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Corporate Governance

CMX Cinemas Accused of Using Pandemic as Pretext to Break Deal

April 3, 2020, 7:04 PM

Cinemex Holdings USA Inc., which operates CMX Cinemas, was hit with a lawsuit seeking to block it from using the Covid-19 pandemic “as a pretext for walking away from” a deal to acquire a Houston-area movie theater chain.

“Far from being unforeseen, the potential impact of the coronavirus was a significant factor discussed by the parties during their negotiation,” the suit says. “Cinemex was even able to extract a multi-million-dollar reduction in the purchase price.”

The case was filed Thursday in the Southern District of Texas by Omar Khan, owner of Star Cinema Grill, which Cinemex agreed to acquire at an undisclosed price. The sale would reportedly have made CMX the seventh-largest U.S. theater chain.

The transaction’s March 31 closing date was a key condition Khan emphasized while soliciting bids and during final negotiations, the suit says.

Cinemex allegedly backed out of the transaction March 26, telling Khan the novel coronavirus pandemic had “triggered the equitable doctrines of impossibility, impracticability, illegality, frustration of purpose, and commercial frustration.”

The letter from Cinemex’s attorneys focused on the temporary shuttering of theaters over public health concerns, according to the complaint. That made it impossible to fulfill the pre-closing condition that Cinemex be allowed to inspect the premises, the letter allegedly said, ignoring Khan’s offer to use remote audiovisual technology.

Cinemex also argued that the pandemic constituted a “material adverse event” that justified canceling the deal, the suit says. But the pandemic was already well-publicized when the agreement was signed March 10, days after Congress passed its first virus-related rescue bill, according to the complaint.

The parties explicitly negotiated over the business risks the virus posed and the possibility of closures, the suit says. Cinemex can’t now use those concerns to break the deal, Khan claims.

Cinemex is owned by nonparty Entretenimiento GM de Mexico, which is backed by billionaire German Larrea. Larrea, reportedly Mexico’s third-richest man, is also the CEO of Grupo Mexico, a diversified multinational that dominates the country’s mining, construction, and rail industries.

Cause of Action: Breach of contract.

Relief: Specific performance of the purchase agreement, damages, costs, and fees.

Response: CMX and a public relations firm representing it in connection with the transaction didn’t immediately respond to requests for comment Friday.

Attorneys: Khan and his companies are represented by Beck Redden LLP and Honigman LLP.

The case is Khan v. Cinemex USA Real Estate Holdings Inc., S.D. Tex., No. 20-cv-1178, complaint 4/2/20.

To contact the reporter on this story: Mike Leonard in Washington at mleonard@bloomberglaw.com

To contact the editors responsible for this story: Rob Tricchinelli at rtricchinelli@bloomberglaw.com; Nicholas Datlowe at ndatlowe@bloomberglaw.com

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