Level 4 Yoga, LLC v. CorePower Yoga, LLC and CorePower Yoga Franchising, LLC ( 2022 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
LEVEL 4 YOGA, LLC, )
)
Plaintiff, )
)
v. ) C.A. No. 2020-0249-JRS
)
COREPOWER YOGA, LLC, )
COREPOWER YOGA FRANCHISING, LLC, )
)
Defendants. )
MEMORANDUM OPINION
Date Submitted: December 23, 2021
Date Decided: March 1, 2022
Lisa A. Schmidt, Esquire and Matthew D. Perri, Esquire of Richards, Layton &
Finger, P.A., Wilmington, Delaware; Michael Dockterman, Esquire, John J. Byron,
Esquire, Cara Lawson, Esquire and Betsy Zyrkowski, Esquire of Steptoe &
Johnson LLP, Chicago, Illinois; and Lia Metreveli, Esquire of Steptoe & Johnson
LLP, Washington, DC, Attorneys for Plaintiff Level 4 Yoga, LLC.
Daniel B. Rath, Esquire, Rebecca L. Butcher, Esquire and Jennifer L. Cree, Esquire
of Landis Rath & Cobb LLP, Wilmington, Delaware and Howard Graff, Esquire,
Michael Cryan, Esquire, Bernice K. Leber, Esquire, Eric A. Biderman, Esquire and
Jacob M. Gilbert, Esquire of Arent Fox LLP, New York, New York, Attorneys for
Defendants CorePower Yoga, LLC and CorePower Yoga Franchising LLC.
SLIGHTS, Vice Chancellor
According to the Centers for Disease Control and Prevention, the first case of
the COVID-19 virus in the United States was “laboratory confirmed” on January 20,
2020.1 Eight months before, in May 2019, Defendants, CorePower Yoga, LLC and
CorePower Yoga Franchising, LLC (together, “CorePower”), exercised a pre-
existing contractual “call option” to require one of its franchisees, Plaintiff, Level 4
Yoga, LLC (“Level 4”), to sell CorePower all of Level 4’s assets, comprised mainly
of yoga studios located in several states and the business components required to
operate those studios under the CorePower Yoga brand (the “Transaction”).
The parties’ acquisition agreement was memorialized in an Asset Purchase
Agreement (“APA”), dated as of November 27, 2019. According to the APA, the
acquisition of Level 4’s yoga studios was to occur in three tranches, with the first
tranche to close on April 1, 2020. But as April 1 approached, and as businesses
throughout the country began to “shut down” to manage exposure to COVID-19,
either voluntarily or in response to government mandates, CorePower decided it
wanted to delay or terminate the Transaction. Level 4 refused to delay and insisted
that it stood ready and willing to honor its commitments under the APA.
1
See CDC Museum COVID-19 Timeline, Centers for Disease Control and Prevention,
https://www.cdc.gov/museum/timeline/covid19.html#:~:text=January%2020%2C%2020
20%20CDC,18%20in%20Washington%20state (last visited February 18, 2022).
1
Frustrated that Level 4 would not agree to delay closing, CorePower turned to
the APA looking for ammunition to support its “delay or terminate” position. By
then, CorePower had directed its franchisees, including Level 4, to shut down their
yoga studios, just as CorePower had shut down the studios it owned and operated
directly. With Level 4’s studios now temporarily closed, on March 26, 2020, after
invoking the APA’s Material Adverse Effect (“MAE”) clause and the APA’s
requirement that Level 4 continue to operate its yoga studios in the Ordinary Course
of Business (as defined), CorePower declared that the APA was no longer valid
because Level 4 had “repudiated” the contract such that CorePower was no longer
obligated to perform.
In response, Level 4 invoked the operative franchise agreements and argued
that it was bound by contract to follow the direction of CorePower, as franchisor,
even if Level 4 did not agree with that direction. Operating its studios in compliance
with the franchise agreements, as it had always done, was “ordinary course,” said
Level 4, and therefore, temporarily closing its studios at CorePower’s direction was
also “ordinary course.” Moreover, according to Level 4, CorePower was ignoring
that Level 4 was contractually obligated to sell to CorePower and that, in recognition
of this unusual dynamic, the parties intentionally structured the APA as a “one-way
gate” without any conditions to closing and without any right to terminate. Level 4
2
insisted on this structure to account for the fact that it was not a voluntary seller once
CorePower exercised its right to force the sale of Level 4’s highly profitable studios.
Following several rounds of back-and-forth saber-rattling, Level 4 demanded
that CorePower close on time. CorePower refused. Unable to see the way to
compromise, these purveyors of mindfulness launched what would become a nearly
two-year, hard-fought litigation campaign against each other, culminating in a week-
long trial during the summer of last year. “Everything zen? Everything zen? I don’t
think so. . . .”2
After carefully considering the evidence presented at trial, I am satisfied that
the APA is structured, as Level 4 describes it, to effectuate a “one-way gate” through
which the parties would pass on their way to inevitable closings. By agreeing not to
include conditions to closing or express rights to terminate in their contract, the
parties evidenced their intent to close the Transaction even if either party was in
breach of the APA prior to the contractually-designated staggered closings.
Moreover, there are no common law bases to allow CorePower to back out of
the one-way gate and refuse to close. Level 4 has not repudiated or materially
breached the APA in any respect, and the purpose of the APA has not been frustrated.
By following the directions of its franchisor, as it always has done, Level 4 operated
2
Gavin Rossdale, Everything Zen (Interscope, ©BMG 1994).
3
its yoga studios in the Ordinary Course of Business when it closed them as directed
by CorePower and as mandated by state and local governments. The preponderance
of the evidence also reveals that the temporary closure of Level 4’s studios did not
meet the definition of Material Adverse Effect as stated in the APA and as applied
under Delaware law.
Upon satisfying its contractual obligations, Level 4 was entitled to expect that
CorePower would do the same. It did not. Instead, upon concluding that the
Transaction was no longer in its best interests, and frustrated that Level 4 would not
agree to delay closing, CorePower abruptly announced that its obligations under the
APA had been “discharged.” That was a material breach of the APA. Having so
proven, Level 4 is now entitled to the benefits of its bargain.
I. BACKGROUND
The following facts were either stipulated to by the parties before trial or
proven by a preponderance of the evidence during trial.3 I address which party bears
the burden of proof in my analysis of the claims and defenses presented.
3
I cite to the joint trial exhibits as “JX__”; the docket items as “D.I. __”; the trial transcript
as “Tr. __ (witness name)”; the Joint Pre-Trial Stipulation and Order (D.I. 152) as
“PTO [paragraph number]”; and depositions lodged as evidence as “(Name) Dep. __.”
4
A. Parties and Relevant Non-Parties
Defendants, CorePower Yoga, LLC and CorePower Yoga Franchising, LLC
(together “CorePower”), are Colorado limited liability companies that in
combination operate as the largest chain of yoga studios in the United States.4
CorePower’s network of yoga studios consists of both corporate-owned and
franchisee-owned studios.5 Non-Party, TSG Consumer Partners LLC (“TSG”),
is the majority owner of CorePower.6
Plaintiff, Level 4 Yoga, LLC, a Colorado limited liability company, became
a franchisee of CorePower in 2007, and has since grown into the largest franchisee
of CorePower-branded yoga studios.7 It operates its studios across six states under
separate franchise agreements with CorePower.8
Several non-party fact witnesses offered relevant testimony at trial:
(1) Christopher Kenny, co-founder and principal of Level 4, who served as Level 4’s
principal negotiator in connection with the Transaction,9 (2) Edward Wong,
4
PTO ¶¶ 29–30, 32.
5
PTO ¶ 32.
6
PTO ¶ 31.
7
PTO ¶¶ 28, 33. The APA provides that Delaware law governs the agreement and the
parties consented to venue and jurisdiction in this Court. PTO ¶ 27.
8
PTO ¶ 34.
9
PTO ¶ 80(a).
5
Managing Director of TSG and member of CorePower’s board, who served as a
principal negotiator for CorePower in connection with the Transaction,10 (3) Sara
Otepka, co-founder and CEO of Level 4,11 (4) Karina Brett Jaros, director of
financial planning and analysis at Level 4,12 (5) Niki Leondakis, CorePower’s
CEO,13 (6) Rebecca Pessin, CorePower’s former CFO,14 and (7) Michael Layman,
managing director of TSG, member of CorePower’s board and also a negotiator in
connection with the Transaction.15
Level 4 called Jeffrey Mordaunt to testify as an expert witness regarding the
transactional structure and allocation of risk agreed to by the parties, the operational
representations and warranties in the APA, whether Level 4 experienced an MAE,
the “financial and operational aspects of the material breach test set forth in the
Restatement (Second) of Contracts,” and damages.16 Level 4 also presented the
expert reports and deposition of Sheri Colosimo regarding “whether the actions that
10
PTO ¶ 81(g).
11
PTO ¶ 80(b).
12
PTO ¶ 80(c).
13
PTO ¶ 81(b).
14
PTO ¶ 81(d).
15
PTO ¶ 81(h).
16
JX 644 at 2.
6
Level 4 took in the wake of the COVID-19 pandemic, including in the pre-Closing
period, were consistent with past customs and practices.”17
CorePower presented expert testimony from Jay C. DeCoons regarding
standard operating procedures for yoga studios, an overview of CorePower’s and
Level 4’s business operations before and after the COVID-19 pandemic, and the
effects of the pandemic on the fitness industry generally and Level 4 specifically.18
Robert F. Reilly testified as an expert witness on behalf of CorePower regarding
whether Level 4 experienced a post-signing MAE and damages.19
B. The Franchise Agreement
As noted, prior to the APA, the relationship between CorePower and Level 4
was governed primarily by a series of “nearly identical” franchise agreements
(collectively, the “Franchise Agreement”).20 CorePower requires its franchisees to
enter into its form franchise agreement before they can operate CorePower-branded
yoga studios, and Level 4 was no exception.21
17
JX 645 at 1; see also JX 670 (rebuttal report); JX 2017 (expert deposition).
18
JX 661 at 3.
19
JX 660 at 7.
20
See JX 34 (“Franchise Agreement”); PTO ¶¶ 34–35; Tr. 11:7–12:1, 19:4–21 (Kenny).
21
Tr. 998:2–16 (Wong).
7
In order to maintain consistency across its network of yoga studios,
CorePower requires in the Franchise Agreement that franchisees, like Level 4,
follow certain operational standards, referred to in the agreements as “System
Standards.”22 The System Standards are the “standards, specifications, operating
procedures, and rules that [CorePower] periodically prescribe[s] for operating a
Studio,”23 as set forth in the Franchise Agreement and CorePower’s “Operations
Manual.”24 Level 4’s obligation to operate and maintain its studios in accordance
with the System Standards is not discretionary, and it must adhere to the standards
even when it “believe[s] that a System Standard is not in the Franchise System’s or
[its own] best interests.”25
Certain provisions of the Franchise Agreement are particularly relevant here:
• CorePower May Regulate Level 4’s Days of Operation: CorePower
may regulate the days and hours of operation for Level 4’s studios.26
22
See Franchise Agreement §§ 4.4.1, 8.1.3; JX 52 at 8; Tr. 19:4–22:20 (Kenny); Tr. 298:9–
299:3 (Otepka).
23
Franchise Agreement § 4.3.
24
JX 52 at 8. The Operations Manual includes “one or more separate manuals, as well as
audiotapes, videotapes, compact discs, computer software, information available on an
Internet site, other electronic media, bulletins and/or other written materials.”
Franchise Agreement § 4.3.
25
Franchise Agreement § 8.1.1.
26
Franchise Agreement § 8.1.2.7.
8
• CorePower May Dictate Membership Terms: CorePower may
regulate Level 4’s membership terms, including payment terms.27
CorePower may also contact Level 4’s members directly to inform
them of studio closures and changes to payment terms.28
• Compliance with Law: Under the Franchise Agreement, Level 4 is
required to operate its yoga studios “in full compliance with all
applicable laws, ordinances and regulations.”29 Section 1.1 of the
Franchise Operations Manual further reinforces this obligation.30
• Adherence to Good Business Practice: The Franchise Agreement
requires Level 4 to adopt good business practices and to “refrain
from any business . . . which may injure [CorePower’s] business and
the goodwill associated with the [CorePower brand] and other
[CorePower studios].”31
The Franchise Agreement also imposes on Level 4 and its owners a two-year non-
compete, non-solicitation and non-interference covenant that begins to run after the
franchise relationship terminates.32
C. The Call Option and the Call Option Agreement
In addition to setting operational standards, the Franchise Agreement gave
CorePower the right, at its election, to purchase the yoga studios governed by the
27
Franchise Agreement §§ 8.1.2.3, 8.4.
28
Franchise Agreement § 8.4.4.
29
Franchise Agreement § 8.7.1.
30
JX 10 (“Franchise Operations Manual”) § 1.1 (noting that “one [] brand standard is the
requirement that owners adhere to all laws related to the operation of the Studio”).
31
Franchise Agreement § 8.7.2.
32
Franchise Agreement §§ 15.6, 15.7.
9
Franchise Agreement upon the occurrence of certain events (the “Call Option”).33
Concerned that CorePower might exercise this Call Option with respect to some but
not all of Level 4’s studios, and thereby leave Level 4 without the scale it had worked
hard to achieve, Level 4 bargained for and obtained a commitment from CorePower
that any exercise of the Call Option would cover all of Level 4’s studios.34
To memorialize this commitment, on April 27, 2017, CorePower and Level 4
entered into a “Call Option Agreement” in which CorePower agreed that it would
acquire all of Level 4’s CorePower-branded yoga studios in the event it exercised
its Call Option.35 Under the Call Option Agreement, CorePower had thirty days
from the triggering event to exercise its Call Option.36 The purchase price associated
with the option would then be determined under a formula set forth in Section 5 of
33
See Franchise Agreement § 15.5. Relevant here, CorePower’s “right to purchase
[Level 4’s] studio[s]” was triggered by a “Control Event,” defined to include “a merger”
or a “sale of all or substantially all” of CorePower’s assets. See Franchise
Agreement § 15.5.6. As discussed below, the parties stipulate that “TSG’s purchase of
CorePower was a Control Event. . . .” PTO ¶ 38.
34
Tr. 34:10–20 (Kenny).
35
See JX 18 (“Call Option Agreement”).
36
Call Option Agreement § 3.
10
the Call Option Agreement.37 Once calculated, CorePower was required to close on
the Transaction and pay the prescribed purchase price within sixty days.38
D. The Franchise Expansion Plan Agreement
On April 30, 2018, well before either party contemplated that CorePower
would exercise its Call Option, CorePower and Level 4 entered into a Franchise
Expansion Plan Agreement.39 This agreement gave Level 4 the right to develop at
least eleven additional studios in Arizona, North Carolina, South Carolina and other
markets (the “Development Studios”).40 The Franchise Expansion Plan Agreement
evidenced Level 4’s long-term devotion to the CorePower brand and its intent to
grow its already substantial network of CorePower yoga studios.
E. CorePower Exercises Its Call Option
On April 2, 2019, TSG, a San Francisco-based private equity firm, purchased
CorePower.41 This acquisition was a “Control Event” that triggered CorePower’s
Call Option and activated the Call Option Agreement,42 giving CorePower’s new
37
Call Option Agreement § 5.
38
Call Option Agreement § 3.
39
JX 47 (“Franchise Expansion Plan Agreement”).
40
Franchise Expansion Plan § 3.
41
PTO ¶ 37.
42
PTO ¶ 38.
11
owner, TSG, the right to acquire all of Level 4’s CorePower-branded studios.43
TSG quickly determined that it wanted to exercise the Call Option with respect to
Level 4 but it was not pleased with the Call Option Agreement’s requirement that it
take all of Level 4’s studios at once.44 The intake of more than 30 studios would
pose serious integration challenges.45 To minimize these challenges, CorePower
asked for accommodations: staggered closings, the removal of certain Level 4
Development Studios not yet built from the acquisition, Level 4’s commitment to
“build out” certain other Development Studios before transferring them to
CorePower, and Level 4’s commitment to enter into a definitive acquisition
agreement even though the Call Option Agreement did not require one.46
Level 4 was reluctant to agree to amend the Call Option Agreement it had
bargained hard to secure.47 CorePower’s proposed changes meant delay and risk.48
43
See Call Option Agreement § 2.
44
Tr. 967:3–8 (Wong).
45
Id.
46
Tr. 902:11–903:4, 970:17–971:2 (Wong); Tr. 42:10–48:13 (Kenny).
