Delaware Court of Chancery Holds That ‘Effect of Termination’ Provision Bars Party Who Terminated Merger Agreement From Also Recovering Breach Damages

In its recent decision in Yatra Online, Inc. v. Ebix, Inc., Case No. 2020-0444-JRS, 2021 WL 3855514 (Del. Ch. Aug. 30, 2021) (Slights, V.C.), the Delaware Court of Chancery dismissed plaintiff’s breach of contract and other claims against defendants arising from a failed merger, holding that plaintiff’s claims were barred by the Effect of Termination provision in the Merger Agreement. The decision highlights the importance of carefully considering the negotiated language of a contract’s termination provisions before deciding whether to exercise one’s termination rights when a deal goes sour.

Background

In 2019, plaintiff Yatra Online Inc. (Yatra), a provider of online travel-related services, entered into merger discussions with defendant Ebix Inc. (Ebix). In July 2019, the parties executed a Merger Agreement, pursuant to which Ebix agreed to acquire Yatra, and as consideration Yatra stockholders would receive shares of Ebix’s Convertible Preferred Stock per a fixed exchange ratio. The Convertible Preferred Stock contained a “Put Right” provision providing that the Convertible Preferred Stock could be redeemed 25 months from the closing of the merger for $5.31 per share, providing Yatra stockholders with a floor under which the price of their shares could not fall. Because the shares were to be issued for the first time in connection with the merger, a condition precedent to closing was that Ebix would register the shares with the SEC by filing, and receiving approval of, a Form S-4 registration statement.

The Merger Agreement provided that ether party could terminate the agreement if closing did not occur by the designated outside closing date, originally April 12, 2020. The Effect of Termination provision provided, in relevant part, that “[i]n the event of any termination of this Agreement as provided in Section 8.1, the obligations of the parties shall terminate and there shall be no liability on the part of any party with respect thereto ….” The provision also stated that “nothing contained herein shall relieve any party from liability for damages arising out of any fraud occurring prior to such termination,” but did not contain a similar exception in the event of a willful breach by a party.

Prior to the original outside closing date, the COVID-19 pandemic had severely affected Yatra’s business, making the acquisition of Yatra less attractive to Ebix. Yatra alleged that Ebix then intentionally took steps to delay the closing, including by insisting on the renegotiation of certain terms of the Merger Agreement, and by delaying the preparation and filing of the S-4. Yatra further alleged that — unbeknownst to Yatra — Ebix entered into an amendment to its agreement with its lenders that essentially prohibited Ebix from issuing the Put Right, even though Ebix knew that the Put Right was a crucial component of the consideration payable to Yatra, and that entering into the amendment to the lending agreement would make payment of the Put Right impossible.

As a result of Ebix’s delay tactics, the outside closing date was extended several times. When the final closing date passed with Ebix still unprepared to close, Yatra terminated the Merger Agreement and filed suit in Delaware alleging breaches of several of the covenants and representations made by Ebix in the Merger Agreement, notably that it would use “reasonable best efforts” to ensure all closing conditions would be satisfied, including preparation and filing of the S-4. Yatra later amended its complaint to also assert claims against Ebix for (i) breach of the implied covenant of good faith and fair dealing and (ii) fraud, and a claim for tortious interference against Ebix’s lenders for entering into the amendment to the lending agreement.

The Court’s Ruling

In its motion to dismiss, Ebix argued that the plain language of the Effect of Termination provision barred Yatra’s post-termination claims for pre-termination contractual breaches by providing that if either party terminates “there shall be no liability on the part of any party with respect [to]” the obligations of the parties set forth in the Merger Agreement. In response, Yatra contended that (i) the Effect of Termination provision extinguished liability only with respect to termination, and not with respect to any pre-termination obligations; or (ii) at a minimum, the provision was ambiguous in this regard. The court agreed with Ebix, finding that the Effect of Termination provision unambiguously barred claims for pre-termination breaches, and interpreted the Merger Agreement as offering “a choice to a party faced with a breach by the counterparty: either (a) sue for damages (or specific performance) or (b) terminate the Merger Agreement and extinguish liability for all claims arising from the contract (except those specifically carved-out, including claims for fraud).” The court noted that “[t]he latter option would be preferable where, for example, the terminating party believed it had some liability exposure of its own and would prefer to terminate the Merger Agreement to eliminate that risk.” Because Yatra chose to terminate the Merger Agreement before suing for damages, the court ruled that Yatra’s breach of contract claims must be dismissed.

The court also dismissed Yatra’s claim for breach of an implied covenant of good faith and fair dealing, because such a claim is viable only if “the contract is truly silent concerning the matter at hand.” Here, “the contract occupies the space Yatra seeks to fill with the implied covenant.” Yatra’s fraud claim, which was also dismissed, was premised on the theory that Ebix made extracontractual promises to Yatra it did not intend to keep, which precluded Yatra from seeking specific performance. The court held that Yatra had failed adequately to allege loss causation in light of the fact that the SEC never declared the S-4 effective, meaning that specific performance would not have been an option available to Yatra in any event. Finally, the court dismissed Yatra’s tortious interference claim against the lenders because Yatra had failed adequately to allege that the amendment to the lending agreement was a “significant factor” in causing a breach of the Merger Agreement; the S-4 was never declared effective, and thus the Convertible Preferred Stock could not be issued and the Put Right could not be implemented.

Conclusion

Yatra’s breach of contract claims might have been saved had it negotiated an exception to the Effect of Termination provision for willful breach, as opposed to only for fraud. In any event, the case highlights the importance of a party understanding its rights under the termination provisions of a contract before choosing whether to terminate the contract.