Kohlberg & Co. is arguing in Delaware court that its decision to back out of a deal to buy a cake decorations wholesaler from Snow Phipps Group LLC was unavoidable, given the widespread cancellation of public gatherings due to the coronavirus.
“The Covid-19 pandemic has dramatically curtailed birthday and similar celebrations for the foreseeable future,” Kohlberg says in a brief unsealed Monday. “Sales and orders have plummeted. The company’s business has cratered. There is no end in sight.”
The filing by a group of Kohlberg affiliates came the same day Snow Phipps’ lawsuit against them was made public. The suit, originally filed under seal, asks the Chancery Court to force Kohlberg to close on their acquisition of DecoPac Inc., the world’s top cake decorations supplier.
Some of the other suits involve a business unit sale from
Snow Phipps’ suit accuses Kohlberg of making “an abrupt about-face” after efforts to renegotiate its financing broke down, then “manufacturing after-the-fact claims that the coronavirus excuses performance.”
The pandemic “was specifically known to the Kohlberg parties as a potential risk to this deal” when it was signed March 6, and they used it to negotiate the unspecified purchase price downward, according to the partly redacted complaint. Both Kohlberg and Snow Phipps are private equity firms.
A Kohlberg spokesman called the case meritless Monday.
In its partly redacted brief, the investment firm assails Snow Phipps’ motion for expedited proceedings and blasts its bid to close the deal by judicial fiat.
“Plaintiff’s motion ignores the company’s plight, brushing it aside in passing as a ‘short-term dip in sales,’” Kohlberg says. “It is no such thing. To the contrary, the company’s severe, disproportionate, and durationally significant financial collapse is a material adverse effect (MAE).”
That position echoes the arguments being made in the other similar suits.
The outcome in each case will likely hinge on whether the MAE clause at issue excludes “general” business downturns—even those based on unforeseen calamities—and whether the reneging party can show the deal has been disproportionately affected by the pandemic, relative to the broader economy.
Kohlberg is represented by Morris, Nichols, Arsht & Tunnell LLP and Paul, Weiss, Rifkind, Wharton & Garrison LLP. Snow Phipps is represented by Abrams & Bayliss LLP and Quinn Emanuel Urquhart & Sullivan LLP.
The case is Snow Phipps Grp. v. KCAKE Acquisition, Inc., Del. Ch., No. 2020-0282, brief opposing expedited proceedings filed 4/20/20.