a cash forecast as a liquidity
check to “make sure that we have adequate funds on hand.”251 In connection with
those efforts, DecoPac also began considering what it could draw from its revolver
and “still be in compliance with covenants.”252 Opheim provided liquidity analyses,
one of which calculated a sales decline and indicated that DecoPac would be
spending of cash over a quarter, which Opheim testified at his deposition
248 SPA at KCAKE00053745.249 JX0887. 250 Id.251 JX0909 at DEC000114076.252 JX0909 at DEC000114075.
50
is “a significant … cash burn that I would not like to see.”253 This analysis showed
that DecoPac would be in a negative cash flow position by June.254
DecoPac also made numerous changes to its operations in response to
the pandemic. Among other measures, DecoPac suspended business-related travel,
banned visitors, created a thirty-minute gap between first and second shift start
times, and allowed employees to work from home.255
On March 21, Anderson reached out to the President and CEO of the
International Dairy Deli Bakery Association (“IDDBA”), to inform him that
DecoPac would not be attending the group’s annual convention in Indianapolis,
because, among other reasons, DecoPac was “being pushed by our owners to look
at where we can cut costs, due to the slow down.”256 Internally, Anderson told
Gardner that “[s]upermarkets will be stretched for the foreseeable future,” and “[t]he
253 Opheim 181:4-7.254 JX0932. 255 JX0888 at DECO00120613.256 JX0946. Anderson testified that he was not being truthful in this email and was,
in fact, feeling no such cost-cutting pressure. See Anderson 211:3-10. Contemporaneous DecoPac emails confirm, however, that the Company viewed this cancelation as a necessary savings measure. See JX0982 (March 23 email from Anderson stating, “I pulled the plug on all IDDBA spending this weekend. Once COVID-19 is behind us, we can revisit these spends.”). DecoPac also cited the IDDBA spending cut as an offset to revenue declines in talking points for a call with one of its lenders, Antares. See JX1331 at DECO00227184.
51
last thing[] they are going to want to do is to go to a convention center with a bunch
of people.”257
Per Snow Phipps’s directive, DecoPac began implementing numerous
additional cost-cutting measures. On March 23, Anderson sent an email to
DecoPac’s Vice President of Licensing and Chief Commercial Officer, with the
subject line “Spending.”258 Anderson wrote that “the most prudent thing to do, given
the situation we are in,” was to “hit the pause button immediately on all outside
consultants,”259 and further instructed to “just tell them the faucet is off until further
notice.”260
That same day, Twedell wrote to Mantel that DecoPac was “preparing
to advance under the revolving credit agreement in an abundance of
caution.”261 Per Twedell, the company had not drawn on its revolver for non-
acquisition reasons since “early days post [Snow Phipps] acquisition.”262 DecoPac
sought advice on how to structure the draw, noting that they had “never paid a
breakage fee for any revolver,” though they were anticipating having to do so now.263
Later that day, DecoPac made its borrowing request for of its
257 JX0941 at DECO00296475.0001. 258 JX0982.259 Id. 260 Id. 261 JX0986 at DECO00049396.262 JX0986 at DECO00049393.263 JX0986 at DECO00049392.
52
revolving credit facility.264 This request was the largest one-time
revolver draw DecoPac had ever made,265 and the only one that was ever done
without a specific business or acquisition purpose in mind.266 DecoPac did not
inform Kohlberg that it intended to borrow these funds or seek its consent to do so;
rather, DecoPac told Kohlberg about the draw after the fact, during a call on March
27.267
On the morning of March 24, DecoPac implemented a number of
operational changes in an attempt to manage excess inventory in light of
significantly decreased demand. Among the items marked for “immediate action”
were: (1) pulling back on orders of certain large-size products; (2) discussing with
vendors a halt in production of all open orders (except graduation orders) “until
further notice”; (3) asking vendors to hold for 2-3 weeks all shipments that were
ready to ship; and (4) “not plac[ing] any new open orders unless it is a new item for
catalog launch.”268 Anderson further determined to avoid “contacting our customers
and asking them things that may cause them to re-think their planned orders.”269
Twedell thought this “ma[de] perfect sense.”270
264 JX0985 at DECO00049360-61.265 Anderson 379:2-4.266 Anderson 380:17-381:19.267 JX1153. 268 JX1022 at DECO00112197.269 JX1022 at DECO0012196.270 Id.
53
On March 25, DecoPac prepared a response to Kohlberg’s March 24
request for updated weekly sales and order data and a monthly 2020 reforecast.
While DecoPac carried significantly less debt at that point than it would under
Kohlberg’s ownership, Opheim also raised the possibility of including a calculation
to probe compliance with DecoPac’s (lower) covenants,271 though he advised
Anderson, Twedell, Mantel, and Somers that he “would expect that we can do a
calculation to addback the impact of Covid-19.”272 Opheim testified that, as of this
time, asking for such an addback from DecoPac’s lenders “would appear
reasonable.”273 Opheim also testified that, if the Company were to come within even
5% of violating its covenants (that is, a 5% drop in revenue would cause a covenant
breach), he “would be concerned.”274 Twedell collected and circulated detailed
order and sales data, but suggested that, while some of it was “responsive” to one of
Kohlberg’s questions, “it may just be more information than we want to share.”275
When DecoPac sent the update to Kohlberg, it omitted the more detailed data to
which Twedell referred.276
271 JX1046; Opheim 261:19-267:17.272 JX1046.273 Opheim 261:19-262:14.274 Opheim 175:8-21. Opheim further testified that if DecoPac were to violate its
covenants, it “would be in default” to its lenders. Opheim 169:22-170:3.275 JX1039.276 Compare JX1039 at DECO00000988, DECO00001001, with JX1058 at
KOHLBERG00005973, KOHLBERG00006003.
54
On March 27, after DecoPac’s management discussed DecoPac’s
reforecast with the Kohlberg deal team, Anderson updated Vaynberg, Mantel, and
Somers that “Seth [Hollander] said they are working with Lenders and said their
assumptions they were presenting were more conservative, which is good.”277
Anderson also texted Twedell: “I thought the call with Kohlberg went well and by
all accounts they are working to close as expected […] if we get this done […] we
will be soooo lucky on timing. If we hadn’t signed the SPA, we would not sell this
puppy for 9-12 months.”278 Twedell responded: “Completely agree.”279
The same day, Anderson sent Twedell an article about a second wave
of the virus affecting factories in China.280 Anderson instructed that DecoPac should
not merely place a hold on its orders from suppliers, but should also cancel some, as
“we have too much inventory [] now due to reduced sales” and “[w]e don’t know
when we will pick back up.”281 Anderson was “adamant that we get aggressive
immediately to cut back on orders coming in.”282
On March 31, DecoPac provided Kohlberg its second weekly update
on sales and orders. The Company’s regular orders, regular sales, and total sales
277 JX1144. 278 JX1145 at DECO00300839. 279 JX1145 at DECO00298316. 280 JX1140.281 Id.282 Id.
55
were down and versus the prior year.283 Vaynberg suggested
that DecoPac include exclusions in this update to “blunt[] the impact of the regular
orders falling off.”284 Anderson agreed and said doing so was “a swing of .”285
2. April: Free-Fall
On April 1, Gardner told Anderson that Walmart was “re-evaluating
summer/fathers day/patriotic [orders] due to ‘extreme shifts in demand for cakes
right now.’”286 DecoPac was “asked to review quantities, shipment dates, and
number of waves coming in and come up with options to reduce or move out.”287
On April 4, DecoPac provided a third update to Kohlberg, showing that
regular orders, regular sales, and total sales were down , and
versus the prior year.288 Anderson suggested that he “would put the spin that number
of regular orders are up, with basically flat $, which tells you stores are beginning to
see some traffic in the bakery.”289 The same day, Target “turn[ed] … off” its special
order program.290 Sam’s Club also delayed certain orders and asked DecoPac for
help “design[ing] smaller cake formats.”291
283 JX1210 at DECO00104494, DECO00104498.284 JX1214.285 Id.286 JX1256. 287 Id. 288 JX1298 at DECO00104258, DECO00104263.289 JX1299.290 JX1294. 291 JX1307.
