CURRENT MONTH (September 2021)

Business Litigation

Target Company’s Decision to Terminate Merger Agreement Extinguished Breach of Contract Claims

By Lakshmi Muthu and Skyler Speed, Young Conaway Stargatt & Taylor, LLP

In Yatra Online, Inc. v. Ebix, Inc., 2021 WL 3855514 (Del. Ch. Aug. 30, 2021), the Court of Chancery determined that under the terms of a merger agreement, plaintiff and target company Yatra Online Inc. (“Yatra”) extinguished its breach of contract claims when it elected to terminate a merger agreement before suing defendant buyer Ebix, Inc. (“Ebix”) for breach.[1]

In July 2019, the parties executed a merger agreement whereby the buyer agreed to acquire Yatra through a stock-for-stock reverse triangular merger. “[E]ach share of Yatra stock would be converted into the right to receive shares of [Ebix’s] convertible preferred stock[.]” 2021 WL 3855514, at *1. With the convertible preferred stock, former Yatra stockholders would receive a put right, which could be exercised 25 months following closing and used to force Ebix “to redeem any unconverted shares of Convertible Preferred Stock for $5.31 per share.” Id. At the time of signing, the convertible preferred stock had not been registered with the Securities and Exchange Commission (SEC); an effective Form S-4 registration statement was one of several closing conditions. Ebix delayed preparing the Form S-4. By late March 2020, shortly before the closing date, Ebix was severely impacted by the COVID-19 pandemic. Ebix sought repeated extensions of the closing date, and Yatra agreed with the hope of closing the merger. Meanwhile, Ebix and its lenders negotiated an amendment to Ebix’s credit agreement, which “essentially would prohibit [Ebix] from issuing the Put Right.” Id. at *5. On June 5, 2020, “Yatra terminated the Merger Agreement and filed [an] action for breach of contract against Ebix.” Id. at *6. As of that date, the Form S-4 had not been declared effective by the SEC, and there was no “hint” as to whether Ebix was prepared to close. Id. Yatra later amended its action to assert that Ebix committed fraud by intentionally delaying the consummation of the merger and that the lenders tortiously interfered with the merger agreement by amending the credit agreement to frustrate the put right. Defendants moved to dismiss Yatra’s action.

Ebix’s core argument was that the merger agreement’s “Effect of Termination” clause barred plaintiff’s breach of contract claims. The provision provided, “In the event of any termination of this Agreement . . . the obligations of the parties shall terminate and there shall be no liability on the part of any party with respect thereto,” with limited exceptions, including “damages arising out of any fraud occurring prior to such termination[.]” Id. at *7. According to Ebix, Yatra’s decision to terminate eliminated any potential “liability . . . with respect” to the “obligations” arising from the merger agreement. Yatra countered that the phrase “with respect thereto” modified “any termination of this Agreement” and therefore applied only to damages caused by terminating the agreement.

The Court agreed with Ebix, ruling that plaintiff’s interpretation “stretche[d] the words beyond their tolerance” and that the language read “naturally to indicate the Merger Agreement’s drafters intended the phrase ‘with respect thereto’ to modify ‘the obligations of the parties’ as opposed to ‘any termination of this agreement.’” Id. at *8. The Court determined that this construction was consistent with the Court’s interpretation of a substantively similar termination provision in AB Stable VIII LLC v. Maps Hotels & Resorts One LLC, where the Court observed that the termination provision and its exceptions were “pretty standard” and the consequences of termination are “usually [ ] that all of the provisions, with a few possible exceptions, will terminate and no longer be of any force and effect.” 2020 WL 7024929, at *104 n.311 (Del. Ch. Nov. 30, 2020).

The Court also dismissed Yatra’s fraud and tortious interference claims. Yatra claimed that absent “Ebix’s false promises that it would engage in meaningful negotiations” and Ebix’s and the lenders’ amendment of the credit agreement, Yatra would have sued for specific performance. The Court rejected Yatra’s theory because Yatra could not have obtained specific performance; the SEC had never declared the Form S-4 effective, and the put right therefore could not have been issued.

Yatra v. Ebix is a reminder to parties to merger agreements to carefully consider the effects of termination provisions on potential claims before terminating.

Dispute Resolution

Ninth Circuit Holds that State Law Does not Bar the Enforcement of Arbitration Clauses under the New York Convention—Will the Supreme Court Grant Cert?

By Leslie Berkoff, Partner, Moritt Hock & Hamroff LLP

On August 12, 2021, the Ninth Circuit Court of Appeals rendered a decision holding that the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “Convention”) could be utilized to enforce the application of arbitration clauses in insurance contracts in states with similar anti-arbitration laws. CLMS Management Services LP et al. v. Amwins Brokerage of Georgia, LLC et al., 8 F.4th 1007 (9th Cir. 2021). The plaintiffs have already indicated that they intend to petition the Supreme Court to review this determination in light of an existing split in the Circuits. (The Second Circuit has held that an anti-arbitration provision contained in Kentucky insurance law preempts the provisions of the Convention, whereas the Fourth and Fifth Circuits have held that the New York Convention must be applied. See ESAB Group, Inc. v. Zurich Ins. PLC, 685 F.3d 376, 390-391 (4th Cir. 2012); Safety National Casualty Corp. v. Certain Underwriters at Lloyd’s, London, 587 F.3d 714, 725 (5th Cir. 2009)).

The case involved a dispute concerning the amount of a deductible to be applied to a property damage insurance claim flowing from Hurricane Harvey. The contract provided that all disputes arising out of the contract were to be resolved by arbitration in New York. In response to a state court lawsuit filed by plaintiffs, the insurance company and underwriter filed a motion to compel arbitration, citing the arbitration clause in the contract and arguing that the arbitration provision fell within the scope of the Convention. In opposition, the Plaintiffs argued that state law reverse-preempted the Convention because of the federal McCarran-Ferguson Act. (The McCarran-Ferguson Act delegates to states the right to regulate the business of insurance, providing “[n]o Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance . . . unless such Act specifically relates to the business of insurance.” 15 U.S.C. § 1012(b)) (It should be noted that almost twenty states have similar anti-arbitration laws that prohibit arbitration provisions in insurance contracts).

In granting the motion to compel arbitration, the district court held that Article II, Section 3 of the Convention is self-executing and is not an “Act of Congress” under the McCarran-Ferguson Act, as it does not specifically relate to the business of insurance; thus the court found the Convention was not reverse-preempted by the McCarran-Ferguson Act. On appeal, the Ninth Circuit affirmed that Article II, Section 3 of the Convention is indeed self-executing given that it: (i) is addressed directly to domestic courts; (ii) mandates that domestic courts “shall” enforce arbitration agreements; and (iii) “leaves no discretion to the political branches of the federal government whether to make enforceable the agreement-enforcing rule it prescribes.” CLMS Management Services LP, 8 F.4th 1007, at 1013.

If the Supreme Court grants certiorari and holds that Article II, Section 3 of the Convention is self-executing, then arbitration clauses would be enforceable regardless of any anti-arbitration state laws that may otherwise reverse-preempt federal law.


[1] The decision has been appealed.

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