As the COVID-19 pandemic continues to disrupt markets and shake the global economy, the full impact on private equity transactions remains unknown.  Many businesses have had to shut down or drastically change their operations because of governmental actions or the impact of social-distancing.  While private equity buyers and sellers appear to have focused a lot of attention on whether the impact of these actions have or are reasonably expected to have a “material adverse effect” on a target business, less attention appears to have been focused on the impact of these actions on the normally innocuous “ordinary course of business” covenant.  And almost all private company acquisition agreements condition the buyer’s obligation to close on the target company’s covenants having been complied with in all material respects—one of which is the obligation to operate its business in the ordinary course between signing and closing.

But when the ordinary is disrupted by external factors like those arising from the COVID-19 pandemic, exactly what does it mean to conduct one’s business in the “ordinary course?”  In other words, what is ordinary when there is no ordinary?  Is a target expected to continue to operate as if the external extraordinary events had not occurred?  Or do the extraordinary events actually dictate what is now in the ordinary course?  How has the target typically responded to other extraordinary events (keeping mind of course that many doubt that there is an historical event comparable to the impacts arising from the COVID-19 pandemic) and how did that alter what was historically the target’s ordinary course?  And would that historical change in the ordinary course because of extraordinary external events really matter for the purposes of a target’s contractual obligation to conduct its business in the ordinary course? 

While the phrase “ordinary course of business” is ubiquitous in contracts of all types, as well as in statutes, such as the Uniform Commercial Code and the Bankruptcy Code, parties seldom define it (except by adding a qualifier such as “consistent with past practices”).[1]  Operating in the ordinary course is one of those concepts that appears so obvious that there is no need to define it.  Everyone assumes that if someone is acting contrary to the ordinary course, everyone will know it when they see it.  Moreover, the caselaw is so fact and context specific, that there is little guidance to help define “ordinary course” in the context of a buyer’s condition to closing in a private company acquisition agreement.  However, two Delaware cases provide at least some guidance on the meaning of the phrase in the particular circumstances presented in those cases.  In both of these cases, the court found that a seller had breached its covenant to continue to operate its business in the ordinary course and that such a breach was sufficient to justify the buyer in terminating an acquisition agreement. 

Akorn, Inc. v. Fresenius Kabi AG, C.A. 2018-0300-JTL, 2018 WL 4719347 (Del. Chancery Ct. Oct. 1, 2018).

The Akorn[2] case is most known for its discussion on material adverse effect clauses, as it was the first case in Delaware where a court determined that there had been a material adverse effect. However, the Akorn court also held that there was a breach of the ordinary course of business covenant, and used an objective standard to define “ordinary course of business,” as opposed to the seller’s own conduct prior to signing. 

The background to Akorn is as follows:

  • Fresenius Kabi AG, a pharmaceutical company headquartered in Germany, agreed to purchase Akorn, Inc., a generic pharmaceutical manufacturer based in Illinois.
  • Shortly after signing the merger agreement, however, Akorn’s financial performance “fell off a cliff” and continued to deteriorate by the day.[3]
  • In addition to performance issues, Fresenius received letters from an anonymous whistleblower containing allegations about Akorn’s failure to comply with certain regulatory requirements and quality compliance programs, which called into question whether Akorn’s representations regarding regulatory compliance were accurate and whether Akorn had been operating in the ordinary course of business.
  • Fresenius undertook its own investigation into such allegations and found, among other things, that following signing Akorn had (i) cancelled regular audits, assessments and inspections of known problems, (ii) failed to maintain its data integrity system, and (iii) submitted regulatory filings that contained inaccurate data, all of which Fresenius argued were deviations from the ordinary course of Akorn’s business.[4] 

The court made a number of findings on the ordinary course covenant:

  • In the absence of language requiring that the seller’s conduct in the ordinary course be consistent with its own past practice, the court interpreted “ordinary course of business” to mean that of a “generic pharmaceutical company” and found that Akorn’s actions had deviated from “a generic pharmaceutical company operating in the ordinary course of business.”[5]
  • The court further noted that when making decisions about not remediating deficiencies, not continuing its audit program, not maintaining its data integrity system, and not conducting investigations, Akorn consciously chose to depart from the ordinary course of a generic pharmaceutical company’s business. 
  • According to the court, because the ordinary course covenant contained a “commercially reasonable efforts” qualifier, Akorn was required to “take all reasonable steps” to maintain its operations in the ordinary course. (It is worth noting that while in Akorn the ordinary course covenant was qualified by “commercially reasonable efforts,” many of such covenants are not).
  • This enabled Fresenius to terminate the merger agreement due to a failure of the condition that Akorn’s pre-closing covenants were complied with in all material respects. 
  • Importantly, the court also noted that the “commercially reasonable efforts” qualifier to the ordinary course covenant mattered in determining whether certain actions were in violation of that covenant.  According to the court: “By contrast, the record does not permit a similar finding with respect to the destruction of Akorn’s database for a high accuracy liquid particle counter along with the local backup file and the associated electronic security logs. That was not an ordinary course of business event, but it is one where the “commercially reasonable efforts” modifier prevents a finding of breach. The destruction of these files was an unexpected event outside of Akorn’s control, which is the paradigmatic situation where an efforts clause comes into play. It is possible that by failing to maintain its data integrity systems, Akorn created the conditions under which the destruction of the files could occur, but the evidence in this case is not sufficient to support a finding to that effect.”[6]

Cooper Tire & Rubber Company v. Apollo (Mauritius) Holdings Pvt. Ltd., C.A. No. 8980-CVG, 2014 WL 5654305 (Del. Chancery Ct. Oct. 31, 2014).

In Cooper Tire,[7] like Akorn, the buyer claimed that there had been a material adverse effect between signing and closing, and that there had been a breach of the ordinary course of business covenant. But in Cooper Tire, unlike Akorn, the court declined to consider whether a material adverse effect had occurred and based its decision to permit the buyer to terminate based solely upon the target having failed to conduct its business in compliance with the ordinary course of business covenant.

Unlike Akorn, the ordinary course covenant under consideration in Cooper Tire was unqualified (that is, it did not have the “commercial reasonable efforts” qualifier) thereby suggesting an absolute obligation on behalf of the target business to operate in the ordinary course.

The background of Cooper Tire is as follows:

  • In June 2013, Cooper Tire and Rubber Company (Cooper) agreed to be acquired by Apollo Holdings (Apollo), an Indian tire manufacturer.
  • Following the announcement of the transaction, employees at CCT, Cooper’s majority owned subsidiary in China, went on strike, halted production of Cooper branded tires at CCT, and denied Cooper and Apollo access to the facilities, books and records of CCT.
  • All of these actions were taken at the direction of the Chairman (and 35% owner) of CCT.
  • In response, Cooper suspended payments to suppliers of CCT.
  • At the same time, Cooper’s domestic union, the United Steel Workers (USW), was claiming that the merger triggered Cooper’s obligations to renegotiate its collective bargaining agreements.
  • In response, Apollo attempted to negotiate with the USW, but was unsuccessful in resolving the dispute.
  • Cooper sued Apollo seeking specific performance or damages for breach of contract based on Apollo’s alleged failure to negotiate with the USW in good faith.
  • Cooper then decided to terminate the merger agreement and seek a reverse termination fee under the merger agreement.
  • Apollo then sought to prevent Cooper from collecting the reverse termination fee by seeking a declaratory judgment from the Delaware Court of Chancery that Cooper had not satisfied all conditions to closing the merger.
  • Apollo argued that the events at CCT constituted a breach by Cooper of the ordinary course of business covenant thereby relieving Apollo of the obligation to close the transaction. 

The ordinary course of business covenant contained two clauses:

  • the first clause provided that, between signing and closing, except as otherwise expressly contemplated by the merger agreement, Cooper “shall, and shall cause each of its Subsidiaries to, conduct its business in the ordinary course of business consistent with past practice”[8], and
  • the second clause provided that Cooper “shall, and shall cause each of its Subsidiaries to, use its commercially reasonable efforts to preserve intact its present business organization, keep available the services of its directors, officers and employees and maintain existing relations and goodwill with customers, distributors, lenders, partners, suppliers and others having material business associations with it or its Subsidiaries.”[9]

The parties disputed whether the first or second clause applied, and, as a result, whether Cooper’s obligation to conduct the business of CCT was governed by “commercially reasonable efforts.”  According to Apollo, “Cooper has an unqualified obligation to cause CCT to operate its business in the ordinary course, consistent with past practice, and that Cooper was unable to satisfy this obligation due to the lockout at CCT.”[10]  Cooper, on the other hand, argued that only the second clause applied as the first clause only applied to actions within Cooper’s complete control and that the alleged breaches involved third parties.