47
Tr. 42:10–43:12 (Kenny); Tr. 967:9–20 (Wong).
48
Tr. 42:22–43:4 (Kenny) (discussing Level 4’s belief that the Call Option Agreement had
memorialized the parties’ intent that once CorePower exercised the call option, all Level 4
studios would be transferred in a structure he characterized as a “one-way gate”);
Tr. 47:24–48:21 (Kenny) (discussing Level 4’s concerns with CorePower’s proposed
changes to the Call Option Agreement).
12
CorePower appreciated Level 4’s concerns and was willing to make concessions to
address them.49 In May 2019, the parties entered into the Call Option Exercise
Agreement, a modification of the Call Option Agreement, that incorporated the
following elements: the “definitive agreement in respect of the acquisition” would
not contain closing conditions or express rights to terminate, but would contain a
post-closing indemnification regime; the Franchise Expansion Plan Agreement
would be cancelled; CorePower would make certain payments in consideration for
not acquiring certain Development Studios; and the parties would agree to revised
valuations for other Development Studios to incentivize Level 4 to develop
them well.50
After several months of negotiations, CorePower and Level 4 entered into the
APA to memorialize the terms by which CorePower would acquire all of Level 4’s
assets.51 Specifically, CorePower agreed to purchase thirty-four CorePower-
branded yoga studios from Level 4.52 Consistent with the Call Option Exercise
Agreement, the Level 4 studios were to be delivered in tranches at staggered
49
Pessin Dep. at 114:22–116:4; Tr. 914:16–915:9 (Wong).
50
JX 131 (the “Call Option Exercise Agreement”); Tr. 43:5–12, 48:7–17, 49:14–50:23,
50:22–23, 52:10–19, 57:20–58:13, 66:19–67:7 (Kenny); Tr. 967:17–20, 971:3–16,
979:15–23, 983:4–19 (Wong).
51
JX 149 (“APA”).
52
PTO ¶ 2.
13
closings, there were no closing conditions or express rights to terminate, certain
Development Studios would not be part of the Transaction, and the valuation
methodologies for certain studios, including other Development Studios, were
modified from the valuation methodologies set forth in the Call Option Agreement.53
The APA designates the tranches of studios as follows:54
Tranche/Studio Region Number of Transfer Date
Type Studios
Tranche 1 Colorado 8 April 1, 2020
Tranche 2 Arizona & North 6 July 1, 2020
Carolina
Development55 South Carolina, 5 July 1, 2020
Arizona & North
Carolina
Tranche 1 Illinois 15 October 1, 2020
F. The APA
As noted, the parties executed the APA “as of November 27, 2019.”56 Several
provisions are relevant here and summarized below.
53
PTO ¶¶ 44–46; APA §§ 2.2.1, 2.2.4.; Tr. 903:20–904:3 (Wong).
54
PTO ¶ 43. The chart in the APA, as replicated in the Pretrial Order, is confusing in that
it describes the Colorado and Illinois studios as Tranche 1, even though the
“Transfer Dates” for the studios are different. I have found no explanation for this apparent
discrepancy in the trial record or in the parties’ briefs.
55
As for the Development Studios CorePower agreed to acquire, CorePower agreed to pay
Level 4 a total of $3,212,623 for those studios upon the execution of the APA. PTO ¶ 46.
CorePower made that payment on November 27, 2019. Id.
56
APA at 1.
14
1. Level 4’s Representations and Warranties
As is customary, Level 4 made certain representations and warranties in the
APA concerning its yoga studios.57 Three are particularly relevant here.
a. The Absence of Certain Developments
In Section 3.6, Level 4 represented that, “[s]ince January 1, 2019,
the Business58 has been conducted in the Ordinary Course of Business 59 (including
promotional and marketing practices consistent with past practice) and [as relevant
here], except for the matters disclosed on Schedule 3.6:”
• “There has been no material loss, destruction, damage or eminent
domain taking (in each case, whether or not insured) affecting
the Business or any Acquired Asset with a value in excess of
$50,000;”60
• “[Level 4] has not . . . terminated any agreement or contract
providing for the employment or engagement of any Person . . .
or otherwise . . . terminated the employment or engagement of
any foregoing persons, in each case other than in the Ordinary
Course of Business . . . ;”61
57
APA §§ 3–5.
58
The APA defines “Business” to mean “the CorePower Yoga business conducted by the
Seller.” APA Ex. A at 53.
59
The APA defines “Ordinary Course of Business” to mean “action taken by any Person
in the ordinary course of such Person’s business which is consistent with the past customs
and practices of such Person (including past practice with respect to quantity, amount,
magnitude and frequency and standard employment policies and past practices with respect
to management of cash and working capital).” APA Ex. A at 59.
60
APA § 3.6(a).
61
APA § 3.6(c).
15
• “[Level 4] has not terminated or closed any facility, business or
operation;”62
• “[Level 4] has not entered into, amended or terminated any lease
or sublease of real property or any renewals thereof;”63
• “[Level 4] has not accelerated any accounts receivable or delayed
any accounts payable, except in the Ordinary Course of
Business;”64 and
• “No event or circumstance has occurred which constitutes a
Material Adverse Effect.”65
b. Compliance with Laws
In Section 3.11 of the APA, Level 4 represented and warranted that its
business had been operated in compliance with the various legal requirements set
forth in Sections 3.11.1 through 3.11.4.66 Significantly, at Section 3.11.1, Level 4
represented that it was not in “violation . . . in any material respect [of] any Legal
Requirement,” defined to include “any United States federal, state or local . . . law,
62
APA § 3.6(e).
63
APA § 3.6(i).
64
APA § 3.6(j).
65
APA § 3.6(l).
66
APA § 3.11.
16
statute, standard, . . . ordinance, code, rule, regulation, . . . or any Government
Order . . .”67
c. Compliance with the Franchise Agreement
In Section 3.15.3, Level 4 represented and warranted that, as of each closing,
it would not be “in breach of or violation of . . . any . . . Franchise Agreement.” 68
And “Franchise Agreement” was defined to include all of the franchise agreements
related to each yoga studio to be sold under the APA.69
Covenants
At Section 5 of the APA, Level 4 gave several covenants with respect to its
operation of the Business until closing. One, in particular, is relevant here.
In Section 5.1.1, Level 4 agreed that, “[f]rom the date of this Agreement until the
final Closing,” it would “conduct the Business only in the Ordinary Course of
Business” (as previously defined) (the “Ordinary Course Covenant”).70
67
APA § 3.11.1; APA Ex. A at 58.
68
APA § 3.15.3.
69
APA Ex. A at 56.
70
APA § 5.1.1.
17
No Closing Conditions or Express Right to Terminate
As noted, both parties acknowledge that the APA does not contain any express
conditions to either party’s obligation to close.71 Nor does it contain any provision
expressly allowing for termination of the agreement, a force majeure clause, or any
provision expressly allowing either party unilaterally to postpone any of the
staggered closings.72
The Specific Performance Provision
Section 8.11 of the APA, entitled “Specific Performance,” provides that both
parties agree a breach of the APA will result in irreparable harm and, therefore, the
parties may seek “to enforce specifically this Agreement.” The provision goes on to
state that, in addition to specific performance, the parties may pursue “any other
remedy to which [they] may be entitled, at law or in equity.”73
71
Wong Dep. at 115:22–24; see generally APA.
72
Id.
73
APA § 8.11. CorePower maintains that the language to the effect that the parties may
seek specific performance “in addition to any other remedy to which [they] may be entitled,
at law or in equity” is tantamount to a termination clause in that either party would possess
a common law right to terminate if the counter-party materially breached the contract.
I address that argument below.
18
*****
Upon executing the APA, the parties turned their focus to the first of the
staggered closings to be held on April 1, 2020. As discussed below, that closing
never occurred.
G. CorePower Requires the Temporary Closure of Level 4 Yoga Studios to
Manage COVID-19 Risks
In January 2020, the COVID-19 virus began to spread rapidly across the
United States.74 By January 31, 2020, the Department of Health and Human
Services had declared a public health emergency for the entire country.75 Nearly six
weeks later, on March 11, 2020, the World Health Organization declared COVID-
19 a pandemic.76 And two days after that, on March 13, 2020, former President
Donald Trump declared the COVID-19 pandemic a national emergency.77
On March 15, 2020, to manage the risk of COVID-19 exposure, CorePower
announced that all CorePower-branded yoga studios, including those operated by
Level 4, would close for two weeks beginning on March 16, 2020.78 CorePower did
74
PTO ¶ 52.
75
Id.
76
Id.
77
Id.
78
PTO ¶¶ 53, 55. CorePower notified Level 4’s CorePower members of the temporary
closures directly. PTO ¶ 53.
19
not seek Level 4’s consent to the closures because, under the Franchise Agreement,
it was not required to do so.79 Following CorePower’s March 15 announcement,
Level 4 closed its thirty-four yoga studios as directed.80 Through MindBodyOnline
(CorePower’s online scheduling tool), CorePower erased the class schedules for all
of Level 4’s studios and caused the Level 4 website to display the message:
“Temporarily Closed.”81
CorePower’s management understood that these closures could create internal
liquidity issues and, to protect itself from a liquidity crisis,82 CorePower drew down
$36.5 million on its delayed-draw term loan facility.83 As a condition to obtaining
the loan, CorePower certified to its lenders that, as of March 19, 2020, its business
79
See Franchise Agreement § 8.1 (“Therefore, you agree at all times to operate and
maintain your Studio according to all of our System Standards, as we periodically modify
and supplement them, even if you believe that a System Standard is not in the Franchise
System’s or your best interests.”); Tr. 342:4-343:8 (Otepka) (commenting that after the
CEO of CorePower announced that CorePower yoga studios were closed, Level 4 had to
close its CorePower-branded studios because “you can’t tell your customer one thing and
then do something else. So, in this case, you know, the CEO of CorePower said, we’re
closing all our studios. It was not a decision for me to be made to say, Nope. I’m Sara.
I’m doing something different.”).
80
PTO ¶ 56.
81
Tr. 119:9–125:6 (Kenny).
82
Tr. 1282:17–24 (Leondakis).
83
JX 224; PTO ¶ 58.
20
had not experienced and was not reasonably expected to experience a Material
Adverse Effect, as defined in the credit agreement.84
CorePower’s board of directors held a meeting on the morning of March 20,
2020, during which management forecasted that CorePower’s COVID-19 related
studio closures would now last six weeks instead of the two weeks originally
anticipated.85 That forecast proved prescient as state and local governments began
to issue proclamations in various forms, typically at the executive level, mandating
that certain businesses, including commercial fitness centers, close to the public.86
At the conclusion of its March 20 meeting, the CorePower board decided to
delay the Level 4 acquisition.87 A few hours after the meeting, on the evening of
March 20, 2020, Wong sent an email to Kenny stating that CorePower and TSG
believed Level 4 was not operating in the Ordinary Course of Business, as required
by the APA, because Level 4 had temporarily closed its yoga studios in response to
84
See JX 224; JX 120; Pessin Dep. at 165:5–166:11; Tr. 1093:17–1094:2 (Wong);
Tr. 1303:21–1306:16 (Leondakis).
85
JX 257 at 3.
86
See JX 246; JX 247; JX 253; JX 263; JX 266; JX 301; Tr. 343:9–12 (Otepka).
87
Tr. 1292:14–1293:21 (Leondakis).
21
COVID-19.88 Wong ended his email by proposing that the parties consider
adjourning the closing dates under the APA.89
Two days later, on March 22, 2020, Kenny responded to Wong’s email,
expressing his disagreement with Wong’s assertion that Level 4 was operating
outside the Ordinary Course of Business.90 Kenny also assured Wong that Level 4
was ready to transfer its assets on the schedule agreed to in the APA and expected
CorePower to consummate the Transaction.91 On March 26, 2020, four days after
Kenny’s response to Wong, Michael Layman, a CorePower board member and
managing director at TSG, emailed Kenny to advise Level 4 that CorePower and
TSG believed Level 4 had “disavow[ed]” the following Representations and
Warranties and Covenants in the APA:
• “There ha[d] been no material loss, destruction, damage or eminent
domain taking . . . affecting the Business or any Acquired Asset with
a value in excess of $50,000” (Section 3.6(a) of the APA);
• Level 4 had not “terminated or closed any facility, business or
operation” (Section 3.6(d) of the APA);
• “No event or circumstances ha[d] occurred which constitutes a
Material Adverse Effect” (Section 3.6(1) of the APA); and
88
JX 273 at 2.
89
Id.
90
JX 273 at 1–2.
91
JX 273 at 2.
22
• Level 4 would conduct its business in the Ordinary Course of
Business (defined as “consistent with past customs and practices”)
(Section 5.1.1 of the APA).92
The email also advised Level 4 that, “[i]t is now [CorePower and TSG’s] view that
[CorePower and TSG’s] contractual performance has been discharged” due to
Level 4’s “repudiation” of its obligations under the APA.93
During a brief conference call held shortly after Layman’s email was received,
TSG and CorePower reiterated their position to Level 4 and declared that CorePower
would not close the Transaction.94 Four days later, on March 30, 2020,
Nikki Leondakis, CorePower’s CEO, sent yet another email to Kenny, again
reiterating CorePower and TSG’s position: “Level 4 Yoga, LLC has repudiated
multiple material obligations embodied in the Asset Purchase Agreement
thereby . . . discharging our obligations thereunder.”95 When the time came to close
on the first tranche of yoga studios on April 1, 2020, only Level 4 showed up to the
virtual closing table.96
92
JX 288 at 1.
93
Id.; Layman Dep. at 226:2–25.
94
Tr. 1084:15–1085:6 (Wong).
95
JX 303; PTO ¶ 65.
96
PTO ¶ 66; Leondakis Dep. at 280:23–281:5.
23
H. Level 4’s Post-April 1 Operations
After the failed closing on April 1, 2020, Level 4 began to take a number of
cost-saving measures to preserve what it now believed to be CorePower’s assets
“as steward” of those assets and to mitigate damages.97 These included temporary
studio closures,98 laying off or furloughing a majority of its workforce,99 and
restructuring its leases.100 Level 4 also continued to satisfy its obligation under
Section 2.5.1 of the APA to provide CorePower with estimated balance sheets for
each of the subsequent scheduled closings.101 CorePower never responded to
Level 4’s emails transmitting the estimated balance sheets, nor did it attend any of
the subsequent staggered closings.102
I. Procedural History
Level 4 filed this lawsuit on April 2, 2020, the day after the first closing was
scheduled to occur, claiming that CorePower breached the APA in March 2020 by
refusing to close on the Transaction, failing to deliver certain required payments
97
Tr. 111:8–9 (Kenny).
98
E.g., Tr. 191:14–18, 207:11–208:1 (Kenny).
99
E.g., Tr. 403:3–405:1 (Otepka); JX 316; JX 342.
100
E.g., JX 292; JX 293.
101
See APA § 2.5.1; Tr. 492:17–493:9 (Jaros); JX 291; JX 417; JX 467.
102
Tr. 113:4–114:7 (Kenny).
24
under the APA, and ultimately failing to take possession of Level 4’s yoga studios.103
Level 4 requested declaratory relief, specific performance and damages, including
damages incurred by having to maintain the yoga studios while CorePower refused
to perform under the APA.104
CorePower brought a motion to dismiss the initial complaint,105 which the
Court denied.106 Level 4 subsequently filed a Verified First Amended Complaint on
August 28, 2020,107 and a Verified Second Amended Complaint (the operative
Complaint) on November 5, 2020.108 CorePower filed its Answer, Affirmative
Defenses, and Amended Verified Counterclaims on December 14, 2020.109 Level 4
moved to dismiss CorePower’s counterclaims, which motion the Court granted in
part and denied in part.110
103
D.I. 1; PTO ¶ 6.
104
PTO ¶ 6.
105
D.I. 4.
106
D.I. 29.
107
D.I. 31.
108
D.I. 46. (Verified Second Am. Compl.) (“Complaint”).
109
D.I. 50 (Answer, Aff. Defs. and Verified Countercls. of Defs. CorePower Yoga, LLC
and CorePower Yoga Franchising, LLC) (“CorePower Counterclaim”); PTO ¶ 19.
110
PTO ¶ 20.
