The Delaware Supreme Court Speaks on ‘Ordinary Course’ Covenants

The Delaware Supreme Court recently affirmed the Court of Chancery’s 2020 decision in AB Stable VIII LLC v. MAPS Hotels & Resorts One LLC, which blessed a buyer’s termination of a merger agreement on grounds that the target breached its covenant to operate its business in the ordinary course between signing and closing.

In this closely watched appeal, the Delaware Supreme Court held that the ordinary course covenant in this case was breached because of the unprecedented steps the target hotel company took in response to COVID-19, even though the court found those steps to have been reasonable and consistent with the actions of others in the same industry.  This decision provides important guidance both in terms of how such covenants should be drafted but also how to deal with unprecedented crises between signing and closing.

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