56
On April 7, Anderson circulated proposed talking points to Mantel,
Somers, Twedell, and Opheim in response to an inquiry from Antares regarding the
impact of the pandemic on DecoPac.292 According to Anderson’s talking points, the
Company had cut costs in part by: (1) reducing hours in customer service and the
warehouse; (2) suspending all new hires (except for the Lucks Plant Manager); and
(3) placing on hold “all non-essential” capital expenditures.293
That same day, DecoPac received a request from one of its customers,
PriceSmart, to extend payment terms until December.294 On April 9, Gardner told
his colleagues that he had “gotten a few of these requests, and unfortunately we are
in a similar situation as they are in terms of impact on business.”295 He further stated
that the Company “need[ed] to be cautious in [its] approach at this point, being
unsure of when the market for special order cakes will come back enough to build
back sales.”296
On April 13, DecoPac provided Kohlberg with another weekly update
on orders and sales.297 Regular orders, regular sales, and total sales were down
292 JX1331.293 Id. 294 JX1343.295 Id. 296 Id.297 JX1365.
57
, and year-over-year.298 A day later, DecoPac reached out to
its insurer to initiate a business interruption claim.299
VIII. KCAKE Validly Terminated the SPA on April 20
Snow Phipps filed this lawsuit on April 14. On April 20, KCAKE
delivered a notice of termination to Plaintiffs.300 KCAKE stated that the Company
had “breached representations, warranties and covenants set forth in the [SPA],
including its representations and warranties under Sections 3.9(a) (Absence of
Certain Changes) and 3.21 (Customers and Suppliers) and its covenants under
Section 6.1 (Conduct of Business Prior to Closing).”301 KCAKE thus terminated the
SPA pursuant to Section 8.1(d).302 KCAKE further reiterated that, “notwithstanding
our efforts to arrange for alternative financing, the full proceeds of the Debt
Financing have not been and will not be funded on the terms set forth in the [DCL]
to fund the payment of the Estimated Closing Payment at Closing.”303
KCAKE’s valid termination of the SPA resulted in the immediate,
automatic termination of the DCL and the Lenders’ commitments and undertakings
thereunder.304 The valid termination of the SPA also resulted in the immediate,
298 JX1365 at DECO00024046.299 JX1384.300 JX1390. 301 Id. 302 Id. 303 Id. 304 DCL § 15.
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automatic termination of the ECL and Limited Guarantee, and the Kohlberg Funds’
obligations thereunder.305
On May 5, Plaintiffs filed their Amended Complaint. That Complaint
asserted, among other things, a claim for breach of the implied covenant of good
faith and fair dealing,306 and for damages “in an amount to be determined at trial.”307
In its ruling on Defendants’ Motion to Dismiss, the Court dismissed the former claim
and ruled that any alleged damages would be limited to the Termination Fee.308 The
Court also dismissed Plaintiffs’ breach of contract claim in part, ruling that it was
not reasonably conceivable that KCAKE failed to provide prompt notice to Plaintiffs
of its pursuit of Debt Financing and lender negotiations.309
On June 18, Defendants filed their Answer, Defenses, and Verified
Counterclaims, seeking, among other things, a declaration that KCAKE validly
terminated the SPA and that Plaintiffs are precluded from seeking specific
performance of the SPA.
IX. The Pandemic Enters its Darkest Stage
As of April 20, when KCAKE validly terminated the SPA, DecoPac
had experienced or was reasonably expected to suffer an MAE. KCAKE’s grave
305 ECL § 3; Limited Guarantee § 8.306 D.I. 34 (Am. Compl.) at Count II. 307 Id. at 53. 308 D.I. 221 (Tr. Ruling) at 28, 46-47, 50. 309 Id. at 24-25.
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concerns regarding DecoPac’s business have been borne out by DecoPac’s ongoing
struggles as a result of COVID-19. Through October, DecoPac’s sales are down
year-to-date compared to 2019 and compared to its original 2020
budget.310 The company’s EBITDA shortfalls are even more severe, at year-
to-date compared to 2019 and compared to the original 2020 budget.311 The
Company’s October financials indicate that DecoPac cut its operating expenses by
, as compared to the previous year.312
DecoPac recently conducted a reforecast for Q4,313 demonstrating that
its March reforecast (which projected no impact from COVID-19 after June) was
completely unrealistic. The reforecast projects that sales for 2020 will be down
compared to 2019 and compared to the original 2020 budget.314 In
terms of EBITDA, the Q4 reforecast projects a decline of compared to 2019
and compared to DecoPac’s 2020 budget.315
Trial will show that these negative trends were and are likely to persist
given the pandemic’s continuing severity as well as lasting industry changes caused
by the pandemic. The onset of winter is making outdoor celebrations impossible in
310 See JX1751 at DECO00303354; JX1515.311 See JX1751 at DECO00303354; JX1515. 312 JX1751 at DECO00303354.313 JX1717.314 See JX1717; JX1515; JX1120 at KOHLBERG00067976.315 See JX1717; JX1515; JX1120 at KOHLBERG00067976.
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much of the United States. On December 9, the United States saw its pandemic-
related daily death toll exceed 3,000 for the first time and “more new cases and
hospitalizations than ever before.”316 Federal data indicate that “[m]ore than a third
of Americans live in areas where hospitals are running critically short of intensive
care beds.”317 Nine months into the pandemic, the United States is just now seeing
its highest infection, hospitalization, and death figures. Terrifyingly, experts warn
that “[t]he worst is yet to come.”318
ARGUMENT
I. KCAKE VALIDLY TERMINATED THE SPA BECAUSE THE CLOSING CONDITIONS WERE NOT MET
A. The Company and Sellers Breached Their Representation That There Would Not Be an MAE
KCAKE was not obligated to close the DecoPac transaction unless
“[e]ach of the (i) representations and warranties of the Company set forth in Section
3.9(a) [were] true and correct in all respects when made as of the date of this
316 Sarah Mervosh, et al., “‘Numb’ and ‘Heartbroken,’ the U.S. Confronts Record Virus Deaths,” N.Y. Times (Dec. 10, 2020), https://www.nytimes.com/2020/12/10/us/coronavirus-death-record.html (Menken Decl. Ex. A).
317 Lauren Leatherby, et al., “‘There’s No Place for Them to Go’: I.C.U. Beds Near Capacity Across U.S.,” N.Y. Times (Dec. 9, 2020), https://www.nytimes.com/interactive/2020/12/09/us/covid-hospitals-icu-capacity.html?action=click&module=RelatedLinks&pgtype=Article (Menken Decl. Ex. B).
318 Mervosh, et al. (Menken Decl. Ex. A).
61
Agreement and … as of the Closing Date as if remade on such date.”319 The
Company represented and warranted in Section 3.9(a) that “since December 28,
2019, there has not been any event, change, circumstance, occurrence, effect, state
of facts, development or condition that has had, or would reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect.”320
The Company’s representations under Section 3.9(a) of the SPA were
false as of April 20, when KCAKE terminated the SPA, and remained false as of
May 4, which would have been the latest “Closing Date” contemplated under the
SPA.321 Thus, KCAKE was not obligated to close and validly terminated the
transaction.
1. An MAE Was Reasonably Expected As of April 20
Significant declines in a seller’s business between signing and closing
“threaten the fundamentals of the deal.” Akorn, Inc. v. Fresenius Kabi AG, 2018
WL 4719347, at *47 (Del. Ch. Oct. 1, 2018), aff’d, 198 A.3d 724 (Del. 2018).
Merger agreements address this issue through MAE clauses, which allow a buyer to
walk away if there has been an adverse, material change to the seller’s business that
will persist in a “durationally-significant manner.” Id. at *52-53, *58, *60. When
assessing the severity of the seller’s financial decline, this Court considers metrics
319 SPA § 7.1(a).320 SPA § 3.9(a).321 D.I. 34 (Am. Compl.) ¶¶ 89-90.
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such as revenue and EBITDA, and compares the company’s performance against
prior periods, such as corresponding quarters of previous years. See id. at *53.