25
The Court convened a five-day trial from August 9 through August 13.111 The
parties presented their closing arguments on December 9, 2021, and, after
supplemental briefing, the matter was deemed submitted for decision on
December 23, 2021.112
II. ANALYSIS
The parties seek competing declaratory judgments––Level 4 seeks a
declaration that the APA is valid and enforceable and that CorePower is in breach
of the agreement; CorePower seeks a declaration that Level 4 repudiated or
materially breached the APA pre-closing such that CorePower was excused from
performing. If the Court determines that CorePower breached the APA, Level 4
seeks a decree of specific performance that would compel CorePower to close on all
of the Level 4 yoga studios per the APA and an award of damages caused by the
breach.113 For its part, in addition to seeking declaratory relief, CorePower asserts a
claim for breach of contract or, alternatively, sounding in “quasi-contract” to recover
payments made by CorePower to Level 4 related to the Development Studios after
the APA was signed.114
111
D.I. 170–74.
112
D.I. 198 (“Post-Trial Oral Arg.”); D.I. 199–200.
113
Complaint at 25.
114
CorePower Counterclaim at 68.
26
While the parties’ relationship was forged long before CorePower exercised
its Call Option and initiated the Transaction, the claims and counterclaims arise from
the APA. It is, therefore, appropriate to focus the analysis there. With that said,
when undertaking to construe a contract, our Supreme Court has instructed that the
trial court must consider “[t]he basic business relationship between [the] parties” so
that it can “give sensible life” to the agreement.115 Accordingly, I begin my
deliberations by reviewing the parties’ pre-APA relationship and the context in
which they negotiated the APA before turning to the contractual language.
“With the [APA’s] commercial context in hand, and mindful that my
understanding of the parties’ contractual relationship cannot overwrite an
unambiguous contract,”116 I turn to whether the APA, as written, represents a “one-
way gate” to closing, as Level 4 construes it, or whether the parties included off-
ramp provisions in the APA, as Core Power believes, that would allow a party to
elect not to consummate the Transaction in certain circumstances. As explained
below, the APA unambiguously contains no conditions to closing and no express
115
Chi. Bridge & Iron Co. v. Westinghouse Elec. Co. LLC, 166 A.3d 912, 926–27
(Del. 2017).
116
Pearl City Elevator, Inc. v. Gieseke, 2021 WL 1099230, at *9 (Del. Ch. Mar. 23, 2021),
aff’d, 265 A.3d 995 (Del. 2021) (citing Town of Cheswold v. Cent. Del. Bus. Park,
188 A.3d 810, 820 (Del. 2018)); see also Ascension Ins. Hldgs., LLC v. Underwood,
2015 WL 356002, at *4 (Del. Ch. Jan. 28, 2015) (“[O]ur courts will enforce the contractual
scheme that the parties have arrived at through their own self-ordering.”).
27
right for either party to terminate the contract pre-closing. Nor are there provisions
in the APA that somehow imply a pre-closing right to terminate.
Having concluded that the APA is indeed a one-way gate, I next address
CorePower’s assertion that, even though the APA provides no express right to avoid
closing, its performance was excused under the common law because Level 4
repudiated or materially breached the APA and because the purpose of the APA was
frustrated. Rejecting these contentions as factually unsupported, I conclude that
CorePower was, both as a matter of contract and as a matter of common law, obliged
to close and that its refusal to do so was a breach of the APA.
Finally, I discuss the remedies to which Level 4 is entitled. As explained
below, the Court’s verdict and final judgment will include a decree of specific
performance and an award of damages with pre-judgment and post-judgment
interest.
A. The Parties’ Pre-Signing Business Relationship
More so than usual, the pre-signing relationship between this buyer and this
seller directly informs my analysis of the parties’ competing claims of breach of
contract. In fact, as discussed below, the parties’ significant pre-signing relationship
directly influenced the timing and structure of the APA and the conduct of Level 4,
as seller, after signing.
28
The franchisor/franchisee relationship is animated by the franchisor’s need
“to drive consistency across its stores.”117 To accomplish the goal of consistency,
the franchisor requires the franchisee to adhere to certain standards, referred to
within the CorePower network as “System Standards,” that, in essence, “instruct
[the] franchisees [how] to behave.”118 Given that Level 4 cannot operate
CorePower-branded studios without a franchise agreement, it must comply with the
System Standards or lose the requisite authorization to run its business.119
Significantly, this obligation to comply with the Franchise Agreement and its System
Standards continued during the post-signing/pre-closing period, and CorePower
sought and obtained from Level 4 a representation in the APA that Level 4 had
117
Tr. 19:15–16, 21:3 (Kenny).
118
Tr. 12:13–12:15 (Kenny). Cf. Billops v. Magness Const. Co., 391 A.2d 196, 197
(Del. 1978) (noting that “franchise agreements, in general, attest to the skill of corporate
counsel in reserving as many rights in the franchisor as is possible to maintain control and
to protect the product and service covered by the trademark or tradename,” and holding
that, in some instances, the degree of control exercised over the daily operations of the
franchisee can create “an agency relationship” between franchisor and franchisee).
119
Tr. 998:2–16 (Wong) (“Q. Well, how do you – I mean, legally, how do you establish a
relationship with a franchisee, Mr. Wong? A. We have a franchise agreement with them.
Q. And in the absence of a franchise agreement, can the franchisee operate as a CorePower
Yoga studio? A. No, they can’t brand it a CorePower Yoga studio.”); Tr. 298:9–12
(Otepka) (“[Being a] franchisee of the franchisor gives us the right to own and operate
under their trademark and gives us a playbook which we follow to operate.”).
29
remained in compliance with the Franchise Agreement pre-closing.120 In other
words, unlike the typical “busted deal” case, CorePower, as buyer, had the
contractual right to direct, in large measure, how Level 4, as seller, operated its
business post-signing and pre-closing.
The franchisor/franchisee relationship between CorePower and Level 4 is
marked by another feature relevant here––the Call Option, the Call Option
Agreement and the Call Option Exercise Agreement. Again, this is not the typical
“busted deal” case where the story begins with a willing buyer and willing seller.
Indeed, Level 4 was not looking to sell.121 Its studios were highly profitable and it
had entered into the Franchise Expansion Plan Agreement that paved the way for it
to grow its already extended family of CorePower-branded yoga studios even
further.122 Nevertheless, as a condition to becoming a CorePower franchisee,
Level 4 had agreed to provide CorePower a Call Option that, when exercised, would
120
APA § 3.15.3; see, e.g., PTO ¶ 34; Tr. 302:6–18 (Otepka); Tr. 1306:23–1307:16
(Leondakis) (“Q. Is it fair to say that as the franchisor, CorePower expects Level 4 to
operate its yoga studios in accordance with the franchise agreements? A. Yes.”).
121
Tr. 41:12–43:12 (Kenny) (recalling when he was notified that CorePower was going to
exercise its call option and describing the CorePower-branded studios as the Level 4
owners’ “core asset”).
122
Tr. 9:5–21 (Kenny) (describing the purpose of the Franchise Expansion Plan
Agreement); Tr. 32:9–35:2 (describing how the Franchise Expansion Plan Agreement was
mutually beneficial to CorePower’s original owner and Level 4); Tr. 142:15–143:9
(Kenny) (confirming Level 4’s revenue pre-COVID-19); see also JX 146.
30
require Level 4 to sell its yoga studios back to CorePower.123 That obligation was
refined in the Call Option Agreement, where CorePower agreed that if it exercised
its Call Option, it would do so as to all of Level 4’s yoga studios.124
When TSG acquired CorePower, it inherited the Call Option right but also the
obligation that it acquire all Level 4 studios, not just a few.125 That posed a challenge
for TSG. Level 4 was CorePower’s largest franchisee. When TSG exercised the
Call Option, it was just “24 days into [its] ownership period, and [it] needed time to
figure out how to digest the fact that Level 4 was 20 percent of the stores in the
system and put together a plan to take those [studios] into the system.”126 As Kenny
credibly testified, Layman approached Kenny to deal with the integration challenges
and told him, “[w]e want some things, and we’re willing to give some things.”127
What CorePower wanted, and received, was an agreement to acquire the
Level 4 studios in tranches, with Level 4 agreeing to manage the studios
123
See Franchise Agreement § 15.5.
Tr. 901:1–902:17 (Wong) (recognizing that after the occurrence of a “Control Event”
124
CorePower had the “ability to effectively call and acquire Level 4”).
125
Tr. 902:11–24 (Wong) (acknowledging that under the Call Option Agreement
CorePower was obligated to acquire all of Level 4’s studios at the same time).
126
Tr. 42:14–18 (Kenny).
127
Tr. 42:11–12 (Kenny).
31
(for payment) until the studios were transferred.128 In exchange, Level 4 asked for,
and CorePower agreed to give, an acquisition agreement with “no closing
conditions” and “no force majeure”; “[the] transaction ha[d] to close.”129 As Kenny
credibly described it, the deal structure Level 4 bargained for, as previewed in the
Call Option Exercise Agreement, was one where the APA would be the visage of a
“one-way gate.”130 This structure was “consistent with the call option all the way
through.”131
B. The One-Way Gate
“While [our courts] have recognized that contracts should be read in full and
situated in the commercial context between the parties, [as noted], the background
facts cannot be used to alter the language chosen by the parties within the four
corners of their agreement.”132 Accordingly, “[a]s is the Delaware way, I turn to the
128
Tr. 42:6–43:20, 169:1–8 (Kenny); Tr. 902:17–903:19 (Wong).
129
Tr. 43:5–7 (Kenny). See also Tr. 914:13–916:2 (Wong) (acknowledging that the APA
was structured to omit express closing conditions or express rights to terminate).
130
Tr. 43:1, 43:12, 52:18 (Kenny). The Call Option Exercise Agreement set forth terms to
be incorporated within a “definitive agreement in respect of the acquisition.” JX 131 § 3.6.
Those terms did not include conditions to closing or express termination provisions.
Id. at Ex. B.
131
Tr. 52:18–19 (Kenny).
132
Town of Cheswold, 188 A.3d at 820.
32
words the parties agreed to in their contract [for] the best evidence of their intent.”133
As explained below, those words and the words intentionally omitted, speak
volumes about who is in breach and who is not.
No Closing Conditions or Express Right to Terminate
Not surprisingly, CorePower maintains that it never would have agreed to sign
the APA if the contract required it to close no matter what.134 But that position is
hard to reconcile with CorePower’s failure to secure any of the typical provisions
that would allow a party to refuse to close under contractually identified
circumstances.135 Not a single one––there are no conditions to closing, no express
termination provisions, and no termination or reverse termination fees; there is not
even a force majeure clause.136 Indeed, with respect to the staggered closings, while
133
Pearl City, 2021 WL 1099230, at *12.
134
Tr. 915:16–916:2 (Wong); Defs. and Countercl. Pls. CorePower Yoga, LLC
and CorePower Yoga Franchising LLC’s Post-Trial Opening Br. (“CPY OB”) (D.I. 184)
at 27–29.
135
Tr. 43:5–12, 66:19–67:2 (Kenny); Tr. 967:17–20 (Wong); see generally the Call Option
Exercise Agreement; the APA; cf. Lou R. Kling & Eileen T. Nugent, Negotiated
Acquisitions of Companies, Subsidiaries and Divisions § 13.01 (2013) (“Kling & Nugent”)
(observing that “the representations, the covenants and the closing conditions in the
acquisition agreement should be carefully woven together”); id. at § 14.01 (stating that
“[o]nce the agreement has been signed, a party is obligated to consummate the transaction
unless one or more of the conditions to its obligation to close are not satisfied at the time
set for closing,” and noting that acquisition agreements that “have the fewest and the most
limited [closing] conditions are known as ‘hell or high water’ agreements”).
136
Tr. 66:24–67:7 (Kenny) (explaining that “there are no exits to [the APA]. There’s no
closing conditions. There’s no force majeure.”); Tr. 914:15–915:9 (Wong)
(acknowledging that because of Level 4’s focus on the certainty that the Transaction close,
33
there is no right to avoid them, the APA does allow CorePower to accelerate them
at its election.137 The absence of any contractual condition to closing or express
CorePower “agreed to drop the closing conditions. But [CorePower] would not agree to
drop the reps and warranties, which [it] thought was a baseline of what [it] would at least
expect to receive.”). In this regard, CorePower argues that the representations and
warranties in the APA “embody a ‘bring down’ provision” that, in essence, assured
CorePower that the “business of the target will be substantially the same at the date of
closing as it was on the date the purchase agreement was signed” and served to induce it to
enter the APA. See CPY OB at 27 (citing AB Stable VIII LLC v. Maps Hotels & Resorts
One LLC, 2020 WL 7024929, at *74 (Del. Ch. Nov. 30, 2020), judgment entered,
(Del. Ch. 2021), and aff’d, 2021 WL 5832875 (Del. Dec. 8, 2021)); APA § 3 (stating that
“in order to induce the Buyer to enter into and perform this Agreement and to consummate
the Contemplated Transactions, the Seller hereby represents and warrants to Buyer, as of
the date hereof and as of the applicable Closing Date, as follows:”). The argument is not
persuasive. I note that the only evidence of actual inducement was offered by Wong in
response to highly leading questions. See, e.g., Tr. 917:9–9:18:6; 1115:13–1121:8 (Wong).
More importantly, the inducement language in the preface to Section 3 is a far cry from the
typical condition to closing language that this APA conspicuously lacks. Cf. AB Stable
VIII LLC, 2020 WL 7024929, at *1, 29, 33, 52 (discussing at length conditions to closing
and distinguishing them from the operative agreement’s “bring-down condition”); Akorn,
Inc. v. Fresenius Kabi AG, 2018 WL 4719347, at *2–3, 18, 45 (Del. Ch. Oct. 1, 2018)
(discussing contractual conditions to closing), aff’d, 198 A.3d 724 (Del. 2018);
Bardy Diagnostics, Inc. v. Hill-Rom, Inc., 2021 WL 2886188, at *14 (Del. Ch. July 9,
2021) (same); Snow Phipps Gp., LLC v. KCAKE Acq., Inc., 2021 WL 1714202, at *23–24
(Del. Ch. Apr. 30, 2021) (same). A closing condition expressly makes the truth of the
representation(s) a condition to closing. See GRT, Inc. v. Marathon GTF Tech., Ltd., 2011
WL 2682898, at *12–13 (Del. Ch. July 11, 2011). No such provision appears in the APA.
137
Section 2.3 of the APA provides that each closing: “will take place on the dates set forth
on Exhibit D hereto (each, a “Closing Date”). Notwithstanding the foregoing, the Buyer
may elect to consummate any Closing for the Tranche 1 Studios, Tranche 2 Studios or
Development Studios at any time prior to the applicable date set forth on Exhibit D by
providing the Seller with written notice of such new Closing Date at least 75 days prior
thereto.”
34
termination right is potent evidence of the parties’ intent here and supportive of
Kenny’s “one-way gate” descriptor.138
This is not to say that the APA left CorePower without recourse should
Level 4 breach its representations and warranties pre-closing. On the contrary, the
APA contains a purchase price adjustment clause,139 and a hearty post-closing
indemnification regime.140 Additionally, because the APA does not contain an anti-
138
See Kling & Nugent §14.01 n.3 (citing to Restatement (Second) of Contracts §§ 237,
239 (1981); Farnsworth, Contracts § 8.15 (1990)) (“There is clear authority to the effect
that a party is not obligated to perform its obligations under an agreement if the other party
is in material breach of its obligations. However, the issue is essentially one of contractual
intent. Consequently, if the parties did not include any conditions to their obligations to
close, the issue would be one of whether the omission evidenced an intent to require closing
notwithstanding the breach.”) (internal citations omitted); Julian v. E. States Const.
Serv., Inc., 2008 WL 2673300, at *15 (Del. Ch. July 8, 2008) (noting that the absence of
contractual language in the operative contract used in similar agreements that were
proffered as evidence of the parties’ intent was “striking”); Casey Empl. Servs., Inc. v. Dali,
634 A.2d 938, at *3 (Del. 1993) (TABLE) (discussing the extent to which the absence of
contractual language, in certain circumstances, can be evidence of the parties’ intent);
Gluckman v. Holzman, 51 A.2d 487, 491 (Del. Ch. 1947) (Seitz, Vice Chancellor)
(observing that the lack of contractual provision with respect to “time of performance” was
presumptive evidence that the parties intended performance to be made “within a
reasonable time”). But see Levy Fam. Inv., LLC v. Oars + Alps LLC, 2022 WL 245543,
at *10 (Del. Ch. Jan. 27, 2022) (observing in the context of a form promissory note that,
given the likely lack of negotiation surrounding the agreement, the lack of a “superseding
clause” did not necessarily reflect an intent that the promissory did not “supersede” prior
note agreements).
139
APA § 2.5.5.
