The Cineplex matter concerned Material Adverse Change and Ordinary Course of Business covenants following the terminated merger between Cineworld Group plc, the acquirer, and Cineplex Inc., the target. In December 2019, Cineworld—parent of the U.S. Regal Cinemas chain—agreed to acquire the Canadian movie-theater operator Cineplex for CAD $0.34 per share, or approximately CAD $2.8 billion, expected to close in the first half of 2020.
After COVID-19 severely affected the movie-theater industry in early 2020, Cineworld announced in June 2020 that it would not complete the acquisition. Cineworld asserted that Cineplex had breached the Ordinary Course of Business covenant in the merger agreement and that Cineplex’s responses to the pandemic constituted a Material Adverse Change. Cineworld cited Cineplex’s deferral of rent, vendor payments, and capital expenditures, which affected its working capital and balance sheet.
On behalf of the plaintiff, Professor Zmijewski, supported by Pavel Nikolov, Zawadi Lemayian, and Erik Himan, analyzed Cineplex’s financial responses to the pandemic. He evaluated whether cash-management practices such as delaying payments to landlords and vendors and extending accounts payable are common during financial distress. He further examined whether these practices are economically equivalent to trade credit, a more efficient financing source than bank debt because it avoids interest costs, collateral requirements, and debt covenants. He further analyzed cash-management practices at Cineplex and other movie-theater companies.
The merger agreement also permitted termination upon a Material Adverse Change, subject to exclusions for events such as pandemics, epidemics, industry-wide developments, and general economic changes, unless they disproportionately affected Cineplex. Professor Zmijewski conducted a comparative analysis of Cineplex and other movie-theater companies before and after the onset of COVID-19, evaluating financial performance, operating efficiency, liquidity, and solvency. Based on that analysis, Professor Zmijewski evaluated whether the pandemic disproportionately affected Cineplex, therefore causing a Material Adverse Change within the meaning of the merger agreement.
The Court rejected Cineworld’s claims that Cineplex had suffered a Material Adverse Change and/or had breached the Ordinary Course of Business covenant.