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CorePower Says It Had Right to Back Out of Deal Over Coronavirus

June 9, 2020, 6:24 PM

CorePower Yoga LLC fired back in Delaware court Tuesday at a claims that it wrongly broke off a $23 million buyout of 34 franchise locations shuttered by the coronavirus, saying the yoga studios’ owner assumed the risk of a “disaster” like the pandemic.

“Plaintiff’s characterization of the calamitous consequences of the Covid-19 pandemic (as a temporary or inconsequential hiccup) is not only irrelevant but will not withstand scrutiny,” CorePower says in a Chancery Court filing. “Plaintiff’s effort to diminish the severity and prolonged impact of this pandemic should not be well received.”

The lawsuit against CorePower, filed in April, is part of a wave of suits asking courts to keep mergers on track as the coronavirus scrambles deals worldwide. Most of those disputes are being heard in the Chancery Court.

Some of the similar cases involve a $5.8 billion hotel deal; the purchase of Victoria’s Secret; a business unit sale from Bed Bath & Beyond to 1-800-Flowers; a CMX Cinemas merger; and private equity transactions over a cybersecurity company and the world’s top cake decorations wholesaler.

The CorePower case concerns a three-stage deal that was set to start closing April 1, when CorePower would have turned over $6.3 million for eight Colorado locations owned by Level 4 Yoga LLC. The other studios, and the rest of the money, would have changed hands following subsequent closings in July and October, the suit says.

The staggered nature of the transaction was allegedly a negotiated concession to CorePower, which agreed in return it “would assume any market- and industrywide risk associated with the delayed closing.”

Although the Colorado studios are currently closed, their temporary shuttering doesn’t qualify as a material adverse event, according to the complaint, which also targets CorePower’s franchising arm.

No Exception, No Carve-Out, No Excuses

That’s not the point, CorePower says in its motion to dismiss the case.

Instead, it had the right to walk away from the deal because Level 4 pledged to keep operating its studios “in the ordinary course of business,” and its failure to do so constitutes a repudiation of the contract, according to the filing. CorePower upped the purchase price in exchange for those guarantees, it claims.

The franchise owner’s claim that closed studios reflect the new normal—and therefore have “become” the ordinary course of business—is “legally untenable,” CorePower says.

The “ordinary course” provision was meant “to ensure that the business conveyed would be substantially the same on the closing dates as it was on the date the agreement was signed,” according to the dismissal motion.

“This warranty was absolute and unconditional,” the motion says. “There was no exception. There was no carve-out. There was no mention of a pandemic or any other type of market disruption that might constitute an exception or excuse.”

Moreover, the unforeseeable and unprecedented pandemic has frustrated the purpose of the deal, making the purchase agreement unenforceable as a matter of contract law, CorePower says.

Those arguments—over the scope of the deal’s MAE clause, the meaning of its “ordinary course” provision, and the frustration of purpose doctrine—echo the issues being raised in the other similar suits.

CorePower is represented by Landis Rath & Cobb LLP and Arent Fox LLP. Level 4 is represented by Richards, Layton & Finger PA and Steptoe & Johnson LLP.

The case is Level 4 Yoga LLC v. CorePower Yoga LLC, Del. Ch., No. 2020-0249, motion to dismiss filed 6/9/20.

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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