140
APA § 6.1.1. Indeed, as contemplated in the Call Option Exercise Agreement (JX 131,
Ex. B), the APA acknowledges that CorePower had coverage under a Representations and
Warranty Insurance Policy. APA §§ 5.2, 5.15, 6.1.1. And CorePower bargained expressly
for the right to pursue indemnification from Level 4 for any claim “excluded from coverage
under the R&W Insurance Policy.” APA § 6.1.1(d); Tr. 1137:11–1138:3 (Wong).
Relatedly, Level 4 points out that, under Section 6.8, CorePower’s only remedy post-
35
sandbagging provision,141 nothing expressly prevented CorePower from closing on
a tranche of studios and then seeking indemnification for a known breach.142 While
the indemnification provisions are not conclusive evidence that the parties intended
to close come-what-may, they do fit well within Level 4’s view that CorePower had
agreed to close on the Level IV studios upon exercise of its Call Option, and support
Kenny’s credible description of the APA’s “one-way gate.”
closing is indemnification. CorePower responds that Level 4’s reliance on Section 6.8 is
misplaced because Section 6.8 applies only after a Closing has occurred; it does not affect
the buyer’s pre-closing rights. D.I. 150 at 28; CPY OB at 82. Section 6.8 is titled
“Exclusive Remedy” and provides that “[t]he Seller and the Buyer each acknowledge and
agree that from and after the applicable Closing, excluding any claim for injunctive or other
equitable relief, the indemnification provisions of this ARTICLE VI are intended to be the
sole and exclusive remedy with respect to any and all claims relating to the subject matter
of this Agreement and the Contemplated Transactions.” APA § 6.8. Ultimately, I need
not address the relevance of Section 6.8 as my construction of the contract does not rely on
that provision.
141
Tr. 1137:11–1138:3 (Wong).
142
See NASDI Hldgs. v. N. Am. Leasing, No. 10540-VCL, at 57 (Del. Ch. Oct. 23, 2015)
(TRANSCRIPT) (observing that “Delaware is what is affectionately known as a
‘sandbagging’ state”); Cobalt Operating, LLC v. James Crystal Enter., LLC, 2007
WL 2142926, at *28 (Del. Ch. July 20, 2007) (“[A] breach of contract claim is not
dependent on a showing of justifiable reliance. . . . Having contractually promised [the
buyer] that it could rely on certain representations, [the seller] is in no position to contend
that [the buyer] was unreasonable in relying on [the seller’s] own binding words.”),
judgment entered, (Del. Ch. 2007), and aff’d, 945 A.2d 594 (Del. 2008). But see Eagle
Force Hldgs., LLC v. Campbell, 187 A.3d 1209 n.185 (Del. 2018) (acknowledging that the
issue of sandbagging is not resolved in Delaware).
36
Allowing Termination of the APA Pre-Closing Produces Absurd
Results
Level 4’s one-way gate construct is also entirely consistent with the untenable
consequences of a failure to close. As Level 4 correctly points out, under the APA,
the Franchise Agreement terminated on “the applicable Closing Date,” not upon the
applicable “Closing.”143 In other words, if CorePower did not close on the first
closing date (April 1), then, as of April 2, Level 4 would still be the owner of the
studios that should have been acquired by CorePower, but the Franchise Agreement
associated with those studios would be terminated. Of course, Level 4 cannot
operate a CorePower-branded yoga studio unless it does so under a valid franchise
agreement with respect to that particular studio.144 To require that Level 4 hold
CorePower-branded studios without being able to operate them, or that it turn
elsewhere for a banner under which its studios could operate, are absurd results that,
according to the evidence, neither party intended.145 This is further evidence that the
parties entered into the APA intending to close on the Transaction without limitation.
143
APA § 2.1.6 (emphasis added); see also Tr. 1000:18–1001:18 (Wong) (recognizing that
the defined term “Closing Date” refers to an agreed-upon calendar date).
144
Franchise Agreement §§ 14.2, 15.2.
145
See Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1160 (Del. 2010)
(“An unreasonable interpretation produces an absurd result or one that no reasonable
person would have accepted when entering the contract.”). The parties appeared to
appreciate that Level 4 could not and would not continue to own and operate CorePower-
branded yoga studios after the Closing Date. See, e.g., Tr. 1329:24–1395:20 (Kenny)
(discussing absurd results if APA did not close); Tr. 1019:14–19 (Wong) (stating that at
37
C. No Basis in the Contract to Terminate
CorePower counters Level 4’s one-way gate theory by attempting to
transfigure the APA’s boilerplate “Specific Performance” provision into an express
contractual tunnel out of the bargain it struck,146 and by arguing that the so-called
“materiality scrape” that modifies the APA’s indemnification provisions somehow
reflects the parties’ intent to allow a party to terminate pre-closing.147 For the
reasons explained below, I reject both arguments.148
1. Section 8.11
It is difficult to accept that CorePower would bury its supposedly bargained-
for express right to terminate the APA within a boilerplate provision entitled
“Specific Performance” that appears within other “MISCELLANEOUS” provisions
of the contract.149 In fact, neither the word “terminate” nor any synonym of that
the time the APA was drafted he viewed the prospect of a breach as “highly unlikely”);
Tr. 1001:13–18 (Wong) (“Q: And if you didn’t think for sure the closings were going to
occur on those dates, the franchisor, you, never would have allowed your franchisee to
terminate the franchise agreement on those dates, would you? A: That is correct.”).
146
APA § 8.11.
147
CPY OB at 29.
148
As noted above, I was not persuaded by CorePower’s argument that Level 4’s
representations constitute a “bring down” provision. This argument was another post-hoc
attempt by CorePower to find a nonexistent contractual exit off the one-way street to
closing.
149
APA §§ 8, 8.11.
38
word appear in Section 8.11 or, with respect to a right to terminate the APA at least,
anywhere else in the APA. But, even if I were to accept that the parties intended
Section 8.11 to do the work CorePower would have it do here, as explained below,
Level 4 did not materially breach the APA and, consequently, CorePower enjoys no
“other remedy . . . at law or in equity” that would justify its refusal to close.150
2. The Materiality Scrape
Likewise, CorePower’s argument regarding the so-called “materiality scrape”
is unpersuasive. Specifically, CorePower contends that because the APA’s
indemnification provision removes any materiality qualifiers from the APA’s
representations and warranties,151 this somehow evidences the parties’ intent to
allow a party to terminate the agreement before closing.152 In CorePower’s view, if
this interpretation is rejected, then the “warranties given by [Level 4] that were
qualified as to materiality” and the No-MAE Representation would be rendered
meaningless because those words are specifically deleted in the post-closing
indemnification context; thus, “the only application under the APA of those
150
APA § 8.11. At best for CorePower, Section 8.11 might be read to incorporate default
common law rules into the parties’ contractual relationship. That, of course, was
unnecessary; as explained below, contracting parties always bargain in the shadow of the
common law, unless they choose expressly to disclaim it.
151
APA § 6.1.1(a).
152
CPY OB at 29.
39
warranties (including the MAE warranty) is before closing.”153 In other words,
because materiality is not a condition to a post-closing indemnification claim, the
parties must have included “materiality” within the representations and warranties
for some other purpose—namely, to reflect those representations that, if breached,
would justify pre-closing termination of the agreement. I disagree.
If the representations and warranties were included only to define the
indemnification claims CorePower could bring against Level 4, then CorePower’s
interpretation might have more persuasive force. But the representations and
warranties made by Level 4 serve more than one purpose. In addition to defining
the scope and nature of post-closing indemnification claims available to CorePower,
among other functions, the materiality qualifiers within the representations and
warranties define the scope of what must be disclosed on the disclosure schedules to
the APA and the circumstances in which a party can seek specific performance or
injunctive relief to prevent a breach of the APA.154
In support of its materiality scrape argument, CorePower cites our Supreme
Court’s decision in AB Stable and argues that “the representations and warranties in
153
CPY OB at 28–29 (emphasis in original).
154
See APA § 2.4.2(g) (requiring that at each closing, Level 4 must deliver to CorePower
the consents and approvals set forth on Schedule 3.4); § 3.4 (containing multiple materiality
qualifiers); § 8.11 (stating that the parties have the right to an injunction to prevent breaches
or violations of the provisions of the APA).
40
the APA must be considered to ‘act independently’ from the post-closing remedy
provision embodied in Article VI” because the two provisions contain different
materiality standards.155 CorePower’s reliance on AB Stable, however, is
misplaced. In AB Stable, as part of its analysis of an ordinary course covenant and
a no-MAE representation, the Supreme Court remarked that “[t]he parties also chose
different materiality standards for the two provisions, which shows that the parties
intended the provisions to act independently.”156 Here, as explained above, the
representations and warranties in the APA act independently from the
indemnification provision. At bottom, CorePower’s materiality scrape argument
appears to be yet another post hoc attempt to generate an excuse not to close.157
*****
For the reasons just explained, I am satisfied the parties intended that the
Transaction would close without conditions. Kenny’s explanation of the one-way
155
D.I. 200 (“CPY Supplemental Submission”).
156
AB Stable, 2021 WL 5832875, at *13.
157
Level 4 correctly points out that CorePower first asserted its materiality scrape argument
in its opening post-trial brief. Level 4 AB at 33. Because this argument was not asserted
by CorePower “in any submissions prior to trial, but rather was made for the first time in
its post-trial brief,” the argument was waived. ThoughtWorks, Inc. v. SV Inv. P’rs, LLC,
902 A.2d 745, 754 (Del. Ch. 2006); see also Zaman v. Amedeo Hldgs, Inc., 2008
WL 2168397, at *16 (Del. Ch. May 23, 2008) (“Raising this argument in the post-trial
briefs is unfair, too late, and does not preserve this argument. It is waived.”). I have
considered the argument on the merits for the sake of completeness.
41
gate embedded within the APA was credible and corroborated by other evidence,
especially the APA itself. To the extent Level 4 breached the APA before closing,
CorePower’s remedies included purchase price adjustments and indemnification.
They did not include termination.
CorePower maintains that even if the APA, on its face, did not contemplate
that the parties could “hit reverse” and back out of the one-way gate, CorePower’s
election not to close reflects its proper exercise of common law rights. To be sure,
the parties did not disclaim common law rights in the APA and Level 4 has offered
no principled basis in law or fact to support the notion that either of these contracting
parties intended to waive their common law rights with respect to the APA or
otherwise. Accordingly, having concluded that the APA requires CorePower to
close on the Transaction, I turn next to the extra-contractual, common law
justifications proffered by CorePower that might justify its refusal to perform.
D. No Common Law Bases to Avoid Performance
CorePower contends that it was entitled to walk away from the Transaction
because Level 4 repudiated the contract,158 the purpose of the APA was frustrated,
and Level 4 materially breached the contract.159 I address each of these proffered
158
CPY OB at 101.
159
CPY OB at 104–05.
42
excuses below, but first address a threshold question––at what point should
Level 4’s conduct and compliance with the APA be measured when determining
whether CorePower had an extra-contractual basis to refuse to close?
Level 4 posits that the answer to the timing question is simple––the Court
should focus on the state of performance as of the time CorePower declared that it
would not close. According to Level 4, in advancing its common law excuses for
refusing to perform, CorePower conveniently ignores that it declared it would not
close on the Transaction as of March 26, yet it prates on about Level 4’s purported
breaches of the APA by pointing to events that transpired well after the first closing
date came and went without an actual closing.160
By CorePower’s lights, Level 4 was required to remain in compliance with the
APA’s representations and warranties throughout the entire Transaction period—
meaning through the final closing October 1, 2020—even after CorePower refused
to attend the first closing and declared that its “obligations [under the APA were]
discharged.161 In this regard, CorePower points to Section 5 of the APA, which
160
Level 4 AB at 65; Tr. 620:1–7 (DeCoons) (acknowledging that the furloughs at Level 4
took place on April 3, 2020); Tr. 764:6–14 (DeCoons) (acknowledging that the drop in rent
expenses occurred after April 1, 2020); Tr. 769:3–9 (DeCoons) (acknowledging that no
leases were amended prior to April 1, 2020); Leondakis Dep. at 224:6–10 (acknowledging
that as of April 1, 2020, Level 4 maintained the business’s capital expenditure and
promotional and marketing expenditure practices consistent with past practices).
161
JX 288 at 1; see Defs. and Countercl. Pls. CorePower Yoga, LLC and CorePower Yoga
Franchising, LLC’s Post-Trial Answering Br. (“CPY AB”) (D.I. 191) at 69–78.
43
states that the Ordinary Course Covenant applies “[f]rom the date of [the APA] until
the final Closing.”162 But this provision expressly contemplates that the parties will
have reached the final closing in the succession of closings contemplated in
the APA. They did not. In fact, CorePower saw to it that the parties did not even
reach the first closing. If CorePower had not materially breached the APA by
refusing to close on Tranche 1, then Level 4 would have been required to remain in
compliance with the Seller’s representations and warranties until the final Closing.
But when CorePower communicated to Level 4 that it would not perform under the
APA as of March 26,163 the bargained-for structure of the APA was lost, and when
that was lost, so too was CorePower’s justification for non-performance based on
subsequent actions or omissions by Level 4.164 When CorePower failed to perform
162
APA § 5.
163
E.g., Level 4 Yoga, LLC’s Post-Trial Opening Br. (“Level 4 OB”) (D.I. 183) at 69;
Level 4 AB at 42 (“CorePower’s litany of rationalizations share only one thing in common:
they all post-date CorePower’s decision to walk away from the acquisition.”).
164
See Bardy Diagnostics, 2021 WL 2886188, at *26 (explaining that party seeking to
justify its non-performance must demonstrate that the justification existed “at the time” the
party elects not to perform); Preferred Inv. Servs., Inc. v. T&H Bail Bonds, Inc.,
2013 WL 3934992, at *11 (Del. Ch. July 24, 2013) (“The party first guilty of a material
breach of contract cannot complain if the other party subsequently [does not] perform”);
14 Richard A. Lord & Samuel Williston, Williston on Contracts, § 43:5 (Nov. 2021
Update) [hereinafter Williston on Contracts] (observing that “the party first in default under
a bilateral contract cannot recover for the subsequent failure of the other party to perform”).
The Williston treatise goes on to explain that this rule is especially apt when the first breach
is “total,” such as an outright refusal to perform, as opposed to “partial.” Id. See also
Commonwealth Const. Co. v. Cornerstone Fellowship Baptist Church, Inc.,
2006 WL 2567916, at *19 (Del. Super. Ct. Aug. 31, 2006) (holding that “a party in material
44
on April 1, Level 4 correctly perceived that, from that point forward, it was merely
a steward of CorePower’s assets.165
Having determined that I must focus on Level 4’s compliance with the APA
as of the time CorePower declared it would not close when considering the
bona fides of CorePower’s proffered common law justifications for refusing to
perform, I address each justification in turn. As discussed below, none excuse
CorePower’s non-performance.166
Repudiation
“A repudiation of a contract is an outright refusal by a party to perform a
contract or its conditions.”167 “A party may repudiate an obligation through
statements when its language, reasonably interpreted, indicates that it will not or
cannot perform; alternatively, a party may repudiate through a voluntary and
breach”––here CorePower by refusing to close without justification––“. . . cannot then
complain if the other party fails to perform”). This perspective makes perfect sense in this
case. It is impossible to know how Level 4 might have performed under the APA going
forward had CorePower honored its obligation to close on April 1 and completed the
acquisition of Tranche 1, and Level 4 was not obliged to engage in that conjectural exercise
to prove that it is entitled to specific performance.
165
Level 4 AB at 65. Cf. McKinley v. Casson, 80 A.3d 618, 627 (Del. 2013) (“The duty to
mitigate damages generally arises after a defendant has breached its duty to a plaintiff.”).
166
I begin the analysis with repudiation since that was the only excuse CorePower
communicated to Level 4 in real-time when it decided not to close. JX 288 at 1; Tr. 352:21–
355:16 (Otepka).
167
PAMI–LEMB I Inc. v. EMB–NHC, L.L.C., 857 A.2d 998, 1014 (Del. Ch. 2004).
45
affirmative act rendering performance apparently or actually impossible. In any
event, repudiation must be ‘positive and unconditional.’”168 CorePower argues
Level 4 repudiated the APA in both word and in deed.169 In fact, Level 4’s supposed
repudiation was the rationale proffered by CorePower when it walked away from the
deal.170 The evidence adduced at trial, however, reveals that the proffered
“repudiation” was nothing more than CorePower’s knee-jerk contrivance to justify
its preordained decision to back out of the deal after Level 4 refused to delay the
closings.171
168
W. Willow-Bay Court, LLC v. Robino-Bay Court Plaza, LLC, 2009 WL 458779, at *5
(Del. Ch. Feb. 23, 2009) (quoting Carteret Bancorp, Inc. v. Home Gp., Inc.,
1988 WL 3010, at *6 (Del. Ch. Jan. 13, 1988)).
169
CPY OB at 101.