This Court need not grapple with whether DecoPac ultimately suffered
an MAE based upon its materially diminished year-to-date performance, which is
well below both 2019 levels and DecoPac’s own forecasts (through October,
EBITDA is down roughly and , respectively). Nor need this Court resolve,
looking forward from now, whether DecoPac is reasonably expected to suffer an
MAE given the pandemic’s persistence, recent surge, and anticipated further
devastation. Rather, the only relevant inquiry is whether an MAE was reasonably
anticipated as of the April 20 termination date, excluding hindsight bias in either
direction, based upon contemporaneous knowledge and expectations.
Defendants will demonstrate at trial that, as of April 20, COVID-19 was
reasonably expected to have a Material Adverse Effect on DecoPac.322 Joseph
Welsh, an expert with over forty years’ experience in the grocery industry, will
testify regarding the severe declines in DecoPac’s sales in the weeks preceding
KCAKE’s termination of the SPA, which were reasonably expected to persist, as
well as widespread, long-lasting industry changes caused by COVID-19 that
DecoPac is particularly ill-suited to weather. Specifically, the pandemic has caused
significant changes in the ways that consumers shop for groceries, including online
322 SPA § 1.1.
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ordering and curbside pick-up,323 as well as changes in grocery operations, such as
a transition from custom cakes (the kind that incorporate DecoPac’s products),
which require greater on-site preparation, to thaw-and-sell cakes, which do not.324
In recognition of this trend, grocery stores have significantly decreased skilled labor
in bakeries.325
DecoPac was particularly disadvantaged in these areas versus its
competitors given its narrow product offerings.326 Cakes that incorporate DecoPac
decorations are typically custom cakes ordered at in-store bakery counters, which
customers are now far more reluctant to approach.327 Relatedly, thaw-and-sell
cakes—a business in which DecoPac does not meaningfully participate—have seen
tremendous growth since March, at the cost of custom cakes, in part due to customer
preference and in part because they are less reliant on shrinking skilled labor in in-
store bakeries.328 Welsh will testify that, as of April 2020 and considering these
factors in the aggregate, it would have been reasonable to expect a more than 30%
decline in DecoPac’s sales through 2020 and 2021.329
323 Welsh Report ¶ 65. 324 Id. ¶¶ 55, 66. 325 Id. ¶ 55. 326 Id. ¶ 41. 327 Id. ¶ 24. 328 Id. ¶¶ 20, 66; Gardner 60:2-19. 329 Welsh Report ¶¶ 102, 106.
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Additionally, as of April 2020, it was reasonable to expect that the
adverse impact of COVID-19 would be durationally significant. Dr. Bill Hanage,
Associate Professor of Epidemiology at Harvard’s T.H. Chan School of Public
Health, who specializes in the epidemiology of infectious disease, will testify that it
was reasonable to expect the proliferation of COVID-19, and its attendant social
distancing practices, to persist well into 2021.330 Welsh will further testify that the
industry changes wrought by COVID-19—including, for example, shifts away from
skilled labor in bakeries—are “sticky” and likely to persist long after the pandemic
subsides.331 As a result, it was reasonable to expect that DecoPac’s performance
would suffer long into the future.332
As discussed above, “the events that gave rise to” DecoPac’s
precipitous declines “were unexpected.” See Akorn, 2018 WL 4719347, at *61.
Dr. Hanage will testify that, as of March 6, KCAKE could not have anticipated the
subsequent progression of COVID-19 in the United States or its negative effect on
DecoPac.333 Indeed, when conducting diligence for the DecoPac transaction,
Kohlberg focused on potential risks to DecoPac’s supply chain in China and general
330 Hanage Report ¶¶ 127-28, 136. 331 Welsh Report ¶ 56. 332 Id. 333 Hanage Report ¶¶ 9(c), 26-27.
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economic conditions, without any appreciation of the future calamity of COVID-19
and the resultant societal changes throughout our nation.
2. The Parties Did Not Negotiate Any MAE Carveout for COVID-19
The burden rests with Plaintiffs to show that the effect of the COVID-
19 pandemic “fell within at least one exception” to the MAE definition. AB Stable
VIII LLC v. Maps Hotels & Resorts One LLC, 2020 WL 7024929, at *55 (Del. Ch.
Nov. 30, 2020). Plaintiffs cannot meet that burden here.
“COVID-19” is not among the MAE carveouts that Plaintiffs secured
here. The SPA also lacks any carveouts for “pandemics,” “epidemics,” “diseases,”
or “health crises.” Nor did the parties agree to any other common carveouts that
might potentially capture COVID-19, such as for “natural disasters,” “acts of God,”
or related “calamities.” Cf. id. at *57.
Had Plaintiffs wished to demand any such carveouts, they had ample
precedent at their disposal. A March 2020 analysis334 of more than 1,000 MAE
provisions, spanning more than a decade, demonstrated that 8.3% included a
carveout “specific to the outbreak of a contagious disease” (as examples,
334 Matthew Jennejohn, Julian Nyarko & Eric Talley, “Coronavirus is Becoming a ‘Majeure’ Headache for Pending Corporate Deals,” Columbia Law School’s Blog on Corporations and the Capital Markets (Mar. 19, 2020), https://clsbluesky.law.columbia.edu/2020/03/19/coronavirus-is-becoming-a-majeure-headache-for-pending-corporate-deals/ (Menken Decl. Ex. C).
66
“pandemics” or “epidemics”), while an additional 31.6% included a carveout that
would “arguably have sufficient breadth and scope” to capture COVID-19 (as
examples, “acts of God” or “calamities”). Thus, as graphically represented in that
article, roughly 40% of MAE provisions include a specific or umbrella exclusion
that would capture COVID-19:
The absence of any pandemic exclusion in the SPA is no accident. On
March 4, Plaintiffs proposed an eleventh-hour revision to the MAE definition to
carve out “pandemics” and “epidemics.”335 Kohlberg flat-out refused,336 and its
counsel explained that Kohlberg simply “could not accept the epidemic/pandemic
335 JX0669 at KCAKE00024629, KCAKE00024737-38. 336 JX0746 at KOHLBERG00053980-81.
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risk.”337 Hollander likewise told Plaintiffs’ banker that Kohlberg “absolutely cannot
give” any pandemic carveout.338 Kohlberg prevailed on this negotiating point; the
final SPA contained no such carveout, and Plaintiffs retained the risk.
Plaintiffs should be held to their agreement. Plaintiffs’ New York and
Delaware counsel recently urged that precise result in AB Stable, arguing that the
sellers there should be bound by their choice “not to negotiate for a [pandemic]
exception in the SPA to transfer the risk to Buyer.” AB Stable VIII LLC v. Maps
Hotels & Resorts One LLC, C.A No. 2020-JTL, Defts’ Pretrial Br. [Public], at 83
(Del. Ch. Aug. 26, 2020);339 see also id., Defts’ Op. Post-Trial Br. [Public], at 100-
101 (Del. Ch. Sept. 21, 2020) (“The omission of an exception for ‘epidemics’ and
‘pandemics’ was no oversight. […] Seller deliberately chose not to include an
exception for ‘epidemics’ or pandemics’ in the SPA.”).340 Plaintiffs should be
bound to that same election here.
Nor can Plaintiffs backdoor their way into the carveout they failed to
obtain. Plaintiffs contend that generic carveouts in the MAE definition, such as for
“general economic or political conditions” or “changes in laws,” somehow capture
COVID-19. But their own counsel recently argued (correctly) in AB Stable that a
337 Martinelli 144:24-145:4. 338 JX0751; Vaynberg 250:12-17. 339 Menken Decl. Ex. D. 340 Menken Decl. Ex. E.
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seller cannot sidestep an MAE caused by COVID-19 by shoehorning it into generic
MAE exclusions, including carveouts for (i) changes in “applicable Laws” or
(ii) changes in “general economic, business, regulatory, political or market
conditions.” AB Stable, Defts’ Post-Trial Ans. & Reply Br. [Public], at 51 (Del. Ch.
