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Yoga company twisted after refusing to comply with purchase agreement in wake of COVID – Corporate/Commercial Law


United States: Yoga company twisted after refusing to comply with purchase agreement in wake of COVID

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The Delaware Court of Chancery ruined CorePower Yoga (CorePower) Zen this week, finding it breached an agreement with Level 4 Yoga (Level 4) to acquire 34 yoga studios just before the COVID-19 pandemic hit in early 2020. After a week-long trial in the summer of 2021, Vice Chancellor Slights issued his 88-page notice on March 1, finding CorePower liable for the $29.5 million purchase price, of 3, $5 million in operating losses and millions more in additional interest and damages.

Put on your best Lululemon workout gear and let’s ponder the opinion together.

CorePower is the nation’s largest chain of yoga studios. Level 4 was CorePower’s largest franchisee, with studios in six states. Pursuant to the parties’ franchise agreement, CorePower controlled nearly every aspect of Level 4’s studios, including days and hours of operation, membership terms, and business practices. Additionally, the franchise agreement gave CorePower the right to purchase all of Level 4’s studios during certain “control events”.

One such “control event” occurred when a private equity firm purchased Core Power in April 2019. CorePower’s new owner immediately invoked the Level 4 call option. Level 4 agreed that CorePower may acquire its studios in separate installments throughout 2020 and has promised to operate its studios in the “ordinary course of business” until the deal closes. In exchange, CorePower agreed that the purchase agreement would have no closing conditions or express right of termination. The first tranche of Tier 4 studios to change control was scheduled for April 2020.

Unfortunately, a global pandemic interfered with CorePower’s best plans. On March 15, 2020, CorePower ordered the closure of all of its franchisees’ studios (including those at Level 4). Because CorePower controlled its hours of operation, Level 4 complied and closed all of its studios.

As the pandemic worsened in March, CorePower attempted to delay the shutdown. Level 4, of course, balked at this proposal. In response, CorePower invoked the parties’ purchase agreement and accused Level 4 of not operating in the ordinary course of business because Level 4 closed its studios. CorePower argued that its contractual performance was “cancelled” because Level 4 had “repudiated” its representations and warranties, including (i) that there were no property losses, (ii) that no facilities had been closed and (iii) that there were no significant adverse effects. Both parties eventually sought declaratory judgments that they had not breached the purchase agreement.

After listening to all the evidence, the court placed CorePower in a downward dog. “Absurd” is how the court described CorePower’s arguments: “Level 4 did not repudiate or materially breach the Advance Purchase Agreement (APA) in any respect, and the purpose of the APA was not thwarted. Following the instructions of its franchisor, as it always has, Level 4 operated its yoga studios in the ordinary business court when it closed them in accordance with the instructions from CorePower.” The court also found that the parties’ agreement acted as a “one-way door” – meaning that once the parties executed it, neither party could back out. The complete absence of any closing condition of the right to rescind was key in the court’s mind: “Not one – there are no closing conditions, no express termination clauses, and no fees termination or reverse termination; there is not even a force majeure clause.”

Key points to remember:

  • Now, nearly two years from the disastrous start of the pandemic, it is perhaps easy to forget just how unprecedented the events took place in March and April 2020. Companies around the world took a nose dive in emergency cash-holding mode and implored their attorneys to be creative in the face of uncertainty. CorePower’s decision to delay closing was typical and probably understandable, regardless of the terms of the deal. But it’s surprising that cool heads have failed to prevail in the meantime. The court – perhaps too harshly – sarcastically described the private equity firm as “purveyors of mindfulness” and its arguments as “absurd” and “factually unsubstantiated”. The private equity firm’s portfolio and reputation have been hit hard in this case.

  • CorePower argued that it would never have signed a purchase agreement that did not allow any possible exit. But this case is a good reminder that if a contracting party wants the right to terminate, it must include such provisions in all four corners of the contract.

  • What was CorePower’s best course? If he truly believed Level 4 was in breach, he should have made the deal and then sued Level 4 for damages. In a court of equity like the Court of Chancery, it is far better to seek relief when your own hands are clean.

Namaste.

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