170
E.g., JX 288 at 1 (stating on March 26 in an email that CorePower viewed Level 4’s
“denials and posturing” as “a repudiation of multiple obligations embodied in the Purchase
Agreement”); JX 303 (reiterating CorePower’s view that Level 4 had “repudiated multiple
material obligations embodied in the Asset Purchase Agreement” and thereby
“discharge[ed] [CorePower’s] obligations thereunder”).
171
I note that CorePower has not invoked “anticipatory repudiation” or “anticipatory
breach” as a basis to avoid performance. Its position in March 2020 (and since) was
(and has been) that Level 4, then and there, had repudiated the APA. JX 288 at 1. In any
event, “to constitute an anticipatory repudiation,” the acts or statements of the alleged
repudiator must “amount[] to an unequivocal statement . . . that the breaching party would
not perform its promise.” AMG Vanadium LLC v. Glob. Advance Metals U.S.A., Inc.,
2020 WL 1233752, at *7 (Del. Super. Ct. 2020) (cleaned up). “An expression of doubt
alone as to one’s ability to tender performance on time is not enough to amount to
repudiation.” Elliott Assoc., L.P. v. Bio-Response, Inc., 1989 WL 55070, at *3 (Del. Ch.
May 23, 1989) (citing 4 Corbin on Contracts § 974 (1951)). As discussed below, Level 4
made no such unequivocal statement, by word or deed, prior to the time CorePower
announced it would not close.
46
a. No Repudiation by Word
CorePower appears to rely on a single email exchange between Kenny and
Wong as evidence that Level 4 expressed its intent to repudiate by word.172
On March 19, 2020, Kenny wrote that current COVID-19 dynamics “have
[Level 4’s] operating mode no longer in the ordinary course of business.”173
According to CorePower, this email evidences Level 4’s unconditional intent to
repudiate the APA since it confirms at the highest level that Level 4 was unable to
honor its express commitment to operate in the ordinary course before closing. The
persuasive trial evidence, however, revealed CorePower’s characterization of
Kenny’s email to be litigation-driven hyperbole.174
Repudiation requires “an outright refusal by a party to perform a contract or
its conditions.”175 Aside from the language plucked out by CorePower, Kenny’s
March 19 email, as a whole, illustrates a commitment from Level 4 to close on the
172
PTO ¶ 59.
173
JX 265 at 3.
174
Kenny credibly explained that his email was responding to a previous telephone
conversation with Wong during which Wong generally observed that COVID-19 had
caused operations at CorePower yoga studios to deviate from the ordinary course.
Tr. 72:5–74:14 (Kenny). During that discussion, the parties were speaking in general terms
and not specifically referring to the APA’s Ordinary Course Covenant or representations
that included an ordinary course qualifier. Id.
175
Veloric v. J.G. Wentworth, Inc., 2014 WL 4639217, at *15 (Del. Ch. Sept. 18, 2014).
47
Transaction.176 Moreover, three days later, Kenny’s next email affirmed that Level 4
believed the deal was on: “We expect the Buyer to close on the timeline described
in the amended Exhibit D to the APA . . . .”177 To remove any doubt as to Level 4’s
intentions and expectations, in his March 22 email, Kenny expressly states,
“[w]e want to be clear on our expectations and the terms of the APA. We have and
will continue to operate the Business in the ordinary course pursuant to
the APA . . . . More specifically, we have, and we will, preserve the assets associated
with the Business.”178 These are not the statements of a repudiating party. Wong
himself agreed.179
b. No Repudiation by Deed
Nor did Level 4 repudiate the APA by deed. In its March 26 email to Level 4,
CorePower asserts that its “contractual performance has been discharged” because
Level 4’s “disavowal of [certain] obligations constitutes a repudiation of the
176
E.g., JX 265 at 3 (“Our team would commit the resources pre- and post-closing to ensure
success with the transitioning team.”).
177
JX 265 at 1. At best for CorePower, even if Level 4 repudiated the APA by email on
March 19, Kenny’s later email expressly revoked that repudiation. See Willow-Bay Court,
2009 WL 458779, at *5 (“Unless the non-repudiating party relies upon the repudiation or
notifies the promisor that it considers the repudiation final, the promisor may retract his
repudiation, thereby returning the parties to the status quo ante.”).
178
JX 265 at 1 (emphasis added).
179
Tr. 1079:24–1080:14 (Wong) (“Q. Did this email, in your view, constitute a repudiation
of the asset purchase agreement? A. This email itself? Q. Yes. A. No.”).
48
[APA].”180 Specifically, CorePower identified the following as evidence of
Level 4’s supposed repudiation by deed:
The applicable contractual provisions [Level 4 had allegedly
disavowed] include, among others:
• Section 3.6(a), which calls on you to conduct the Business in
the Ordinary Course of Business so that the Business does not
experience a material loss;
• Section 3.6(e), requiring that the “Seller has not terminated or
closed any facility, business or operation”
• Section 3.6(1), requiring that Seller conduct the Business in
the Ordinary Course of Business so that the Business does not
experience a Material Adverse Effect; and
• Section 5.1, requiring that the Seller conduct the Business
“only in the Ordinary Course of Business” detailing multiple
components of the business that must be so conducted
“consistent with past practice.”181
CorePower’s March 26 email states the basis for its refusal to close. It is appropriate,
therefore, to focus on the proffered acts of repudiation outlined in that email when
assessing whether Level 4, in fact, had repudiated the APA when CorePower
declared it would no longer perform under the APA.182
180
JX 288 at 1.
181
Id.182
CorePower generated new excuses for refusing to close as this litigation wore on,
culminating in its post-trial argument that, by March 26, Level 4 had demonstrated a
general “unwillingness to deliver . . . [a] business with particular attributes operating at an
established standard” and “[t]he goodwill and intangible assets” of the studios. CPY OB
at 102. Of course, CorePower’s argument that Level 4 was obliged to deliver assets with
49
Contrary to its repudiation pretext, CorePower’s proffered evidence reveals
who actually played the repudiation card first and, in so doing, exposes the flaw in
its argument. Indeed, all of the actions (or events) CorePower points to in support
of its repudiation argument were taken (or occurred) after CorePower had
definitively declared it would not close on the Transaction.183 Whether one looks to
March 20, when the CorePower board proposed that the parties consider adjourning
the closing dates under the APA, or March 26, when CorePower asserted that
Level 4 had repudiated, none of the actions CorePower relies on to argue repudiation
by deed had occurred by the relevant date (April 1, 2020, the first closing date)––as
a particular level of “goodwill” value finds no support in the APA. Instead, the APA simply
required Level 4 to deliver the goodwill associated with the Acquired Assets and not to
“engage in any activity that might injure the goodwill of the Business.” See APA Ex. A,
§ 5.6.2(c). Similarly, CorePower’s refrain that Level 4 promised to deliver “well-run” and
“well-operated” studios is nowhere supported by the language of the APA or any other
credible evidence. See, e.g., Tr. 214:22–215:18 (Kenny) (“Q. Well, look at what your
obligations are. Wasn’t the deal you were talking about from where – it’s fair to say that
the transaction you were talking about was the transfer of well-run studios? A. I don’t
believe that’s what the APA says. Q. I’m asking you about – the basic purpose of your
transaction was to have you transfer well-operated studios to the buyer? A. I don’t agree
that that’s what the APA says. Q. Let me try again. Isn’t it fair to say that the essence of
the transaction, because you talked all about lots of different pieces of paper – the essence
of this transaction was for you to transfer well-operated studios to CorePower? A. I don’t
know of a defined term in the APA or the call option agreement defining “well-operated
studios.” So I don’t know how to live up to that statement.”). In fact, the APA makes clear
that Level 4 was to deliver its yoga studios “as is” and “where is.” APA § 3.21.
183
Level 4’s Answering Post-Trial Br. (“Level 4 AB”) (D.I. 192) at 8. While the studios
were closed prior to April 1, CorePower points to the “prolonged shutdown of all Studios”
as evidence of repudiation. CPY OB at 98. The studios were not shut down for a prolonged
period of time prior to April 1; in fact, at that time, as noted, the closures were expected to
be very temporary.
50
discussed below, Level 4 had not restructured any leases, laid-off employees or cut
its marketing expenditures.184
i. Material Loss—Section 3.6(a)
CorePower’s March 26 email maintained that Level 4 repudiated the APA
because Level 4’s business as a whole had experienced financial losses greater than
$50,000.185 Level 4’s expert, Jeffrey J. Mordaunt, disagreed with this interpretation,
stating in his report that “[CorePower’s] interpretation of this provision is
inconsistent with my experience involving similar provisions in acquisition
agreements.”186 Specifically, Mordaunt explained that, based on his experience,
representations like those in Section 3.6(a) are “made to ensure that there is no
physical damage to or dispossession of the assets of the business. The purpose of
184
JX 1020 (lease amendment summary); Tr. 768:19-769:9 (DeCoons) (recognizing that
there were no lease amendments dated prior to April 1, 2020); Tr. 1313:10–15 (Leondakis)
(acknowledging that Level 4 conducted its layoffs on April 3, 2020, which was after
CorePower had conducted its layoffs); Leondakis Dep. at 224:6–10 (“Q. Did Level 4
maintain the business’s capital expenditure and promotional and marketing expenditure
practices consistent with best practice as of the date of closing? A. I believe so.”).
185
JX 288 at 1; CPY OB at 65 n.39 (stating that Section 3.6(a) barred Level 4 from
suffering a material loss in excess of $50,000); CPY AB at 18–20; APA § 3.6(a) (Level 4
representing that “[t]here has been no material loss . . . affecting the Business or any
Acquired Asset with a value in excess of $50,000”).
186
JX 644 (“Mordaunt’s Report”) ¶ 107.
51
these types of representations is for the seller to provide assets in a similar condition
compared to when the agreement was entered.”187
In my view, neither party has proffered a reasonable construction of the
contractual provision at issue. Section 3.6(a) represents that no “material loss”
(undefined) had “affect[ed]” the Business or an “Acquired Asset with a value in
excess of $50,000.”188 As the language makes clear, $50,000 describes the value of
the Acquired Assets subject to the representation, not that the value of the loss to
such Acquired Assets. And CorePower presented no evidence of a “material loss”
as of March 26. That being said, even under CorePower’s proffered interpretation,
the evidence supports a finding that Level 4 “had not experienced a financial loss
over $50,000 by the time TSG and the Defendants [walked away from] the
Transaction on March 20, 2020.”189 As Mordaunt credibly testified, as of the date
CorePower terminated the Transaction, “Level 4’s EBITDA was $(28,669), which
does not meet the threshold of a $50,000 loss.”190
187
Mordaunt’s Report ¶ 108.
188
APA § 3.6(a).
189
Mordaunt’s Report ¶ 112.
190
Mordaunt’s Report ¶ 112(a).
52
ii. Studio Closures—Section 3.6(e)
CorePower also asserted that Level 4 had repudiated the APA by breaching
Section 3.6(e).191 There, Level 4 represented that it had “not terminated or closed
any facility, business or operation.”192 On March 15, 2020, CorePower announced
on its website that all CorePower studios, including Level 4’s, would be closed in
response to COVID-19.193 As a result, Level 4 was required to close its studios and
did so the following day.194 Not long after, when government-mandated closures
went into effect, like all other CorePower yoga studios, Level 4 was obligated under
the Franchise Agreement to close its studios to comply with those mandates.195
At the time CorePower walked away from the Transaction, the parties operated
under the assumption that these closures would be temporary.196
191
JX 288 at 1.
192
APA § 3.6(e).
193
PTO § III(D)(55).
194
PTO § III(D)(56).
195
Pessin Dep. at 42:9–24 (acknowledging that the franchise agreements required
CorePower franchisees to operate their studios in full compliance with all applicable laws,
ordinances and regulations, and if a government order required a CorePower franchisee,
like Level 4, temporarily to close a CorePower-branded yoga studio, then CorePower
would expect the franchisee to do so).
196
Tr. 587:10–588:6 (Mordaunt) (commenting that “as of March 16th of 2020, the CDC
and the White House had only suggested temporary closures for two weeks. And then
states that issued closure orders within the second half of March, all of them expected the
closures to last through the end of March or, worst case, mid-April of 2020, that on April 1,
2020”); Pessin Dep. at 141:11–19 (“Q. Is it fair to say that on March 2020 – March 20,
53
When determining whether these temporary closures evidenced Level 4’s
“outright refusal . . . to perform the [APA],”197 I must focus on whether Level 4
signaled “that it [would] not or [could not] perform” the APA when it complied with
CorePower’s direction that it temporarily shutter its CorePower-branded yoga
studios.198 No such signal was delivered. First, repudiation requires a
“voluntary act.”199 Level 4 did not voluntarily close its yoga studios; it was required
to close them, first at the direction of its franchisor and then by government
mandates.200 Moreover, at most, CorePower expected the closures to last for six
2020, that CorePower management’s best estimate about the anticipated duration of the
Coronavirus closures was six weeks? A. Yeah, I guess. I guess. There’s probably a deck
that shows two, and there’s probably one that shows eight. So yes, I guess. At that moment
in time, maybe it was six weeks we were looking at.”).
197
PAMI–LEMB I Inc., 857 A.2d at 1014.
198
W. Willow-Bay Court, LLC, 2009 WL 458779, at *5.
199
Id.200
See JX 230; JX 261; Tr. 336:8–23, 343:9–12 (Otepka); Tr. 120:24–122:11 (Kenny);
JX 302; JX 306–07; JX 320; JX 340; JX 343;JX 345–46; JX 349; JX 363; JX 367; JX 375;
JX 391; JX 393; JX 396; JX 412–13; JX 432; JX 618. To be sure, CorePower notified
Level 4’s members of the closures directly and then shut-down Level 4’s yoga class
reservation system. See Tr. 342:18–343:12 (Otepka). Once the government stepped in,
the APA and the Franchise Agreement both required Level 4 to comply with the mandated
closures lest it breach its contractual obligations. See APA § 3.11.1; Franchise Agreement
§ 8.7; Tr. 1069:23–1070:4 (Wong).
54
weeks.201 Such temporary closures hardly evidence outright refusal and inability to
perform.202
iii. Material Adverse Effect—Section 3.6(l)
CorePower next asserted that a repudiation had occurred because the effects
of the COVID-19 pandemic caused Level 4 to breach its representation that no MAE
had occurred (the “No-MAE Representation”).203 To determine whether an MAE
occurred, I start with the APA’s definition of the term and then consider “whether
there has been an adverse change in the target’s business that is consequential to the
company’s long-term earnings power over a commercially reasonable period, which
one would expect to be measured in years rather than months.”204 With that said,
I am mindful that “[t]here is no ‘bright-line test’ for evaluating whether an event has
caused a material adverse effect.”
Under the APA, MAE is defined as “a material and adverse effect on the
business, assets, liabilities, financial condition, property or results of operations of
201
JX 257 at 3 (showing that as of March 20, 2020, CorePower thought the studios would
be closed for no longer than six weeks).
202
PAMI–LEMB I Inc., 857 A.2d at 1014.
203
JX 288 at 1; CPY AB at 75. See APA §3.6(l) (representing that “[n]o event or
circumstance has occurred which constitutes a Material Adverse Effect”).
204
Hexion Specialty Chems., Inc. v. Huntsman Corp., 965 A.2d 715, 738 (Del. Ch. 2008).
55
the Seller, taken as a whole.”205 This definition, unlike other MAE definitions,
contains no exceptions.206 This would signal that the seller is assuming most of the
risk of an MAE.207
On the other hand, certain aspects of the APA’s MAE definition favor the
seller. Specifically, the definition does not contemplate that the parties will
undertake a forward-looking analysis when assessing if an MAE has occurred.208
This court has observed that, “[t]he forward-looking nature of the [MAE] also flows
from the language of a standard MAE provision, which asks whether an effect
‘has had or is reasonably expected to have’ a material adverse effect.”209 The phrase
205
APA Ex. A at 58.