Oct. 16, 2020).341 Allowing sellers to do so would “impermissibly render the MAE
provision a nullity,” id., Defts’ Op. Post-Trial Br. [Public], at 98, and render
superfluous the pandemic/epidemic carveouts in every M&A agreement containing
them, in contravention of foundational principles of contractual construction. See,
e.g., Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010) (“We will read a contract as
a whole and we will give each provision and term effect, so as not to render any part
of the contract mere surplusage. We will not read a contract to render a provision or
term meaningless or illusory.”) (internal quotation marks & citations omitted).
3. Plaintiffs Cannot Show That Declines in DecoPac’s Sales Were Caused by Changes in Law
As noted above, “[a] party seeking to take advantage of an exception to
a contract is charged with the burden of proving facts necessary to come within the
exception.” AB Stable, 2020 WL 7024929, at *51. Plaintiffs’ failure to secure a
pandemic carveout should be dispositive; and, in any event, they cannot meet their
burden as to any of the SPA’s generic MAE carveouts.
341 Menken Decl. Ex. F.
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Plaintiffs primarily rely on the MAE exclusion for the impact of
“changes in any Laws, rules, regulations, orders, enforcement policies or other
binding directives issued by any Governmental Entity, after [March 6].”342
Plaintiffs cannot come close to demonstrating that DecoPac’s decline came from
“binding directives” (whether laws, orders, or otherwise), rather than the pandemic
itself.
Plaintiffs’ expert, Professor Steven Davis, has opined that government
orders somehow caused virtually all—up to 88%—of the shortfall in DecoPac’s
sales from March 8 to May 30, 2020 relative to the same period in 2019. That is
facially wrong. No government edict barred Americans from shopping at grocery
stores, which remained open as essential business, or otherwise purchasing
DecoPac’s products. And DecoPac’s performance began to crater before the
enactment of stay-at-home orders:
342 SPA § 1.1 (emphasis added).
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As Plaintiffs’ own counsel acknowledged in AB Stable, it is incoherent to invoke an
MAE carveout for changes in laws where the target’s decline “predated the COVID-
related restrictions.” AB Stable, Defts’ Post-Trial Ans. & Reply Br. [Public], at
52.343
Professor Davis’s analysis is fundamentally flawed in numerous other
respects. Dr. Anup Malani, a professor at the University of Chicago School of Law
with nearly two decades of experience researching law and economics and health
economics and policy, will testify as to methodological and other errors plaguing
Professor Davis’s conclusions, including that: Professor Davis’s regression model
343 Menken Decl. Ex. F.
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improperly includes the effect of government orders that could not possibly apply to
DecoPac’s customers, like restaurant closure orders and school closure orders;
Professor Davis’s model would show that 2020 government orders had a statistically
significant impact on 2019 sales, under a “placebo” test, which of course would be
impossible; and Professor Davis impermissibly implies causation from correlation.
Professor Malani will testify that when certain methodological errors
are corrected, Professor Davis’s analysis shows a drastically reduced impact from
government orders. Professor Davis’s conclusions also run contrary to recent
academic literature on this subject, which concludes that most behavioral changes
associated with the pandemic are voluntary, and not driven by government orders.
Plaintiffs will thus be unable to meet their burden to prove that
DecoPac’s sales declines were somehow attributable to changes in laws.
4. DecoPac Has Been Disproportionately Impacted Compared to Other Participants in the Grocery Industry
If Plaintiffs could somehow fit the pandemic into a generic MAE
carveout (and they cannot), the MAE closing condition still fails because COVID-
19 was reasonably expected to have “a materially disproportionate effect” on
DecoPac “relative to other comparable entities operating in the industry in which the
[it] operates.”344
344 SPA § 1.1.
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DecoPac is a supplier of ingredients and products to grocery stores, and
within them, in-store bakeries.345 Welsh will explain at trial that the retail
supermarket industry has flourished during the pandemic for several reasons,
including decreased dining in restaurants and increased in-home cooking.346
DecoPac’s collapse is thus at odds, even directionally, with the industry in which it
operates. Additionally, many of DecoPac’s direct and indirect competitors in the
bakery space are far better positioned than DecoPac to withstand the industry
changes the pandemic has caused because they have more diversified product
offerings, which include thaw-and-sell products and retail products, whereas
DecoPac’s product offerings are intended for custom cakes that have experienced,
and will continue to experience, significantly decreased demand.347 In the in-store
bakery space in particular,348 cakes in general have performed worse than items like
bread, croissants, cookies, and brownies, and decorated cakes have performed even
worse than other types of cakes.349
345 Welsh Report ¶¶ 1, 19, 39; see also Wein 55:9-15, 117:16-25. 346 Welsh Report ¶ 51. 347 Id. ¶¶ 42-50, 55, 58-66, 70-71.348 John Gardner, DecoPac’s VP of Sales, testified that DecoPac operates in the in-
store bakery industry. Gardner 19:17-21. 349 Welsh Report ¶¶ 67-70.
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DecoPac has thus been disproportionately impacted by the pandemic,
both in the grocery industry broadly and in the in-store bakery space more narrowly.
That fact further precludes Plaintiffs from invoking any MAE carveout.
* * *
Because Plaintiffs’ representations under Section 3.9(a) were false as
of April 20 and remained false as of May 4, KCAKE had no obligation to close and
validly terminated the SPA.
B. Plaintiffs Breached Their Representation Regarding the Company’s Top Ten Customers
Under Section 3.21 of the SPA, Plaintiffs also represented that since
December 31, 2019, none of DecoPac’s ten largest customers350 had stopped or
materially decreased the rate of business done with DecoPac, nor had any notified
or threatened in writing that they intended to do so. The falsity of this representation
as of April 20 and May 4 amounts to an MAE, and thus relieves KCAKE of any
obligation to close under Section 7.1(a) of the SPA.
DecoPac saw significant year-over-year sales declines for its top
customers in March and April relative to 2019: Total sales to DecoPac U.S.’s351 top
350 Together, these ten largest customers accounted for of DecoPac’s sales in 2019. Welsh Report ¶ 84.
351 “DecoPac U.S.” refers to DecoPac’s headquarters in Anoka, which represents the vast majority of DecoPac’s sales. See Welsh Report ¶ 20 & n.15; JX0290 at KOHLBERG00090488.
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customers declined in March and in April.352 Moreover, virtually all
of DecoPac U.S.’s top customers individually saw significant declines in March and
April sales relative to 2019. For example, Walmart sales declined in March
and in April.353 Other top customers saw even more significant declines:
Relative to 2019, sales to Albertsons Companies declined in March and
in April, and sales to HEB declined in March and in April.354
The figure below shows monthly changes in year-over-year sales for DecoPac U.S.’s
top customers:
352 Welsh Report ¶ 83, Ex. 4. 353 Id. 354 Id.
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Welsh will testify at trial that, given the drastic declines for top
customers in March and April, and lasting industry changes caused by the pandemic,
it would have been reasonable as of April 2020 to expect that sales to these customers
would remain depressed for a prolonged period and to a significant degree.355
Indeed, the negative trends have largely persisted for almost all of DecoPac’s top
customers.
The falsity of Plaintiffs’ Top-Ten Customer representation thus
provides another, independent basis for KCAKE’s valid termination of the SPA.
C. The Company Breached Its Ordinary Course Covenant
KCAKE also was not obligated to close unless Plaintiffs “performed
and complied in all material respects with all of their respective covenants,
obligations and agreements … to be performed and complied with by them on or
prior to the Closing Date.”356
The Company breached its obligation in Section 6.1(a) to “operate the
Business in the Ordinary Course of Business.”357 The purpose of an ordinary course
provision is to “reassure a buyer that the target company has not materially changed
its business or business practices during the pendency of the transaction.” Anschutz
Corp. v. Brown Robin Capital, LLC, 2020 WL 3096744, at *11 (Del. Ch. June 11,
355 Id. ¶ 87. 356 SPA § 7.1(b). 357 SPA § 6.1(a).
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2020). The SPA defined “Ordinary Course of Business” as “in a manner consistent
with the past custom and practice of the Group Companies (including with respect
to quantity and frequency).”358 When determining whether a party has acted
“consistent with past practice,” the Court must evaluate the company’s operations
“before and after entering into” the transaction. Mrs. Fields Brand, Inc. v. Interbake
Foods, LLC, 2017 WL 2729860, at *32 (Del. Ch. June 26, 2017).