The court held as follows:

  • The court rejected Cooper’s argument and determined that Cooper had undertaken in the merger agreement to cause its subsidiaries, which included a majority-owned entity like CCT, to operate in the ordinary course consistent with past practice and, therefore, the first clause, which was not qualified by an “efforts” standard, applied. 
  • The court explained that “ordinary course” meant “[t]he normal and ordinary routine of conducting business”[11] and that the cessation of CCT’s production of Cooper-branded tires, the physical exclusion of Cooper employees from CCT’s facilities, and limitation of Cooper’s access to CCT’s financials “illustrate Cooper’s failure to cause CCT—its largest subsidiary—to conduct business in the ordinary course.”[12] 
  • But the court further explained that by Cooper suspending payments to suppliers of CCT, Cooper made “a conscious effort to disrupt the operations of the facility” further preventing it from complying with the ordinary course covenant.
  • As such, the court held that Cooper breached its obligations to conduct its business in the ordinary course of business consistent with past practice, thereby relieving Apollo of its obligations to close the transaction. 

What does all this mean in the context of Covid-19?

In light of existing Covid-19 restrictions, it seems clear that relying upon a “we will know it when we see it” approach to determining the meaning of “operating in the ordinary course” is a bad idea, at least with respect to those deals not yet signed.  Instead, a real “bespoke” version of an ordinary course covenant should be negotiated that takes into account the new ordinary—at least during the continuation of the restrictions. 

But for those agreements that were signed before the outbreak, but have not yet closed, determining the required actions that do and do not breach a covenant to operate in the ordinary course seems a lot less clear.  From Akorn, we learned that “a commercially reasonable efforts” qualifier to an ordinary course covenant may relieve a target of that covenant where an “an unexpected event outside of [the target’s] control,” intervenes.  And from Cooper Tire we learned that an unqualified ordinary course covenant means “[t]he normal and ordinary routine of conducting business” and an event presumably outside of the control of the target (the wrongful actions of the minority shareholder in halting production in China) may not necessarily relieve the target of that covenant.  But even in Cooper Tire, the court noted that the reactions of the target to the event otherwise outside of its control constituted “a conscious effort to disrupt the operations”—suggesting at least that such specific action contributed to the court’s finding of breach. 

The bottom line is that neither of these cases answer the questions we posed at the beginning of this article as to what constitutes conducting business in the ordinary course when the normal and ordinary routine of conducting business changes across an entire industry because of an external event such as the COVID-19 pandemic.  In any ordinary course of business of any target in any industry, there was always a first time that any course of conduct was undertaken,[13] and what is normal and ordinary in normal and ordinary times may or any not be ordinary in extraordinary times.  Nevertheless, one thing is clear, the words used in the particular agreement and the nature of the specific conduct being challenged will matter greatly. 



Endnotes    (↵ returns to text)
  1. See Joerg H. Esdorn, Aaron D. Simowitz & Daniel Freeman, ‘Ordinary Course Of Business’ In Debt Agreements,’ Law360, New York, June 22, 2010.
  2. Akorn, Inc. v. Fresenius Kabi, AG, C.A. No. 2018-0300-JTL, 2018 WL 4719347 (Del. Ch. October 1, 2018).
  3. Id. at *1
  4. For a more detailed discussion, see Glenn West, A Delaware Case Has Finally Determined That There is Such a Thing as a “Material Adverse Effect”, Weil Insights, Weil’s Global Private Equity Watch, October 8, 2018.
  5. Akorn, Inc. v. Fresenius Kabi, AG, C.A. No. 2018-0300-JTL, 2018 WL 4719347, at *66 (Del. Ch. October 1, 2018).
  6. Id at *89
  7. Cooper Tire & Rubber Company v. Apollo (Mauritius) Holdings Pvt. Ltd., C.A. No. 8980-CVG, 2014 WL 5654305 (Del. Chancery Ct. Oct. 31, 2014).
  8. Id. at *13
  9. Id. at *13
  10. Id. at *16
  11. Id. at *17
  12. Id. at *17
  13. See In re Finn, 909 F.2d 903, 908 (6th Cir. 1990) (“Obviously every borrower who does something in the ordinary course of her affairs must, at some point, have done it for the first time.”).