206
AB Stable, 2020 WL 7024929, at *48 (commenting that the contractual definition of
material adverse effect at issue in that case “follows standard form, consisting of an initial
definition followed by a series of exceptions”); see also Matthew Jennejohn et al., COVID-
19 as a Force Majeure in Corporate Transactions (Columbia L. and Econ. Working Paper
No. 625, BYU L. Research Paper No. 21-10, 2020) (available at
https://ssrn.com/abstract=3577701) (finding that, as of March 26, 2020, nearly 24% of
pending deals explicitly carve out pandemic-like contingencies and 42% implicitly carve
out such events through general force-majeure provisions).
207
Unlike the “overwhelming majority of contemporary deals,” the MAE definition in the
APA “does not contain an exclusion for events that have a disproportionate effect on
[Level 4 or its business]. A disproportionate-effect exclusion favors the seller by shifting
risk back to the buyer.” AB Stable, 2020 WL 7024929, at *61. Thus, “the omission of a
disproportionality exclusion signals a seller-friendly MAE clause.” Id.APA § 3.6(l) (“No event or circumstance has occurred which constitutes a Material
208
Adverse Effect.”) (emphasis supplied).
209
AB Stable, 2020 WL 7024929 at *61 (emphasis supplied) (citing Frontier Oil Corp. v.
Holly Corp., 2005 WL 1039027, at *34 (Del. Ch. Apr. 29, 2005)).
56
“expected to have” would allow a buyer to declare an MAE based on reasonably
anticipated events, even if those events had not yet occurred. As noted, this forward-
looking language is absent from the MAE definition at issue here.210
When determining whether an MAE has occurred, the court must find that
“the magnitude of the downward deviation in the affected company’s performance
[was] material,”211 and that the effect will “substantially threaten the overall earnings
potential of the target in a durationally-significant manner.”212 The durational
significance is particularly important here because CorePower was seeking to
acquire Level 4 as part of a long-term strategy.213 “To such an acquiror, the
important thing is whether the company has suffered a Material Adverse Effect in
its business or results of operations that is consequential to the company’s earnings
210
With this said, even in the absence of forward-looking language in the definition,
“[t]he concept of a material adverse effect is inherently forward looking, and necessarily
so because of the ‘basic proposition of corporate finance that the value of a company is
determined by the present value of its future cash flows.” AB Stable, 2020 WL 7024929,
at *61 (citing Hexion, 965 A.2d at 743 n.75).
211
Akorn, 2018 WL 4719347, at *52.
212
In re IBP, Inc. S’holders Litig., 789 A.2d 14, 68 (Del. Ch. 2001), as corrected (Del. Ch.
June 18, 2001).
213
Tr. 961:6–12 (Wong) (When asked what TSG’s investment horizon was for CorePower
Yoga, Wong remarked that TSG “underwrite[s] to a five-year investment horizon.”);
Tr. 1034: 6–13 (Wong) (“Q. And you were the long-term owner; right? A. Potentially,
yes, we were scheduled to be the long-term owner, yes. Q. Well, you had signed a contract
that made you the long-term owner, hadn’t you? A. Yes, but hadn’t closed yet, so we
weren’t long-term owner yet.”).
57
power over a commercially reasonable period, which one would think would be
measured in years rather than months.”214
CorePower, Level 4 and their respective experts offered dueling perspectives
regarding whether the COVID-19 pandemic significantly impacted the value of
Level 4’s business.215 I need not decide who has the better of the evidence on this
issue, however, because even if the effect ultimately was significant, at the time
CorePower purported to invoke the No-MAE Representation, there was absolutely
no basis for CorePower to conclude that the business effects of COVID-19 were
then, or later would be, significant.216
An MAE’s durational significance must be measured from the perspective of
a “reasonable acquiror.”217 “[O]ur courts have stopped short of prescribing specific
time periods when assessing ‘durational significance,’ and for good reason. . . .
214
In re IBP, 789 A.2d at 67.
215
See generally Mordaunt’s Report; JX 673.
216
See Bardy Diagnostics, 2021 WL 2886188, at *26 (analyzing whether the effect on
plaintiff’s earning potential, “at the time [the defendant] invoked the MAE clause, would
reasonably be expected to constitute an MAE”) (emphasis added) (internal quotation marks
omitted); Channel Medsystems, Inc. v. Boston Sci. Corp., 2019 WL 6896462, at *28
(Del. Ch. Dec. 18, 2019) (holding that the party asserting the occurrence of a material
adverse effect “has the burden to prove that, as of the termination date, the inaccurate
representations in the [a]greement would reasonably be expected to have a Material
Adverse Effect on [the allegedly breaching party] around the time the parties[ ] expected
the merger to close.”) (emphasis added).
217
In re IBP, 789 A.2d at 68 (emphasis added).
58
[T]he determination of what is a ‘commercially reasonable period’ is contextual and
necessarily fact intensive”; it will “turn on the target company’s unique
characteristics and the broader business dynamics in which the target operates.”218
As in Snow Phipps, where Chancellor McCormick observed that
“[t]his court’s decisions in IBP and Akorn provide helpful benchmarks confirming
that it was not reasonable to expect that [COVID-19’s effects on the target] would
mature into a material adverse effect,” I am satisfied those benchmarks lead to the
same conclusion here.219 Chancellor McCormick aptly summarized those cases as
follows:
In IBP, the seller experienced a 64% decrease in year-over-year first
quarter earnings due to severe winter weather that adversely affected
livestock supplies. By the termination date, however, the seller had two
weeks of strong earnings that signaled a strong quarter ahead. Further,
the analyst community was predicting that IBP would return to
historically healthy earnings the following year. The court concluded
that the business appears to be in sound enough shape to deliver results
of operations in line with the company’s recent historical performance.
The court thus held that a material adverse effect was not reasonably
expected.
In Akorn . . . , the seller’s EBITDA had grown each year from 2012
through 2016, but it fell by 55% after the merger agreement was signed
in 2017. The buyer sent the seller a notice of termination in early 2018.
According to the seller’s management, the downturn had already
persisted for a year and showed no sign of abating. Analyst estimates
218
Bardy Diagnostics, 2021 WL 2886188, at *27.
219
Snow Phipps, 2021 WL 1714202, at *33 (finding that no material adverse effect had
occurred).
59
for the seller’s 2018, 2019, and 2020 EBITDA were lower than those
at the time of signing by 62.6%, 63.9%, and 66.9%, respectively. The
court found that the company’s poor performance was the result of
unexpected new market entrants, which lead to price erosion. The court
held that this sudden and sustained drop in Akorn’s business
performance was reasonably expected to constitute a material adverse
effect.
The Akorn court also addressed whether the seller’s regulatory issues,
which were not disclosed to the buyer when the merger agreement was
signed, constituted a material adverse effect. After weighing the
credibility of the experts and conducting its own cross-check, the court
concluded that the regulatory issues represented a 21% decrease in the
equity value of the seller. The court held that this decrease was
reasonably expected to constitute a material adverse effect.220
With this backdrop in mind, it is rather easy to conclude that the evidence of
COVID-19’s effects on Level 4’s business as of the time CorePower declared the
occurrence of an MAE falls well short of reaching the MAE mark. It is not
surprising, then, that CorePower’s expert witness, Robert Reilly, testified that he had
no opinion on whether Level 4 had experienced an MAE prior to April 1, 2020. 221
And CorePower’s other witnesses admitted they performed no analysis of whether
Level 4 experienced an MAE in March 2020 when CorePower decided not to
close.222
220
Snow Phipps, 2021 WL 1714202, at *33–34 (emphasis in original) (internal quotation
marks, footnotes and alterations omitted).
221
Tr. 1213:23–1214:1 (Reilly).
222
Tr. 1297:24–1298:5, 1301:12–1302:15 (Leondakis); Trial Tr. 1064:7–17 (Wong).
60
CorePower’s own actions and statements indicate that, as of the date of the
first closing, it did not believe the COVID-19 pandemic would persist for any
durationally significant period. As a condition to drawing on its delayed-draw term
loan, CorePower certified to its lenders that, as of the proposed borrowing date
(March 19, 2020), “there ha[d] been no event or circumstance, either individually or
in the aggregate, that has had or would reasonably be expected to have a Material
Adverse Effect.”223 Not surprisingly, CorePower presented no credible evidence to
explain how the COVID-19 pandemic purportedly disrupted Level 4’s business to a
degree that would qualify as an MAE while CorePower’s business was able to rise
above the MAE mark. To the contrary, I am satisfied that when CorePower certified
to its lender that it had not suffered an MAE as of March 19, 2020, it had no reason
to believe then, or a week later, that Level 4 was situated any differently.224
On March 20, 2021, during a presentation to its board, CorePower’s
management team forecasted that CorePower’s COVID-related studio closures
223
See JX 120 § 5.04(c); JX 224; Pessin Dep. at 165:5–166:11; Tr. 1093:17–1094:2
(Wong); Tr. 1303:21–1306:16 (Leondakis).
224
This evidence is especially convincing given that the MAE representation made by
CorePower under its credit agreement contained the forward-looking phrase––“has had or
would be reasonably be expected to have”––that the parties chose to omit from the APA’s
MAE definition. See JX 120 § 4.01(i).
61
would last six weeks.225 This is hardly durationally significant under any measure.226
And yet, at this same March 20 board meeting, CorePower decided it would not
close on the Transaction.227 I need not decide whether CorePower’s decision was
motivated by a perceived need to preserve its liquidity, as argued by Level 4,228 or by
a preference to focus more acutely on the evolving COVID-19 situation without
distraction. In either scenario, it appears that CorePower anticipated only “[a] short-
term hiccup in earnings,” which our court has determined “should not suffice” for
an MAE.229
iv. Ordinary Course of Business—Section 5.1
CorePower’s final proffered basis to rationalize its repudiation claim was that
Level 4 had breached the Ordinary Course Covenant and the representations that
225
JX 257 at 3.
226
Akorn, 2018 WL 4719347, at *53 (citing to Raskin v. Birmingham Steel Corp.,
1990 WL 193326, at *5 (Del. Ch. Dec. 4, 1990) and Allegheny Energy v. DQE, Inc.,
74 F. Supp. 2d 482, 518 (W.D. Pa. 1999)) (“Chancellor Allen posited that a decline in
earnings of 50% over two consecutive quarters would likely be an MAE. Courts in other
jurisdictions have reached similar conclusions.”).
227
Tr. 1293:13–1294:21 (Leondakis).
228
See, e.g., Level 4 AB at 4–5 (“The repudiation argument was merely the first of a long
series of CorePower’s excuses for its financial decision at its March 20, 2020 board
meeting to preserve cash during the pandemic regardless of its contractual obligations to
Level 4 and heedless of the cost to Level 4.”).
229
Akorn, 2018 WL 4719347, at *53 (quoting In re IBP, 789 A.2d at 68).
62
were subject to an ordinary course condition.230 CorePower continued to press that
claim at trial and it bore the burden to prove it.231 Here again, its trial proofs fell
short.232
This court has interpreted “the contractual term ordinary course to mean the
normal and ordinary routine of conducting business.”233 As explained in AB Stable:
Generally speaking, there are two principal sources of evidence that the
court can examine to establish what constitutes the ordinary course of
business. First, the court can look to how the company has operated in
the past, both generally and under similar circumstances. Second, the
court can look to how comparable companies are operating or have
operated, both generally and under similar circumstances.234
As is the case here, however, when “an ordinary course provision includes the phrase
‘consistent with past practice’ or a similar phrase, the court evaluates the second
230
JX 288 at 1.
231
See AB Stable, 2020 WL 7024929, at *51 (“Buyer contends that Seller failed to fulfill
the Ordinary Course Covenant. Consistent with prior precedent, Buyer bore the burden of
proving that Seller breached this covenant and caused the Covenant Compliance Condition
to fail.”).
232
I confess that CorePower’s position that it should be excused from performing the APA,
in part, because Level 4 followed CorePower’s instruction temporarily to close its
studios—an instruction CorePower itself executed when it directly contacted Level 4
members to advise them that Level 4’s studios were closed and then manually cancelled
all Level 4 yoga classes––was received by the Court with the sour taste of hypocrisy.
233
See AB Stable, 2020 WL 7024929, at *68 (cleaned up); Cooper Tire & Rubber Co. v.
Apollo (Mauritius) Hldgs. Pvt. Ltd., 2014 WL 5654305, at *17 (Del. Ch. Oct. 31, 2014)
(quoting Ivize of Milwaukee, LLC v. Complex Litig. Supp., LLC, 2009 WL 1111179, at *9
(Del. Ch. Apr. 27, 2009)).
234
AB Stable, 2020 WL 7024929, at *70.
63
category only.”235 Thus, when determining whether Level 4 failed to operate in the
Ordinary Course of Business, I train my sight on how Level 4 itself historically has
operated, both generally and under similar circumstances.236
As explained above, Level 4’s operation of its CorePower-branded studios
was almost entirely dictated by CorePower’s System Standards. And all relevant
evidence presented at trial revealed that Level 4 historically and faithfully adhered
to those standards.237 If CorePower took an action with respect to its corporate-
235
Snow Phipps, 2021 WL 1714202, at *38 (citing AB Stable, 2020 WL 7024929, at *71).
To reiterate, the APA defines “Ordinary Course of Business” as “an action taken by any
Person in the ordinary course of such Person’s business which is consistent with the past
customs and practices of such Person (including past practice with respect to quantity,
amount, magnitude and frequency and standard employment policies and past practices
with respect to management of cash and working capital) which is taken in the ordinary
course of the normal day-to-day operations of such Person.” APA Ex. A at 59 (emphasis
supplied).
236
I acknowledge CorePower’s argument that Level 4 is asking “the Court [to] rewrite the
absolute and unqualified language of the provision—adding a scienter requirement or
efforts qualifier that would limit the application of that provision to Plaintiff’s volitional
conduct.” CPY Supplemental Submission at 3. I disagree. Level 4 did not argue, and the
evidence did not prove, that Level 4 did its best to operate in the ordinary course but fell
short. Rather, Level 4 has maintained all along, and the preponderance of the evidence
proves, that Level 4 was successful in its efforts to operate its yoga studios in the ordinary
course during the post-signing/pre-closing period.
237
Tr. 23:15–25:14 (Kenny) (summarizing instances when Level 4 complied with the
System Standards despite disagreeing with the direction); Tr. 300:11–17 (Otepka) (“Q. Did
Level 4 have a practice of complying with its franchise agreements? A. Yes, we did.
Q. Can you recall a time that Level 4 ever received a notice that it was not in compliance
with its franchise agreement? A. No, we never received that notice.”). I acknowledge that
the evidence reveals that Level 4 occasionally deviated from System Standards.
Tr. 1272:13–1273:20 (Leondakis) (discussing how, unlike CorePower, Level 4 did not
mandate the wearing of masks); Tr. 1270:5–1272:8; 1333:23–1335:13 (Leondakis)
(describing how, in November 2020, CorePower’s Chicago studios remained closed due to
64
operated studios that affected its mode of operation, Level 4 was required under the
Franchise Agreement to follow suit.238 If CorePower gave a direction to its
franchisees, such as to close yoga studios temporarily, Level 4 was obligated to
health regulations, but because Level 4 interpreted the same regulation differently,
it elected to open its Chicago studios). These deviations were almost always cured and
they were uncommon. Tr. 1333:13–22 (Leondakis) (“But you’ve never gone to Level 4
after you became aware of it and said, you’re doing something inconsistent with your
franchise obligations, have you? A. No. Q. And you acknowledged at your deposition that
if CorePower believed that Level 4 was in violation of its franchise agreements, CorePower
would have given notice to Level 4. Right? A. Yes.”) Tr. 1335:4–21 (Leondakis)
(discussing when Level 4 failed to follow system standards regarding studio closures and
masking protocols and CorePower’s response). More to the point, the occasional
deviations do not alter my factual finding that Level 4’s custom and practice was to comply
with System Standards and other directions it received from CorePower as franchisor.
238
Tr. 301:23-302:18 (Otepka) (Section 8.1 of the Franchise Agreement states,
“You acknowledge and agree that operating and maintaining your Studio according to
System Standards is essential to preserve the goodwill of the Marks and all Studios.” When
asked how Level 4 followed this guidance in the ordinary course of its business, Otepka
credibly testified: “So as CEO, it’s my responsibility for running the studios according to
CorePower Yoga’s standards. And as it says here, these – following their standards,
following their guidance, following their lead to follow these standards, it is important for
maintaining brand consistency. And it’s ‘essential to preserve the goodwill of the Marks’
means, you know, it’s critical that we maintain brand consistency by operating under these
standards.”) (emphasis supplied). At trial, Wong testified that, in some respects,
CorePower deviated from its own historic practices and never advised Level 4 that it was
required to “follow these new standards.” Tr. 1054:5–1055:5 (Wong). I found the
testimony confusing and ultimately unpersuasive. No evidence was presented that would
indicate Level 4 was not required under the Franchise Agreement to operate in accordance
with the System Standards. And the System Standards include any direction provided by
CorePower to Level 4 via written or oral communications. Franchise Agreement § 4.3;
see also Tr. 1050:9–1051:23 (Wong).