As the recent AB Stable decision makes plain, the COVID-19 pandemic
does not excuse a company from its obligation to operate in the ordinary course.
See AB Stable, 2020 WL 7024929, at *67-70. Even where management has taken
action “that might be thought of as an ordinary response to an extraordinary event,”
“what matter[s] for the covenant [is] the departure from how the company ha[s]
operated routinely in the past.” Id. at *69. The question is not what a company
“ordinarily would do when facing a global pandemic,” but rather “how the company
has routinely operated.” Id. at *70. A company breaches an ordinary course
covenant by “departing significantly from that routine.” Id. Even where “[t]he
circumstances created by the pandemic” might potentially warrant certain changes
to business operations, and even if those changes may be “reasonable responses to
the pandemic,” a seller will still breach an ordinary course covenant when it departs
from its past custom and practice. Id. at *75.
358 SPA § 1.1.
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Trial will show that the Company breached its Ordinary Course
covenant in numerous respects. Accordingly, KCAKE was not obligated to close
and validly terminated the SPA.
1. The Revolver Draw
First, the Company departed from Ordinary Course operations when it
drew of its revolver on March 23. The draw
was triple the amount of any draw the Company had ever made during the entirety
of Snow Phipps’s ownership.359 Anderson, who was Plaintiffs’ 30(b)(6) witness on
this topic, testified that this draw was “the largest amount [DecoPac] had ever drawn
out of the revolver at one time.”360
The Company’s rationale for the draw further demonstrates the
unprecedented manner in which DecoPac operated in late March. Anderson testified
that, in his judgment as CEO, the revolver draw was not done to address
“anything specific to the business and operations of DecoPac,” nor was there “any
need” for those funds.361 Had the Company actually had no reason or explanation
for drawing on its revolver, and thereby incurring interest fees on that
loan,362 that unexplained course of action would in itself be extremely abnormal.
359 JX1610.360 Anderson 378:23-379:4.361 Anderson 380:2-16.362 Opheim 152:5-11.
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The evidence will show, however, that the Company in fact drew the funds in light
of serious liquidity concerns. Contrary to Plaintiffs’ after-the-fact narrative, they
began considering the revolver draw at the same time that DecoPac prepared a cash
forecast as a liquidity check, which showed that DecoPac would be cash flow
negative by June.363
2. Drastic Cost Cuts in Response to Decreased Demand
At the same time, DecoPac also undertook several draconian cost-
cutting measures, further evincing the liquidity concerns behind the revolver draw.
As in AB Stable, DecoPac “minimized spending” on marketing, capital expenditures,
and wages. See AB Stable, 2020 WL 7024929, at *76. On March 23, the Company
determined that it would halt spending “immediately on all outside consultants.”364
DecoPac also cut marketing costs by “pull[ing] the plug on all IDDBA spending.”365
Likewise, as in AB Stable, DecoPac “placed all non-essential capital spending on
hold.”366 AB Stable, 2020 WL 7024929, at *76. DecoPac also cut shifts for hourly
employees and froze hiring for all positions except one.367
363 JX0932 at DECO00049355. Mantel does not recall sharing this cash flow forecast (which Anderson labeled a “revolver analysis”) with Kohlberg. Mantel 138:5-7; JX1020. The cash flow forecast shared with Kohlberg on March 26, however, projected that DecoPac would be in a positive cash flow position in June. JX1120 at KOHLBERG00067970, KOHLBERG00067978.
364 JX0982.365 Id. 366 JX1331.367 Id.
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In light of drastically decreased demand for its products, DecoPac also
changed the ways in which it dealt with its suppliers and customers. For instance,
DecoPac both halted orders in progress and asked vendors to hold those that were
ready to ship.368 DecoPac also curtailed conversations with customers to avoid
“asking them things that may cause them to re-think their planned orders,”369 which
it was desperate not to lose.
Trial will show that DecoPac has continued to violate the Ordinary
Course covenant after termination. For instance, in October, DecoPac slashed its
operating expenses by nearly as compared to October 2019.370 See AB Stable,
2020 WL 7024929, at *81 (concluding that “minimizing operating expenses”
constituted an “ordinary course deviation[]”).
Because of these breaches, Plaintiffs could not and cannot satisfy the
closing condition under Section 7.1(b).
II. KCAKE Complied with the SPA in All Respects
KCAKE fully complied with its obligations under the SPA, including
specifically its obligations to “use its reasonable best efforts to arrange and obtain
the Debt Financing on terms and conditions acceptable to the Buyer, including
commercially reasonable efforts to (i) maintain in effect the Debt Financing and the
368 JX1022. 369 Id.370 JX1751 at DECO00303354.
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[DCL]” and to “(iii) enter into definitive agreements with respect to the Debt
Financing that are on terms and conditions no less favorable to Buyer than those
contained in the [DCL].”371
A. Reasonable Best Efforts Under Delaware Law
A “reasonable best efforts” clause “mitigate[s] the rule of strict liability
for contractual non-performance that otherwise governs.” Akorn, 2018 WL
4719347, at *86. It also recognizes that “a party’s ability to perform its obligations
depends on others or may be hindered by events beyond the party’s control.” Id.
In sum, “[t]he language specifies how hard the parties have to try.” Id.
A “reasonable best efforts” clause “cannot mean everything possible
under the sun.” See All. Data Sys. Corp. v. Blackstone Capital Partners V L.P., 963
A.2d 746, 763 n.60 (Del. Ch.), aff’d, 976 A.2d 170 (Del. 2009) (quotations omitted).
Rather, a “reasonable best efforts” clause commits the bound party to undertake only
commercially reasonable actions. See AB Stable, 2020 WL 7024929, at *91.372 It
does not “require a party ‘to sacrifice its own contractual rights for the benefit of its
counterparty.’” In re Anthem-Cigna Merger Litig., 2020 WL 5106556, at *92 (Del.
371 SPA § 6.15(a)372 See also Kenneth A. Adams, Interpreting and Drafting Efforts Provisions: From
Unreason to Reason, 74 Bus. Law. 677, 702 (2019) (“Determining whether someone has tried hard involves considering the circumstances, and in the case of a business transaction, that necessarily involves acknowledging that the parties are engaged in the world of commerce. That would be the case whether or not the word commercially is used in the efforts standard.”) (Menken Decl. Ex. G).
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Ch. Aug. 31, 2020) (quoting Akorn, 2018 WL 4719347, at *91); see also, e.g., In re
Chateaugay, 198 B.R. 848, 854 (S.D.N.Y. 1996) (a party need not “stretch so far as
to require it to make futile gestures or to engage in activity harmful to its own
interests”). Had Plaintiffs wanted KCAKE to leave no imaginable stone unturned,
they would have needed to secure the “absolute commitment” of a hell-or-high-
water covenant. All. Data, 963 A.2d at 763 n.60. Plaintiffs did not do so.
In determining whether a party has used reasonable best efforts in the
M&A context, this Court “has looked to whether the party subject to the clause
(i) had reasonable grounds to take the action it did and (ii) sought to address
problems with its counterparty.” Akorn, 2018 WL 4719347, at *91. KCAKE’s
commercially reasonable actions here readily satisfy that standard.
B. KCAKE Fully Complied with its Financing Obligations
1. KCAKE Acted Reasonably in Negotiating EBITDA Addbacks to Avoid Funding into a Covenant Breach
The evidence will demonstrate that KCAKE satisfied its obligations
under Section 6.15(a), notwithstanding the Lenders’ refusal to agree to KCAKE’s
reasonable request for uncapped—or, later, capped—EBITDA addbacks to avoid a
post-closing covenant breach.
In mid-to-late March, as COVID-19 spread and DecoPac’s sales
declined, KCAKE prepared to negotiate the definitive credit agreement with the
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Lenders.373 Accordingly, consistent with its obligation under the DCL to provide
the Lenders accurate projections of DecoPac’s financial performance, Kohlberg
updated its lender model to reflect the rapidly changing environment.374 Kohlberg
reasonably assumed (given DecoPac’s cratering sales to that point) that the COVID-
19 pandemic would have a dramatic impact on DecoPac’s sales through the summer,
resulting in a roughly 40% decrease in net sales for 2020.375 After iterating multiple
drafts in a good faith effort to accurately project the impact of COVID-19, Kohlberg
shared its final version of the updated model with the Lenders on March 26 and
March 31.376
The model showed that, without EBITDA addbacks, KCAKE would
nearly immediately breach its post-closing financial covenants.377 Indeed, just a
17.5% revenue decline would cause a covenant breach absent an EBITDA
addback.378 Kohlberg believed COVID-19 would cause far greater declines.
