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CMX Defends Backing Out of Theater Chain Merger Over Pandemic

April 24, 2020, 6:48 PM

CMX Cinemas fired back at claims in Houston federal court that it’s using the coronavirus “as a pretext for walking away from” a major merger, saying the pandemic undermined the deal’s basic premise of “functioning, available movie theaters.”

“Whatever the parties thought about the prospect of a pandemic, they plainly did not envision an indefinite, government-enforced shutdown of the theaters that are the very subject of this sale,” CMX’s parent company says in court papers filed Thursday.

The case is part of a wave of lawsuits asking courts to keep mergers on track as Covid-19 scrambles business deals worldwide.

Some of other suits involve the purchase of Victoria’s Secret; a business unit sale from Bed Bath & Beyond to 1-800-Flowers; a buyout of 34 franchise locations by CorePower Yoga; and a private equity transaction involving the world’s top cake decorations wholesaler.

Coronavirus Allegedly a Known Risk

The CMX case concerns the planned acquisition of the Star Cinema Grill chain, which consists of 11 Houston-area movie theaters, by CMX parent Cinemex Holdings USA Inc. for an undisclosed price. Star Cinema owner Omar Khan filed the suit April 2 in the U.S. District Court for Southern District of Texas.

The sale would reportedly have made CMX—ultimately controlled by Mexico’s third-richest man, the billionaire industrialist German Larrea—the seventh-largest U.S. theater chain.

But Cinemex allegedly reneged at the last minute, saying the pandemic had “triggered the equitable doctrines of impossibility, impracticability, illegality, frustration of purpose, and commercial frustration.”

The company told Khan the temporary shuttering of theaters made it impossible to fulfill the pre-closing condition that it be allowed to inspect theaters, the suit says, ignoring his offer to use remote audiovisual technology.

It also allegedly said the pandemic constituted a “material adverse event” that justified canceling the deal. But the pandemic was already well-publicized when the agreement was signed March 10, and the parties explicitly negotiated over the business risks it posed, according to Khan.

Pandemic’s ‘Unprecedented’ Scale, Impact

In its motion to dismiss the case, Cinemex argues that though the coronavirus generally was a known risk, the parties couldn’t have anticipated its “unprecedented” scale or economic impact. None of the quarantines or closure mandates were implemented until later, according to the motion.

The deal’s basic purpose has been frustrated, and Cinemex shouldn’t be forced to buy an indefinitely closed business, it claims.

“Where, as here, an unexpected government order makes a contract valueless or unfair to one party, courts around the country have applied frustration of purpose,” the motion says.

It’s also hypocritical for Khan to argue that the pandemic excuses his own obligations—the pre-closing inspection—but not Cinemex’s contractual duty to close the deal, according to the company.

Some of the arguments echo those being made in the other similar suits.

The outcome in each case will likely hinge in part 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.

Cinemex is represented by Quinn Emanuel Urquhart & Sullivan LLP. Khan is 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, motion to dismiss filed 4/23/20.

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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