65
comply.239 This is precisely why Level 4 took the actions that CorePower now
asserts violated the Ordinary Course Covenant.
As noted, CorePower directed that its franchisees close their studios, and
Level 4, consistent with past practice, obliged. CorePower started implementing
employee layoffs soon after, on March 30, 2020.240 Ultimately, CorePower laid off
roughly 98% of its employees and made its franchisees, like Level 4, aware of those
layoffs as they happened.241 CorePower also provided its franchisees with a script
the franchisee could use when conducting its own layoffs.242 A few days later, on
April 3, 2020, Level 4 followed CorePower’s lead and furloughed the majority of its
staff.243 Again, while the layoffs may have been extraordinary, the practice of
239
Tr. 366:14–367:3 (Otepka) (“Q. Were Level 4’s temporary closures consistent with its
past custom and practice? A. Absolutely. Q. And why? A. Well, as I’ve been mentioning,
we’ve had a longstanding history of following the franchise agreement. That’s our Bible.
And in that, we followed, you know, the health and safety, as I described. We also had a
history of following what CorePower was doing. And, again, CorePower was – their studio
closed ours, and we were closing according to what they were doing, as we always would
have.”) Tr. 1037:13–22; 1056:2–1057:13 (Wong) (confirming that CorePower notified its
members that all CorePower studios would be closed).
240
JX 1010; Tr. 1311:4–7 (Leondakis). Of course, by March 30, CorePower had already
advised Level 4 that CorePower would not perform under the APA. See JX 288 at 1.
241
Tr. 1312:1–24 (Leondakis).
242
Tr. 1313:1–5 (Leondakis).
243
Tr. 1313:10–15 (Leondakis).
66
following the direction of the franchisor was entirely ordinary and consistent with
past practice.244
In its post-trial brief, CorePower argued there were differences between
Level 4’s operations pre- and post-pandemic in other respects (even after studios
reopened), including “revenue, staffing, class size, lockers, hands-on training,
teacher training, bring your own stuff, safety protocols[,] etc.” 245 CorePower, once
again, fails to recognize that these actions were consistent with Level 4’s ordinary
course because, in each respect, Level 4 followed the example set by its franchisor.246
With respect to changes in revenue, the APA contains no seller’s representation that
revenue was not affected pre-closing, and CorePower has offered no other basis to
lash a vague assertion that revenue was “affected” to the APA’s Ordinary Course
Covenant.247
244
The lease amendments and PPP loans followed and, again, were necessary responses to
Level 4’s compliance with direction from the mothership.
245
CPY OB at 56.
246
Tr. 1329:15–1331:4 (Leondakis) (acknowledging that when CorePower reopened its
studios it implemented a series of COVID-19 protocols, including reduced studio
capacities, social distancing, increased cleaning protocols, masking, suspending towel and
mat rentals, prohibiting hands-on teacher assists, and reducing staff). Tr. 1329:3–5
(Leondakis) (acknowledging that CorePower closed off access to all of the locker rooms
and showers).
247
In Hexion, this court rejected Hexion’s interpretation of an MAE provision because
“[t]o allow the MAE analysis to hinge on Huntsman’s failure to hit its forecast targets
during the period leading up to closing would eviscerate, if not render altogether void, the
meaning of section 5.11(b).” Hexion Specialty Chems., Inc., 965 A.2d at 741. Specifically,
Section 5.11(b) “explicitly disclaim[ed] any representation or warranty by Huntsman with
67
At the time CorePower claimed Level 4 had repudiated the APA by failing to
operate in the ordinary course, the only steps Level 4 had implemented in response
to COVID-19 were to close its yoga studios at CorePower’s direction and to cancel
yoga classes, again at CorePower’s direction. These steps reflected Level 4’s
compliance with its obligations as franchisee, not deviations from past practice.
There was no repudiation of the APA by virtue of a breach of the Ordinary Course
Covenant.
Frustration of Purpose
While not proffered as a basis to excuse non-performance when CorePower
declared it would not close the Transaction, CorePower now argues that its
performance under the APA was excused because the purpose of the APA was
frustrated by Level 4’s post-signing conduct.248 The frustration of purpose doctrine
applies when: “(1) there is substantial frustration of the principal purpose of the
contract; (2) the parties assumed that the frustrating event would not occur; and
respect to ‘any projections, forecasts or other estimates, plans or budgets of future
revenues, expenses or expenditures, future results of operations, future cash flows or future
financial condition of [Huntsman] or any of its Subsidiaries heretofore or hereafter
delivered to or made available to [Hexion or its affiliates].’” Id. at 740–41 (cleaned up).
The APA contains a similar provision at Section 3.21, which explicitly disclaims any
representations and warranties “regarding the probable success or future profitability of the
Business.” APA § 3.21.
248
CPY OB at 102.
68
(3) the [d]efendant is not at fault.”249 While frustration of purpose can excuse a
party’s performance under a contract, it “is very difficult to invoke,” and for good
reason.250 Delaware courts understandably are “extremely reluctant to allow parties
to disavow obligations that they have agreed to.”251
According to CorePower, the “fundamental purpose of the APA was to
facilitate Defendants’ purchase of an entire business consisting of well-operating
Yoga Studios.”252 The argument that Level 4 “substantially frustrated” this purpose
presupposes that Level 4 either repudiated or materially breached the APA.253
As discussed above and below, Level 4 did not repudiate or materially breach the
APA and, therefore, there was no frustration of purpose. Moreover, to reiterate, the
yoga studio closures, which are at the heart of CorePower’s frustration of purpose
argument, occurred in direct response to CorePower’s own direction. That is not a
249
CRS Proppants LLC v. Preferred Resin Hldg. Co., LLC, 2016 WL 6094167, at *7
(Del. Super. Sept. 27, 2016) (finding that defendant’s performance was not excused by a
frustration-of-purpose defense).
250
Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 2005 WL 5757653, at *6 (Del. Ch. July 27,
2005).
251
Id.252
CPY OB at 5.
253
CRS Proppants LLC, 2016 WL 6094167, at *7.
69
circumstance where the frustration of purpose doctrine will excuse non-
performance.254
Material Breach
As with frustration of purpose, CorePower’s material breach arguments
emerged in the midst of litigation.255 Not surprisingly, the scope of the alleged
material breaches has expanded rather substantially from the bases CorePower
proffered to support its sweeping declaration in real-time that Level 4 had repudiated
the APA in March 2020. Indeed, it very much appears to this factfinder that
CorePower simply went down the list of the seller’s Section 3.6 representations and
checked any that might arguably be implicated by events that transpired after it
declared it would not perform. As discussed below, CorePower has a substantial
hurdle to clear here—the APA does not allow it to walk from closing based on a
simple breach of contract. To justify its non-performance, CorePower was obliged
254
See Id.; Martin v. Star Publ’g Co., 126 A.2d 238, 242–43 (Del. 1956) (“In all the cases
holding that the promisor was discharged from duty by impossibility of performance or
frustration of purpose, it has been assumed that the promisor was not himself the
responsible cause of the impossibility or frustration.”) (quoting 6 Corbin on Contracts
§ 1329).
255
In fact, Level 4 correctly points out that CorePower’s assertions that Level 4 breached
Section 3.6(i) of the APA by amending its leases and Section 3.7 of the APA by accepting
a Paycheck Protection Program (“PPP”) loan did not appear in CorePower’s operative
counterclaim and, instead, first made an appearance in pre-trial briefing. Here again, this
late appearance is tantamount to waiver. See Snow Phipps, 2021 WL 1714202, at *44
(rejecting an argument raised for the first time in pre-trial briefing). Once again, however,
for the sake of completeness, I address the claims below.
70
to demonstrate a material breach of the APA. It did not come close to clearing that
imposing bullfinch.
“Delaware law firmly supports the principle that a party to a contract is excused
from performance if the other party is in material breach of his contractual
obligations.”256 “The converse of this principle is that a slight breach by one party,
while giving rise to an action for damages, will not necessarily terminate the
obligations of the injured party to perform under the contract.” 257 As a matter of
common law, “[a] breach is material if it goes to the root or essence of the agreement
between the parties, or touches the fundamental purpose of the contract and defeats
the object of the parties in entering into the contract.”258 “Under this doctrine,
whether a breach is material ‘is determined by weighing the consequences in the
256
Brasby v. Morris, 2007 WL 949485, at *4 (Del. Super. Ct. March 29, 2007)
(cleaned up). See also Segovia v. Equities First Hldgs., LLC, 2008 WL 2251218, at *23
(Del. Super. Ct. May 30, 2008) (“The concept of cancelling contracts upon a material
breach is well-settled in Delaware law: [‘][A] party may terminate or rescind a contract
because of substantial nonperformance or breach by the other party.”) (citations omitted).
257
Brasby, 2007 WL 949485, at *4 (citation omitted); see also Segovia, LLC, 2008
WL 2251218, at *23 (“Not all breaches will authorize the other party to abandon or refuse
further performance. To justify termination it is necessary that the failure of performance
on the part of the other go to the substance of the contract.[’]”).
258
Mrs. Fields Brand, Inc. v. Interbake Foods, LLC, 2017 WL 2729860, at *28 (Del. Ch.
June 26, 2017).
71
light of the actual custom of men in the performance of contracts similar to the one
that is involved in the specific case.’”259
Section 241 of the Restatement (Second) of Contracts provides five factors that
are useful when determining whether a breach is material. They are:
(i) the extent to which the injured party will be deprived of the benefit
which he reasonably expected, (ii) the extent to which the injured party
can be adequately compensated for the part of that benefit of which he
will be deprived, (iii) the extent to which the party failing to perform or
to offer to perform will suffer forfeiture, (iv) the likelihood that the
party failing to perform or to offer to perform will cure his failure,
taking account of all the circumstances including any reasonable
assurances, and (v) the extent to which the behavior of the party failing
to perform or to offer to perform comports with standards of good faith
and fair dealing.260
Unfortunately, CorePower did not focus on these or any other factors to support its
argument that Level 4’s material breach justified its own non-performance. The
failure to do so is not surprising given that the evidence of material breach is sorely
lacking here.261 As discussed below, none of the alleged breaches of the APA were
consequential enough to excuse CorePower’s performance.
259
AB Stable VIII LLC, 2020 WL 7024929, at *98.
260
Id. (quoting Restatement (Second) of Contracts § 241 (1981) (internal quotations
omitted)).
261
See 14 Williston on Contracts, § 43:6 (noting that “whether a nonperformance is
sufficiently material is ordinarily an issue of fact,” and that “[i]t is ultimately a question of
degree, which, it has been said, should be decided based on the inherent justice of the
matter”); Commonwealth Const. Co., 2006 WL 2567916, at *19 (“Whether a breach is
material is a fact-sensitive analysis.”); 17A Am. Jur. 2d Contracts § 670 (Feb. 2022
72
a. Material Loss—Section 3.6(a)
For the same reasons Level 4 did not repudiate the APA by breaching
Section 3.6(a), it did not materially breach that section either. CorePower presented
no credible evidence that Level 4 had sustained a “material loss . . . affecting the
Business or any Acquired Asset with a value in excess of $50,000” at the time
CorePower declared it would not close the Transaction.262 And, to the extent
CorePower is correct that $50,000 sets the mark for “material loss,” the evidence
reveals that Level 4 did not reach that mark as of March 26, 2020.263 There was no
material breach of Section 3.6(a) as of the date CorePower announced it would not
close.
b. Staff Layoffs—Section 3.6(c)
At Section 3.6(c), Level 4 represented that it had not “amended or terminated
any agreement or contract providing for the employment or engagement of any
Update) (“Where a breach causes no damages or prejudice to the other party, it may be
deemed not to be material.”).
262
APA § 3.6(a).
263
Given the anticipated short-term consequences of COVID-19 at the time CorePower
purportedly was assessing Level 4’s compliance with Section 3.6, I cannot conclude that
CorePower would have been “deprived” of the benefit of the bargain it reasonably expected
even if Level 4’s losses had exceeded the $50,000 threshold, or that CorePower could not
have been “adequately compensated” for such losses post-closing under the APA’s price
adjustment or indemnification regimes. See Restatement (Second) of Contracts § 241
(1981).
73
Person on a full time or time . . . basis . . . other than in the Ordinary Course of
Business.”264 Even assuming Level 4 had initiated staff layoffs prior to CorePower’s
declaration that it would not close, an assumption not supported by the evidence,
CorePower did not prove that the temporary staff layoffs, made in response to
CorePower’s direction that Level 4 close its studios, “touche[d] the fundamental
purpose of the contract and defeat[ed] the object of the parties in entering into the
contract,”265 or that they departed from Level 4’s ordinary past practice of following
its franchisor’s directions. To the contrary, the layoffs were quintessentially
temporary, as CorePower itself recognized.266 That Level 4 followed CorePower’s
lead by laying off employees for the short duration the closures were expected to last
did not provide a basis for CorePower to refuse to close.
c. Studio Closures—Section 3.6(e)
The same is true with respect to studio closures. Level 4 temporarily closed
its yoga studios when CorePower announced to Level 4’s members that the studios
would close and the yoga classes would be cancelled. CorePower internally decided
that it did not wish to proceed with the Transaction in the midst of these temporary
264
APA § 3.6(c).
265
Mrs. Fields Brand, Inc. v. Interbake Foods, LLC, 2017 WL 2729860, at *28 (Del. Ch.
June 26, 2017).
266
Tr. 1313:1–5 (Leondakis).
74
closures and asked Level 4 if it would agree to adjourn the April 1 closing. When
Level 4 refused, and reminded CorePower that there was no contractual exit off the
road to closing, CorePower had a choice. It could have proceeded to close on April 1
as it was contractually obliged to do and then invoke its post-closing remedies, or it
could go “all in” by refusing to close (or otherwise honor the APA) purportedly as a
matter of common law right. Apparently frustrated that Level 4 would not agree to
delay, it abruptly chose the latter course and, by so doing, committed itself to
demonstrating that the temporary closures of Level 4’s studios, prompted by
CorePower’s own direction, “defeat[ed] the object of the parties in entering into the
contract.”267 The preponderance of the evidence said otherwise.
d. Lease Amendments—Section 3.6(i)
In Section 3.6(i), Level 4 represented that it had not “amended or terminated
any lease or sublease of real property of the renewals thereof.”268 CorePower started
267
Mrs. Fields Brand, Inc., 2017 WL 2729860, at *28. See also Restatement (Second) of
Contracts § 241 (1981) (noting that it is appropriate to consider whether the non-breaching
party can be “adequately compensated” for the breach without refusing to perform when
determining whether a material breach has occurred). CorePower certainly could have
been compensated for any harm caused by the temporary closures post-closing through an
indemnification claim or price adjustment. CorePower also argues that Level 4 breached
Section 3.6(e) when it permanently closed four of its yoga studios. CPY AB at 71.
As CorePower acknowledged in its briefing, however, these permanent closures occurred
in October 2020, well after it declared that it would not honor the APA. Id.; JX 556 at 13–
15.
268
APA § 3.6(i).
75
sending letters to its landlord requesting rent abatements on or around March 23,
2020.269 Level 4 began sending out similar letters prior to the first scheduled closing
date, but no lease amendments were effective until April 1, 2020 or later.270 Despite
CorePower’s contention to the contrary, seeking lease amendments without
CorePower’s approval or knowledge was not prohibited by the APA. More to the
point, even if seeking rent abatements and favorable rent adjustments to account for
the temporary closure of studios breached the APA, the credible evidence does not
support a finding that these measures, taken to preserve assets, constituted a material
breach of the APA that would justify CorePower walking away from the deal.271
Here again, the measures were temporary and consistent with CorePower’s own
mitigation efforts. And any harm flowing from the lease amendments readily and
adequately could have been addressed by post-closing remedies.272
e. Material Adverse Effect—Section 3.6(l)
CorePower’s invocation of the MAE clause in its material breach case raises
the interesting question of whether, having failed to bargain for a provision that
269
Tr. 1316:11–1317:7 (Leondakis); JX 374 at 15.
270
JX 1020; Tr. 768:19-769:9 (DeCoons).