Closing into a covenant breach would effectively hand the Lenders the keys to
KCAKE’s new acquisition, giving them “free cakes every friday.”379
373 Hollander 491:25-492:15.374 See id.; DCL § 4.375 Hollander 553:21-554:18, 557:8-21; Woodward 341:3-342:14, 343:9-344:4;
JX998; JX1117; see also Welsh Report ¶ 108.376 JX1117; JX1065; JX1192; JX1224.377 Hollander 762:18-24; DCL at B-38-41; JX1117 at KOHLBERG00035495;
Foster Report ¶¶ 68, 72, 74.378 JX0802. 379 Foster Report ¶ 80; JX1131.
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The DCL explicitly provided a means for KCAKE to avoid this fate; it
authorized KCAKE to negotiate EBITDA addbacks in the definitive debt
documentation.380 KCAKE exercised its right to do so.381
As the Lenders have testified, Kohlberg’s assumptions and addback
requests were reasonable under the circumstances, and Kohlberg’s model evinced a
good faith effort to project the impact of COVID-19.382 The parties reached an
impasse, however, because the Lenders were simply unwilling to agree to any
COVID-19 addbacks.383 Defendants’ debt financing expert, Jonathan Foster, who
has more than 30 years’ experience in M&A, corporate finance, and private equity,
will testify that, if the parties could not agree on the terms for EBITDA adjustments,
they could not finalize the credit agreement.384
The SPA did not require KCAKE to accept the inferior terms that the
Lenders offered. To the contrary, KCAKE was entitled to reject terms that were less
380 DCL at B-38-40; Foster Report ¶¶ 36-37; Churchill 45:10-47:2; Owl Rock 167:22-168:6.
381 Corporate representatives of Churchill and Owl Rock testified that KCAKE had a right to addbacks under subpart (a). Churchill 125:9-126:14; Owl Rock 164:4-25.
382 Antares 246:18-22, 246:24-247:2, 283:19-22; Ares 159:18-160:10; Churchill 119:9-19.
383 Antares 239:24-241:8; Ares 168:23-169:09; Owl Rock 178:3-11; Churchill 104:14-24.
384 Foster 96:19-97:5 (“[I]f [subsection] A and O aren’t agreed, there is no credit agreement.”). A corporate representative of Churchill likewise testified that, if the parties could not agree on the terms for EBITDA adjustments, then they “couldn’t finalize the credit agreement.” Churchill 45:10-47:2.
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favorable than those in the DCL and reject terms and conditions that were not
acceptable to it.385 KCAKE acted reasonably and consistently with those rights.
Foster will testify that the terms proposed by the Lenders were
substantially less favorable to KCAKE than those in the DCL because, among other
things, they would increase the interest rate on Kohlberg’s loans and require a greater
equity investment.386 That conclusion is underscored by the Lenders, whose
counterproposals were so unfavorable that some expressed to Kohlberg their
understanding that the terms “would not be attractive” to Kohlberg.387
The SPA did not require KCAKE “to sacrifice its own contractual rights
for the benefit of its counterparty” by accepting any such unacceptable, less
favorable terms. See In re Anthem-Cigna, 2020 WL 5106556, at *92. KCAKE
expressly was not obliged to pursue and obtain Debt Financing “at all costs and on
any terms.” Akorn, 2018 WL 4719347, at *91. KCAKE’s reasonable best efforts
obligation cannot be construed as requiring it to consummate an acquisition on debt
financing terms that would result in a near-immediate covenant breach, and thus
handing over the keys to the Lenders. Accordingly, KCAKE “had reasonable
grounds to take the action it did.” Id.
385 SPA § 6.15(a).386 Foster Report ¶ 95.387 JX1191 (Ares); see also JX1261 (Churchill).
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KCAKE further adhered to its efforts obligation by working diligently
to “address [the] problems” arising from DecoPac’s collapse with both the Lenders
and Plaintiffs. Id. As the Lenders testified, KCAKE approached the addback
negotiations in complete good faith. When the Lenders refused to entertain
KCAKE’s request for uncapped addbacks, KCAKE proposed capped addbacks.
When the Lenders refused capped addbacks, KCAKE diligently explored alternative
financing. And throughout this span, KCAKE regularly updated the Company on
its efforts to secure Debt Financing.
2. KCAKE Used Its Reasonable Best Efforts to Search for Alternative Financing
Once Debt Financing on terms no less favorable than those in the DCL
proved unavailable, due to the Lenders’ refusal of any COVID-related addbacks,
KCAKE used its reasonable best efforts “promptly to arrange for alternative
financing.”388 Significantly, the SPA defines “Debt Financing” to include any
alternative financing;389 accordingly, “alternative financing,” like all Debt
Financing, must be on terms acceptable to the KCAKE and no less favorable than
those under the DCL.390
388 SPA § 6.15(d). 389 SPA § 6.15(b); id. § 6.15(d). 390 SPA § 6.15(a).
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Having reached an impasse with the Lenders by the evening of March
31, KCAKE promptly informed Plaintiffs the next morning, on April 1, that
financing was unavailable.391 Later that day, KCAKE contacted Houlihan Lokey to
investigate the debt market and advise on the availability of alternative financing.392
Given Houlihan Lokey’s expertise in debt financing, seeking its assessment was an
effective and efficient—and entirely reasonable—way to vet the availability of
alternative financing.393 KCAKE also contacted Madison Capital, which had
previously expressed an interest in funding the transaction.394 Unsurprisingly, given
the state of the M&A market as of early April, Madison Capital declined.
On April 3, Houlihan Lokey reached the same conclusion reached by
the Lenders, Plaintiffs’ own investment banker, Vaynberg, and Plaintiffs themselves
(as represented to this Court in their initial filings): By early April, financing was
not available on terms anywhere near as favorable as those in the DCL.395
391 Hollander 745:4-746:3; Mantel 195:10-22.392 Hollander 738:9-739:11; JX1265 at HL_00000124.393 During the first half of 2020, Houlihan Lokey advised on 91 U.S. transactions,
more than any other investment bank during the period, and in 2019 Houlihan Lokey raised approximately $10 billion of capital for corporate clients worldwide. Foster Report ¶ 99; see also Hollander 738:9-739:11.
394 Hollander 739:12-740:4, 744:20-746:16.395 Vaynberg 272:4-6; Ares 224:18-225:25; Antares 263:6-264:8; Churchill 137:17-
24; Owl Rock 170:3-5, 187:9-15, 188:4-189:23; see also D.I. 1 (Compl.) ¶ 92; D.I. 1 (Mot.) ¶ 4.
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Recognizing this reality, Plaintiffs now argue that KCAKE was
obligated to accept alternative financing on terms inferior to those under the DCL.
Plaintiffs’ argument contravenes the parties’ bargain.396 KCAKE expressly was not
required to attempt “everything possible under the sun” in searching for alternative
financing, see All. Data, 963 A.2d at 763 n.60, and had no obligation to accept
alternative financing on inferior terms. Nor was KCAKE “require[d] … to make
futile gestures,” In re Chateaugay, 198 B.R. at 854, including further pursuit of
replacement financing on terms that all involved—KCAKE, the Lenders, Plaintiffs’
banker, and Plaintiffs themselves—have acknowledged were unavailable.
Plaintiffs’ further contention that KCAKE had an endless, continuing
obligation to pursue replacement Debt Financing likewise fails. No buyer would
ever agree to bear such obligation, and KCAKE certainly did not. The SPA obligates
KCAKE to pursue Debt Financing (including alternative financing) only “prior to
the Closing”397—which was concededly no later than May 4.398 Plaintiffs’
contention also would render a nullity the SPA’s bar on specific performance unless
the debt proceeds “have been funded to Buyer … at Closing,”399 which requires Debt
Financing to be secured and funded by the same date certain—May 4.
