Snow Phipps Group, LLC v. Kcake Acquisition, Inc.

Facts

DecoPac is a Delaware corporation. It is a marketer of cake decorating products. It supplies cake-decorating ingredients and products to in-store bakeries in supermarkets, such as Walmart, Sam's Club, and The Kroger Company. Its products are used to create decorated cakes. DecoPac provides PhotoCake, which allows bakeries to print edible, customizable images onto baked goods, and Cakes.com, which allows consumers to personalize and order baked goods from bakeries. Snow (P) is a private equity firm focused on investments in middle-market companies. P acquired DecoPac in 2017. Word got out that DecoPac could be acquired. Kohlberg & Company, LLC (D), a private equity firm, sent P a letter of intent to acquire DecoPac for $580 million. After its initial due diligence, D remained 'highly interested in acquiring the company,' and increased its bid to $600 million. The second letter of intent stated that D had 'completed substantially all of its business diligence,' including a site visit to one of DecoPac's facilities, and was prepared to begin its confirmatory third party diligence 'immediately.' The purchase price was thus subject to confirming '2019 Pro Forma Adjusted EBITDA of $49.8 million.' P accepted the $600 million bid and agreed to move forward with additional diligence. One potential counterparty expressed interest in acquiring DecoPac, but P placed great weight on D's representation that it was 'uniquely positioned to complete the Transaction with speed and certainty.' The parties complete diligence and negotiated a formal purchase and sale agreement. The process culminated in a March 6, 2020 signing. Of course, at this time the Wu-Han Flue pandemic was escalating. On March 4, California declared a state of emergency. By March 5, global school-closings affected 300 million students, with several closures in the U.S. and warnings of more to come. D proactively evaluated how the spread of the virus might impact its portfolio companies. D's deal team expressly identified risks posed by the Wu-Han Flu. On March 4, P sought to carve out 'pandemics' and 'epidemics' from the definition of a 'Material Adverse Effect' two days before signing. At the time, the draft purchase agreement contained an MAE provision that made no reference to pandemics or epidemics but included other broad carveouts for effects related to 'general economic conditions,' 'terrorism or similar calamities,' and 'government orders.' P sought to expressly add the terms 'epidemics' and 'pandemics.' D claims that the parties allocated to P any potential unknown risks of the pandemic, including the risk that demand for DecoPac's products would be decimated as Americans radically shifted the way they celebrate occasions in response to the pandemic. Both P and D's attorneys testified that, even without express epidemic/pandemic language, if the Wu-Han Flu caused any of the events that were carved out from the MAE definition, the events would not qualify as an MAE. Both P and D's attorneys testified that, even without express epidemic/pandemic language, if the Wu-Han Flu caused any of the events that were carved out from the MAE definition, the events would not qualify as an MAE. D demanded the 10% price reduction on the eve of signing because market volatility caused by the Flu coupled with D's ability to offer speed and deal certainty against near-term risks, gave D the leverage to do so. The contract was signed on March 6, 2020. D entered into a DCL with a number of financing firms. The DCL, under its terms, was set to expire on May 12, 2020. Immediately after signing, D braced for a possible decline in DecoPac sales. Shortly after signing, DecoPac's sales began to decline precipitously. D developed buyer's remorse and set on a course of conduct predestined to derail Debt Financing and supply a basis for terminating the agreements. DecoPac's weekly sales reports reflected that the Company continued to struggle. Weekly 'regular' sales were down 42.4% year-over-year. During each of the following four weeks, regular sales were down 63.9%, 60.3%, 62.2%, and 53.4%, respectively. Total sales during those five weeks saw a year-over-year decrease of 27.5%, 54.8%, 55.5%, 41.9%, and 15.4%, respectively. The sales decline proved a blip. The Company began to recover by the week of April 18. Ultimately, DecoPac's 2020 revenue declined 14%, and adjusted EBITDA declined 25% relative to 2019. D prepared a revised financial model. There was no input from DecoPac, just draconian assumptions by D. D eventually called DecoPac for information concerning the Company's actual performance on March 24, after Dt had already independently reached pessimistic conclusions about DecoPac's future sales. The Company conveyed that customers anticipated 'a return to 'normalcy'' by the end of the summer. D had written off the Company's projections before even seeing the numbers. D sent the draconian model to the financial entities. D sought substantially more favorable and risky terms from the lenders. As almost if on cue the lenders rejected them. Each of the Lenders remained committed to funding the transaction under the terms of the DCL. D then went to P and declared that financing was no longer available. D spent 4 days searching for different financings but found no one. D received actual data from DecoPac that D’s projections were dead wrong. D did not update the Model nor contact the Lenders with updates in response to this information. D walked from the transaction claiming the financing was not available. P filed this action seeking specific performance. P claimed that D breached its obligations to use commercially reasonable efforts in connection with the Debt Financing, by making the Financing Demands, failing to secure alternative financing, and not promptly notifying P regarding the Debt Financing issues. P claims D breached the implied covenant of good faith and fair dealing in the SPA by failing to 'actively preserve the terms of the [DCL] and the availability of financing.' P claims that D breached their obligations under the ECL and seeks specific performance under the ECL. and Section 11.14(b) of the SPA.P seeks declaratory judgments that (a) D's failure to consummate the transaction by May 4, 2020, breached its obligations under Section 6.15 of the SPA and (b) D's 'obligations under the SPA require it to proceed to Closing.' The Company's March forecast proved accurate. Sales were down from 2019 levels by 12.8% in June and only by 2.9% in November. D moved to dismiss. 

Issues

Rule of Law

Holding and Decision

Legal Analysis

© 2007-2024 ABN Study Partner.