271
Tr. 1314:6–20 (Leondakis). Of course, as stated, from Level 4’s perspective, it was
actually preserving CorePower’s assets once the first closing date passed.
272
See Restatement (Second) of Contracts § 241 (1981).
76
would make the non-occurrence of an MAE a condition to closing, CorePower must
now demonstrate that Level 4 suffered a “material Material Adverse Effect”
to justify its refusal to close. Or does any Material Adverse Effect necessarily meet
the material breach threshold?
If it were the case that the occurrence of any MAE would justify a refusal to
close, buy-side transactional planners might well wonder why they have bargained
so hard to include express language in their acquisition agreements that makes clear
the non-occurrence of an MAE is a condition to closing. In my view, they need not
wonder or question whether they’ve been wasting their time. To justify a refusal to
close based on a purported breach of an MAE representation (or covenant) in the
absence of an express corresponding condition to close, the buyer must demonstrate
that the breach of that representation (or covenant) was material.
This is not redundant. Parties may define an MAE to mean whatever they
want it to mean. And one can certainly envision an MAE definition that is triggered
in circumstances that do not “go[] to the root or essence of the agreement between
the parties, or touch[] the fundamental purpose of the contract and defeat[] the object
of the parties in entering into the contract.”273 In such instances, while there might
273
Mrs. Fields Brand, Inc., 2017 WL 2729860, at *28.
77
be an MAE, there would not be a material breach of the MAE representation or
covenant.
Here, for the reasons explained above, there was no MAE and, therefore, there
was no material breach of the MAE representation at Section 3.6(l). To the extent
CorePower seeks to excuse its refusal to close on a material breach of this provision,
the excuse fails.
f. Debt—Section 3.7
CorePower also points to Level 4’s application for a PPP loan as evidence that
Level 4 was not operating in the ordinary course of business as required by the
Ordinary Course Covenant and as evidence that Level 4 was in breach of
Section 3.7.274 Level 4 did not apply for a PPP loan until April 9, 2020. 275 Thus,
Level 4’s application for a PPP loan does not support CorePower’s assertion that
274
CPY OB at 49. In Section 3.7 of the APA, Level 4 represents that it “has no Liabilities
in respect of Debt that is secured by any Encumbrance on any Acquired Asset or that
otherwise could reasonably be expected to become a Liability of the Business except as set
forth on Schedule 3.7. For each item of Debt, Schedule 3.7 correctly sets forth the debtor,
the principal amount of the Debt as the date of this Agreement, the creditor and the
collateral, if any, securing the Debt. The Seller has no Liability in respect of a Guarantee
of any Liability of any other Person relating to the Business.” APA § 3.7.
275
JX 326.
78
Level 4 was not operating in the ordinary course at the time CorePower walked away
from the Transaction.276
In CorePower’s Pre-Trial Brief, it argues that Level 4 breached Section 3.7 of
the APA when it accepted a PPP loan.277 Again, this alleged breach would have
occurred after CorePower walked away from the Transaction and cannot be
proffered as evidence to excuse CorePower’s failure to close on the First Tranche.
g. Ordinary Course of Business—Section 5.1
At the risk of intolerable redundancy, Level 4 did not materially breach its
Ordinary Course Covenant in a manner that would excuse CorePower’s non-
performance because, as of April 1, Level 4 was operating in the ordinary course.
CorePower’s arguments to the contrary are rejected for the same reasons they were
rejected when proffered in support of its repudiation excuse.
E. Level 4 is Entitled to Specific Performance, Damages and Interest
CorePower breached the APA when it refused to close on April 1, 2020, and
then fully abandoned the Transaction it had agreed to consummate. Level 4 claims
276
In seeking the PPP loan, Level 4, once again, was following CorePower’s lead.
Tr. 1324:8–20 (Leondakis) (confirming that CorePower applied for a PPP loan in
March 2020).
277
D.I. 150 at 17.
79
it is entitled to specific performance and compensatory damages, in addition to pre-
judgment interest on the deal price.278 I agree.
Under Delaware law, a party seeking specific performance must establish that
“(1) a valid, enforceable[] agreement exists between the parties; (2) the party seeking
specific performance was ready, willing, and able to perform under the terms of the
agreement; and (3) a balancing of the equities favors an order of specific
performance.”279 The APA expressly provides that specific performance is an
appropriate remedy “in the event any of the provisions of this [APA] are not
performed in accordance with their specific terms or otherwise are breached or
violated.”280 Our Chancellor recently observed that, “[t]his court has not hesitated
to order specific performance in cases of this nature, particularly where sophisticated
parties represented by sophisticated counsel stipulate that specific performance
would be an appropriate remedy in the event of breach.”281 I see no basis to
hesitate here.
278
Level 4 OB at 99.
279
Simon-Mills II, LLC v. Kan Am USA XVI Ltd. P’ship, 2017 WL 1191061, at *32
(Del. Ch. Mar. 30, 2017) (quoting BAE Sys. Info. & Elec. Sys. Integration, Inc. v. Lockheed
Martin Corp., 2009 WL 264088, at *7 (Del. Ch. Feb. 3, 2009)).
280
APA § 8.11.
281
Snow Phipps, 2021 WL 1714202, at *51.
80
The APA was and continues to be a valid contract, and Level 4 is entitled to
the declaration it seeks to that effect. Level 4 continues to “stand ready to deliver to
CorePower the studio assets it contracted to deliver in the APA.”282 And, as
CorePower breached the APA notwithstanding its exercise of the Call Option and
its commitment to honor the Call Option Agreement and Call Option Exercise
Agreement, the balance of equities decidedly favors Level 4.283
According to CorePower, specific performance is impractical in this case
because the Transaction was a “significant undertaking” and “never a simple
transaction.”284 But, as noted, “[t]his court has not hesitated to order specific
282
Level 4 OB at 95; see Tr. 262:15–17, 1396:11–1398:15 (Kenny); Tr. 498:22–499:9,
515:12–518:24 (Jaros); JX 762; JX 763; JX 1019; JX 1020; see also Osborn, 991 A.2d
at 1161 (argument that a party was not able to perform at some historical point in time did
not preclude order of specific performance when party stood ready and willing to perform
at the time of judgment).
283
At trial, Kenny described how the APA contained a noncompete provision that was an
“enhanced” version of the noncompete provision in the Franchise Agreement.
Tr. 1377:15–13 (Kenny); Franchise Agreement § 15.6; APA § 5.6. According to Kenny,
the term of the noncompete was to run from the date of the first closing, and he suggested
the Court’s specific performance order should account for this by finding that the
noncompete term has now expired. Tr. 1381:18–24 (Kenny). There is support for Kenny’s
position in our law. See Physiotherapy Corp. v. Moncure, 2018 WL 1256492, at *5
(Del. Ch. Mar. 12, 2018) (holding that party’s breach of contract excused counter-party’s
performance of non-compete restrictive covenant). But Level 4’s prayers for relief in the
Complaint and in the Pretrial Order did not seek an adjustment of the APA’s non-compete
provision, and so I have no basis to provide that relief here. See generally, Complaint
Prayers for Relief (no prayer for reformation of or excusal from noncompete); PTO Sec. V
(same).
284
CPY OB at 97.
81
performance” of transaction agreements like the APA, even when doing so might
involve a “significant undertaking.”285 Again, I see no reason to hesitate here.286
Level 4 will deliver all assets it agreed in the APA to deliver and CorePower will
pay what it agreed in the APA to pay for those assets.
Section 2.2 of the APA sets forth the methodology for determining the
purchase price associated with each of the staggered closings.287 Mordaunt followed
this methodology and determined that CorePower was to pay Level 4 $6,254,452 as
of the closing for Tranche 1, $6,260,934 as of the closing for Tranche 2, and
$13,850,773 as of the final closing for Tranche 1 (collectively, the “APA
Consideration”).288 Mordaunt’s opinion in this regard was credible and not
285
Snow Phipps, 2021 WL 1714202, at *51; id. at *51 n.565 (collecting cases). See also
Channel Medsystems, Inc. v. Boston Sci. Corp., 2019 WL 7293896, at ¶ 4 (Del Ch. Dec. 26,
2019) (ordering specific performance of merger agreement); Hexion, 965 A.2d at 763(same); In re IBP, 789 A.2d at 84 (same).
286
I note that this case does not involve personal services, construction or the like—cases
in which this court has been hesitant to supervise a specific performance award. See, e.g.,
Ryan v. Ocean Twelve, Inc., 316 A.2d 573, 575 (Del. Ch. 1973) (“As a general rule, a court
of equity will not order specific performance of a building contract in a situation in which
it would be impractical to carry out such an order unless there are special circumstances or
the public interest is directly involved.”); Bali v. Christiana Care Health Servs., Inc.,
1999 WL 413303, at *2–3 (Del. Ch. June 16, 1999) (observing that many courts and the
Restatement hold that a contract for personal services typically will not be specifically
enforced).
287
APA § 2.2.
288
Mordaunt’s Report ¶ 150; at p. 116. See also Tr. 590:13–592:9 (Mordaunt) (credibly
testifying regarding his process for determining the unpaid portion of the purchase price).
82
meaningfully challenged by CorePower. Thus, CorePower must pay Level 4 the
APA Consideration, which, as adjusted, totals $26,366,159.
As “an order of specific performance seldom results in performance within
the time the contract requires,” “damages for the delay will usually be
appropriate.”289 So too here. When CorePower walked-away from the Transaction,
Level 4 became a steward of the studio assets.290 As a steward, Level 4 began taking
cost-saving measures to preserve the assets and mitigate damages.291 From April 1,
2020 through May 31, 2021, Level 4 sustained $3,523,516 in operating losses
protecting CorePower’s assets.292 Under the terms of the APA, Level 4 would have
captured and incurred any profits or losses up until each closing date for the
289
Snow Phipps, 2021 WL 1714202, at *55 (quoting Restatement (Second) of Contracts
§ 358 cmt. c) (internal quotation marks omitted).
290
Tr. 493:13–24 (Jaros) (“Q: So let’s talk about what happened after April 1, 2020. After
CorePower terminated the acquisition, what did Level 4 do with respect to the yoga
studios? A. At that point, we became a steward of the asset for CorePower.”).
291
See Am. Gen. Corp. v. Cont’l Airlines Corp., 622 A.2d 1, 11 (Del. Ch.1992) (“While
there is a general duty to mitigate damages if it is feasible to do so, a plaintiff need not take
unreasonably speculative steps to meet that duty.”), aff’d, 620 A.2d 856 (Del. 1992). I note
that CorePower contends Level 4 could have sought CorePower’s consent before taking its
“good steward” actions. CPY Supplemental Submission at 8. For this proposition,
CorePower cites our Supreme Court’s decision in AB Stable. Here, unlike in AB Stable
and as described above, there and no provisions in the APA requiring consent and, in any
event, the actions taken by Level 4 as the steward of the assets were consistent with
Level 4’s (and CorePower’s) ordinary course of business. Thus, Level 4 did not need to
seek permission from CorePower prior to taking actions to mitigate damages.
292
Tr. at 592:10–593:11 (Mordaunt); Tr. at 508:22–509:22 (Jaros); JX 532; JX 630;
JX 680; JX 681.
83
respective studios to be delivered in each tranche, and CorePower would have
captured and incurred the profits and losses from that date forward.293 Thus, any
losses Level 4 incurred as a result of operating the studios after each “Closing Date”
passed without a closing (the “Operating Losses”) would have been incurred post-
closing by CorePower had it adhered to the terms of the APA, and CorePower must
bear those losses.
Level 4 will also be awarded pre-judgment interest on the APA Consideration
and the Operating Losses at the statutory rate accruing from the date that each
payment was due and payable under the APA (or in the case of the Operating Losses,
the date the Operating Losses were incurred) until the date of this Memorandum
Opinion.294 At trial and in his report, Mordaunt credibly opined that Level 4 suffered
damages by not receiving the purchase price agreed to by the parties at the agreed
upon times.295 As Mordaunt explained, given the staggered closings, it was
293
Mordaunt’s Report ¶ 151(b).
294
See 6 Del. C. § 2301; see also Brandywine Smyrna, Inc. v. Millennium Builders, LLC,
34 A.3d 482, 486 (Del. 2011) (holding that pre-judgment interest “in Delaware cases is
awarded as a matter of right”); 2 Donald J. Wolfe & Michael A. Pittenger, Corporate and
Commercial Practice in the Delaware Court of Chancery, § 16.09[f][1], at 16-136 (2d ed.
2020) (“[T]he Court of Chancery has the authority to grant pre- and post-judgment interest,
and to determine the form of that interest. The practice of awarding pre-judgment interest
is well accepted in Delaware.”) (footnote omitted).
Mordaunt’s Report ¶ 150; 594:3–595:18 (Mordaunt) (credibly testifying regarding the
295
methodology and results of his damages calculations).
84
appropriate to calculate this aspect of the damages either by looking to the statutory
pre-judgment interest or by determining what the expected return on the APA
Consideration would have been had Level 4 invested the APA Consideration.296
In its opening post-trial brief, Level 4 requested “that the Court order
CorePower to pay pre-judgment interest on the purchase price and stewardship
losses at the statutory rate through the date of payment.”297 Because Level 4
requested that I use pre-judgment interest as a basis to calculate the full extent of its
losses both with respect to the APA Consideration and the Operating Losses
(resulting in a lower return than the alternative), and because I have found
Mordaunt’s opinion in this regard to be credible, I am satisfied that an award of pre-
judgment interest on the APA Consideration, as of the contractually determined
closing dates, adequately compensates Level 4 for the harm caused by CorePower’s
breach of the APA.298 Level 4 is also entitled to receive pre-judgment statutory
interest on the Operating Losses, which shall be calculated in accordance with
Exhibit K-2 to Mordaunt’s expert report.299 Within ten (10) days from the date of
296
Id.
297
CPY OB at 100.
298
Mordaunt’s Report ¶ 150; Tr. 595:5–9 (Mordaunt) (stating that the amount Level 4 lost
out on in expected interest or returns through the date of the trial was $1,550,344 and
$3,294,106, respectively).
299
Mordaunt’s Report at p. 120.
85
this Memorandum Opinion, the parties shall submit a calculation of the statutory
pre-judgment interest on the APA Consideration and the Operating Losses, which
should make current the calculation submitted by Level 4 as of the start of trial using
the same methodology.300
Level 4 is also entitled to post-judgment interest, again at the statutory rate,
as well as recoverable costs.301 Level 4 has failed, however, to support its request
for attorney’s fees by failing to articulate a basis for the Court to bypass the
American Rule.
As a final point, CorePower paid Level 4 several pre-closing payments,
including:
• $494,039 to cancel the buildout of the Cancelled Studios, terminate
the concomitant Franchise Agreement, and reimburse Level 4;302
• $3,212,623 for the acquisition of the Development Studios on
November 27, 2019;303 and
300
See Mordaunt’s Report ¶¶ 150(b)(ii); 151(c)(ii). The parties should confer on this
calculation in an effort to agree on the number. This is a mathematical exercise only, and
CorePower waives no rights by agreeing to the math. If the parties cannot agree, then they
shall submit competing, simultaneous calculations.
301
See Wilmington Country Club v. Cowee, 747 A.2d 1087, 1097 (Del. 2000) (observing
that post-trial interest “is a right belonging to the prevailing plaintiff and is not dependent
upon the trial court’s discretion”); Ct. Ch. R. 54(d) (providing for prevailing party costs).
302
PTO ¶ 47.
303
PTO ¶ 46; see also APA § 2.2.4; Tr. 1016:15–20 (Wong).
86
• An unidentified amount to reimburse Level 4 for the cost of building
out the Development Studios for the negative cash flow from
November 2019 to June 2020 agreed to in APA § 2.2.4.304
To clarify, CorePower has paid these amounts and received everything it has
bargained for in exchange for these payments. There is no basis to order Level 4 to
return them.305
III. CONCLUSION
For the foregoing reasons, my verdict is for Level 4 on its claim for specific
performance of the Agreement, damages, pre-judgment and post-judgment interest
at the statutory rate and prevailing party costs. CorePower’s counterclaims fail.
Level 4’s counsel shall file, on notice to opposing counsel, a proposed form of final
judgment within ten (10) days of the date of this opinion that incorporates the Court’s
verdict and includes its revised interest calculations.
304
See APA § 2.2.4.
305
I note there is no provision in the APA for reimbursement of pre-closing payments,
further highlighting the “one-way” nature of this Transaction. See APA; Tr. 983:4–19
(Wong).
87