396 SPA § 6.15(a), (b), (d). 397 SPA § 6.15(d) (emphasis added); id. § 6.15(a).398 D.I. 34 (Am. Compl.) ¶¶ 89-90.399 SPA § 11.14(b).
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III. Plaintiffs Are Not Entitled to Specific Performance
The plain language of the SPA forecloses Plaintiffs’ specific
performance claim to compel closing, regardless of any purported breach of the SPA,
because the Debt Financing was not funded and the DCL has expired.
A. The SPA’s Express Terms Bar Specific Performance
The SPA is a textbook example of a limited, conditional specific
performance right: Plaintiffs are permitted to seek specific performance “if and only
if” “the full proceeds of the Debt Financing have been funded to Buyer on the terms
set forth in the [DCL] to fund the payment of the Estimated Closing Payment at
Closing.”400 It is undisputed that the full proceeds of the Debt Financing were not,
in fact, funded as of Closing—again, May 4. Accordingly, Plaintiffs may not obtain
specific performance to compel KCAKE to “consummate the transaction.”
This Court consistently enforces contractual limitations on the right to
seek specific performance. See, e.g., Draper v. Westwood Dev. Partners, LLC, 2010
WL 2432896, at *1, *4 (Del. Ch. June 16, 2010) (dismissing specific performance
claim because “the unambiguous language of the contract provides that, in the
current circumstances, the [party] is not entitled to the equitable remedy of specific
performance”); Hexion Specialty Chems., Inc. v. Huntsman Corp., 965 A.2d 715,
400 Id. (emphasis added).
89
759-62 (Del. Ch. 2008); United Rentals, Inc. v. RAM Holdings, Inc., 937 A.2d 810,
842-44 (Del. Ch. 2007).
Where financial buyers are involved, as here, predicating the target’s
specific performance right on the availability of debt financing is not merely
permissible but very common—such limitations appear in roughly 80% of
transactions with financial buyers. See Reverse Break-Up Fees and Specific
Performance: A Survey of Remedies in Leveraged Public Deals, Practical Law
Corporate & Securities, at 11 (2018 ed.).401 The consequence of this conditional
remedy is clear and well appreciated: “the target company can only get to the
closing if the debt-financing proceeds are funded.” Id. at 8 (emphasis added);
see also Reverse Break-up Fees and Specific Performance, Practical Law Practice
Note 8-386-5095, at 2 (2020) (“If the debt financing is unavailable, the seller cannot
force the buyer to … close the transaction; it is only entitled to payment of the
reverse break-up fee.”).402 Because the Debt Financing was not funded at Closing,
the SPA forecloses specific performance here.
Plaintiffs’ insistence that they can seek specific performance no matter
what, despite the fact that the Debt Financing was not funded, would render Section
11.14(b) of the SPA—and the broader debt regime under the SPA, DCL, and ECL—
401 Menken Decl. Ex. H. 402 Menken Decl. Ex. I.
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a nullity, and thereby violate basic tenets of contractual construction. See, e.g.,
Osborn, 991 A.2d at 1159. Section 11.14(b)(iii) is meaningless if read to allow
Plaintiffs to obtain specific performance despite the fact that KCAKE does not have
the Debt Financing in hand. Indeed, avoiding that scenario is the fundamental point
of such limitations on specific performance. See Realogy Holdings Corp. v. SIRVA
Worldwide, Inc., C.A. No. 2020-0311-MTZ, at 98-99 (Del. Ch. July 17, 2020)
(TRANSCRIPT) (dismissing specific performance claim and recognizing “the
fundamental quandary … of ordering specific performance” without the
contemplated financing).403
B. The Prevention Doctrine Does Not Help Plaintiffs
In an attempt to overwrite Section 11.14(b), Plaintiffs point to the
prevention doctrine, which provides that a party may not “escape contractual
liability” where it “wrongfully prevented” a condition to its performance. Mobile
Commc’ns Corp. of Am. v. MCI Commc’ns Corp., 1985 WL 11574, at *4 (Del. Ch.
Aug. 27, 1985); see also Neurvana Med., LLC v. Balt USA, LLC, 2020 WL 949917,
at *19 (Del. Ch. Feb. 27, 2020). Plaintiffs’ prevention argument fails on several
independent grounds.
403 Menken Decl. Ex. J.
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1. KCAKE Did Not Breach the SPA, Otherwise “Prevent” Financing, or Act Without Justification or in Bad Faith
The prevention doctrine does not apply because KCAKE in no way
breached the SPA, otherwise “prevented” the Debt Financing from being funded, or
acted without justification or in bad faith.
No Breach: As a threshold matter, Plaintiffs’ prevention argument
necessarily fails because KCAKE did not breach the SPA. As this Court observed:
“[W]hen the contractual scheme authorizes prevention, then the act is not wrongful.
[…] [P]revention has not occurred if the contract permits the conduct at issue.”404
See also In re Anthem-Cigna, 2020 WL 5106556, at *90-93; A.I.C. Ltd. v. Mapco
Petroleum Inc., 711 F. Supp. 1230, 1238 n.24 (D. Del. 1989). The prevention
doctrine does not expand a party’s contractual obligations. Here, for example,
Plaintiffs cannot use the prevention doctrine to displace KCAKE’s “reasonable best
efforts” obligation with a “hell-or-high-water” obligation to obtain Debt Financing
at any or all costs.
No Prevention: The prevention doctrine is also inapplicable here
because KCAKE did not “prevent” the Debt Financing from being funded at
Closing. The DCL expired by its own terms on May 12, regardless of KCAKE’s
conduct.405 As Plaintiffs conceded in their initial motion to expedite, the Debt
404 D.I. 221 (Tr. Ruling) at 38.405 DCL § 15.
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Financing “vanish[ed]” by simple operation of the calendar.406 Further, as described
in detail above, the Lenders have made clear that they would have rejected any ask
for EBITDA addbacks related to COVID-19, regardless of the magnitude of the ask,
and regardless of what KCAKE’s projections showed for DecoPac. And all of the
Lenders and Plaintiffs’ own banker have testified that, regardless of KCAKE’s
conduct, replacement financing on the DCL’s terms was simply unavailable. See In
re Anthem-Cigna, 2020 WL 5106556, at *90 (“[I]f it can be shown that the condition
would not have occurred regardless of the lack of cooperation, the failure of
performance did not contribute to its nonoccurrence.”) (quoting RESTATEMENT
(SECOND) OF CONTRACTS § 245 cmt. b (1981)).
This case thus stands in stark contrast to WaveDivision Holdings, LLC
v. Millennium Digital Media Systems, LLC, 2010 WL 3706624 (Del. Ch. Sept. 17,
2010), in which the defendant successfully lobbied its lenders to reverse their
position. After having been ordered by its creditors to sell its assets, the defendant
reached a deal with the plaintiff, and the parties executed an asset purchase
agreement and unit purchase agreement. Id. at *1, *8. Nevertheless, in defiance of
those agreements’ no-solicitation provisions, the defendant continued to actively
pursue refinancing as an alternative to the sale, and made presentations to its lenders
favoring refinancing, causing several of the lenders to switch from supporting the
406 D.I. 1 (Mot.) ¶ 3.
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sale to preferring refinancing. Id. at *10-11. KCAKE did no such thing here; it
lobbied the Lenders for COVID-related EBITDA addbacks, which they refused.
Justification: As this Court further recognized, “multiple courts have
held that the prevention doctrine does not apply if … the lack of cooperation is
justifiable.”407 See, e.g., Herremans v. Carrera Designs, Inc., 157 F.3d 1118, 1124
(7th Cir. 1998) (doctrine will “click in” only if a party takes an “unjustified step to
prevent the other party from performing”); see generally 17A AM. JUR. 2D
CONTRACTS § 675 (doctrine requires “unjustified action” that “unjustifiably
prevent[s] the other party from performing”); RESTATEMENT (SECOND) OF
CONTRACTS § 245 cmt. a (1981) (doctrine inapplicable if acts are “justifiable”).
Whether conduct is wrongful (and thus justified) takes into account “the commercial
setting, the ethical position of the parties, the probable understanding they would
have reached had they considered the matter, and many other factors.” Flo-Pro Inc.
v. 10 Iron Horse Drive, LLC, 2011 WL 4527416, at *9-11 (D.N.H. Sept. 28, 2011)
(ruling doctrine inapplicable; landlord was justified in refusing tenant’s request to
release letter of credit where landlord had “reason to fear” tenant would use it for
ulterior purposes) (citation omitted).
Trial will confirm that KCAKE’s actions were fully justified. KCAKE
was justified in, among other things, seeking EBITDA addbacks to avoid an
407 D.I. 221 (Tr. Ruling) at 37.
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anticipated post-closing covenant breach and relying upon Houlihan Lokey’s
informed guidance on the unavailability of replacement financing.
No Bad Faith: Plaintiffs also cannot invoke the prevention doctrine
because they cannot show that KCAKE acted in bad faith. “[T]he weight of
authority holds that in order for prevention to constitute an excuse for
nonperformance of a condition or a promise, the preventing party must have
deliberately taken steps to impede performance or have arbitrarily impaired the other
party’s ability to perform.” 13 WILLISTON ON CONTRACTS § 39:10 (4th ed.); see,
e.g., Weiss v. Leewards Creative Crafts, Inc., 1993 WL 155493, at *6-7 (Del. Ch.
Apr. 29, 1993) (applying Illinois law; “failure to allege any bad faith” “precludes
application of the prevention doctrine as a matter of law”), aff’d, 633 A.2d 372 (Del.
1993); Mobile Commc’ns, 1985 WL 11574, at *3-4 (doctrine turns on whether party
“acted in bad faith”); Mendoza v. COMSAT Corp., 201 F.3d 626, 631 (5th Cir. 2000)
(bad faith required); Omaha Pub. Power Dist. v. Employers’ Fire Ins. Co., 327 F.2d
912, 916 (8th Cir. 1964) (doctrine inapplicable because party “made a good faith
effort” and “compliance was prevented by unforeseen, financial difficulty”).
The evidence at trial will show that KCAKE acted in complete good
faith. Kohlberg updated its lender model in accordance with its obligations under
the DCL and made good-faith estimates of the potential impact of COVID-19 on
DecoPac. It then sought to negotiate with the Lenders to secure addbacks necessary
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to prevent closing into a covenant breach. KCAKE promptly notified Plaintiffs of
those efforts and kept them apprised of its lender negotiations—indeed, this Court
dismissed Plaintiffs’ breach of contract claim alleging otherwise.408 When the
Lenders refused to afford any COVID-related addbacks, KCAKE pursued
alternative financing, but—as Plaintiffs and their own banker have acknowledged—
replacement financing on the DCL’s terms was simply unavailable. Plaintiffs cannot
and will not prove bad faith in any of these actions.
2. The Prevention Doctrine Should Not Be Extended to a Remedy Limitation
Plaintiffs’ prevention argument should be rejected for the additional
reason that it conflates liability and remedy. Prevention concerns only liability and
whether a breach has occurred, and not the separate, distinct issue of whether a
particular remedy is available for an alleged breach. See 8 CORBIN ON CONTRACTS
§ 40.17 (2020) (“For purposes of remedy, the defendant’s prevention of performance
eliminates the condition. But the extent of that remedy is governed by the usual
remedial rules.” (emphasis added)).
The parties unambiguously set forth in the SPA the limited remedies
available if the SPA were breached. Rewriting the SPA to compel specific
performance would ignore that limitation. We have located no instance in which
408 Id. at 24-25.
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this Court or any court has ever held that express, agreed-upon limitations on
remedies if there are breaches of contract are somehow nullified by breaches of
contract. Throughout this litigation, Plaintiffs have failed to identify any case in
which any court has so ruled. This Court should decline Plaintiffs’ invitation to be
the first to “extend[] the prevention doctrine far beyond its established limits” to
apply to a remedy limitation. Akanthos Capital Mgmt., LLC v. CompuCredit
Holdings Corp., 677 F.3d 1286, 1297 (11th Cir. 2012) (prevention doctrine applies
to “pre-conditions to contractual duties”; declining to “extend[]” the doctrine to
“conditions allowing Plaintiffs to fall within an exception to an agreed-upon
contractual bar to suits brought by Plaintiffs”). Any such ruling would be
unprecedented, illogical, and have dramatic reverberations for sophisticated parties’
allocation of risk by circumscribing the remedies available for any breach.
3. Prevention Is Inapplicable Because the SPA Allocated the Risk of Nonoccurrence to Plaintiffs
The prevention doctrine also “does not apply where, under the contract,
one party assumes the risk that fulfillment of the condition precedent will be
prevented.” Mobile Commc’ns, 1985 WL 11574, at *4; see also Neurvana Medical,
2020 WL 949917, at *19 n.163. That is the case here.
The unequivocal language in Section 11.14(b) reflects a distinct bargain
between Plaintiffs and Defendants—both sophisticated private equity firms that
regularly negotiate purchase agreements—regarding the availability of a specific
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performance remedy. The parties could have bargained for a deal wherein Plaintiffs
could pursue specific performance even if the Debt Financing were not funded, and
drafted Section 11.14(b) accordingly. They did the opposite. Moreover, in
negotiating the SPA, Plaintiffs could have insisted on a hell-or-high-water provision
for Debt Financing, or rejected the unusual, buyer-friendly requirement that any
Debt Financing terms must “acceptable” to KCAKE. Again, they did not. Plaintiffs
are bound by the terms of the agreement they struck. See Bobcat N. Am., LLC v.
Inland Waste Holdings, LLC, 2019 WL 1877400, at *7-8 (Del. Super. Ct. Apr. 26,
2019) (stating that, where an agreement was negotiated between “sophisticated
parties,” that “weighs in favor of finding an assumption of risk”); see also Zohar II
2005-1, Ltd. v. FSAR Holdings, Inc., 2017 WL 5956877, at *1 (Del. Ch. Nov. 30,
2017) (“The words parties use to bind themselves together in a contractual
relationship matter. This is especially so when sophisticated parties have engaged
in extensive negotiations that produce a bespoke contract.”).
Because the terms of the SPA allocate to Plaintiffs the risk of
nonoccurrence of Debt Financing, the prevention doctrine is inapplicable here.
CONCLUSION
Defendants look forward to demonstrating at trial that Plaintiffs
breached their representations, warranties, and covenants under the SPA; KCAKE
complied with its contractual obligations in all respects; KCAKE validly terminated
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the SPA; the DCL, ECL, and Limited Guarantee have terminated; Plaintiffs are not
entitled to specific performance of the SPA or the ECL; and KCAKE cannot be
compelled to close the transaction.
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OF COUNSEL:
Andrew G. GordonEric Alan StoneAlexia D. KorbergAdam J. BernsteinNina M. KovalenkoPAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP1285 Avenue of the AmericasNew York, NY 10019-6064(212) 373-3000
PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP
By: /s/ Daniel A. Mason Daniel A. Mason (#5206)500 Delaware Avenue, Suite 200Post Office Box 32Wilmington, DE 19899-0032(302) 655-4410 phone(302) 655-4420 fax
MORRIS, NICHOLS, ARSHT & TUNNELL LLP
By: /s/ Thomas W. Briggs, Jr. William M. Lafferty (#2755)Thomas W. Briggs, Jr. (#4076)Daniel T. Menken (#6309)1201 North Market StreetWilmington, DE 19801(302) 658-9200
Attorneys for Defendants-Counterclaim Plaintiffs
Words: 19,884December 23, 2020
CERTIFICATE OF SERVICE
I hereby certify that on December 31, 2020, the foregoing was caused
to be served upon the following counsel of record via File and ServeXpress:
Michael A. Barlow Eliezer Y. Feinstein ABRAMS & BAYLISS LLP 20 Montchanin Road, Suite 200 Wilmington, Delaware 19807 Daniel Mason PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP 500 Delaware Avenue, Suite 200 Post Office Box 32 Wilmington, DE 19899-0032
/s/ Daniel T. Menken Daniel T. Menken (#6309)
