Cineplex awarded $1.24-billion in damages in takeover suit, Cineworld to appeal

TORONTO — Cineplex Inc. says it has won a court battle against a U.K. theatre giant that was due to purchase the Canadian cinema company before the COVID-19 pandemic struck.

Toronto-based Cineplex announced Thursday evening that the Ontario Superior Court of Justice ruled in its favour in a breach of contract lawsuit against its former suitor Cineworld Group PLC.

Judge Barbara Conway awarded damages of $1.24 billion and denied a counterclaim by Cineworld, Cineplex said.

"We are pleased that the court found Cineplex acted properly throughout this difficult period in our history," said Cineplex president and CEO Ellis Jacob in a statement.

But Cineworld isn't giving up. Shortly after Cineplex announced its victory, Cineworld acknowledged the ruling and noted that the court had also ordered it to pay $5.5 million for lost transaction costs.

"Cineworld disagrees with this judgment and will appeal the decision," the company said in a statement.

"Cineworld does not expect damages to be payable whilst any appeal is ongoing."

The acrimony between the two cinema chains began when Cineworld walked away from its deal to acquire Cineplex in June 2020.

By then, the pandemic was in full swing and theatre operators in many corners of the globe had been forced to close cinemas.

Cineplex and Cineworld reported massive losses and turned to layoffs to save any cash they could as bills from landlords, studios and concession stand suppliers came due.

As the companies navigated the crisis and awaited final approvals from Canadian regulators for their deal, Cineworld backed out of the takeover, alleging the company it was due to buy was responsible for "material adverse effects and breaches."

Cineplex chalked up the adverse effects Cineworld was blaming it for as “nothing more than a case of buyer’s remorse" and decided to sue its former suitor for more than $2.18 billion in damages.

Cineworld filed a counter claim valued at about $54.8 million.

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The court was left to decide whether Cineworld had the right to terminate the takeover agreement it signed with Cineplex in December 2019 without payment.

Cineworld argued it was free to walk away from the deal because Cineplex strayed from "ordinary course," when it deferred its accounts payable by at least 60 days, reduced spending to the "bare minimum" and stopped paying landlords, movie studios, film distributors and suppliers at the start of the pandemic.

"Ordinary course" is a legal term that often features in acquisition agreements when companies want to ensure they will have the ability to terminate a deal and limit their risks, if other parties deviate wildly from their current operations or business model.

In response to Cineworld's claims, Cineplex argued it fulfilled all of its obligations and continued with an "ordinary course" for the industry during the pandemic.

It said the deferred payments to landlords, film distributors and suppliers were the norm for the industry during COVID-19 and introduced testimony from studio and real estate executives, who said the delays had not strained their relationship with Cineplex.

Cineplex also claimed that Cineworld did not have grounds to terminate the deal because there was a clause exempting outbreaks of illness or changes affecting the motion picture theatre industry from being considered "material adverse effects."

Cineworld, however, felt the clause should have no bearing on the case because it claimed it terminated the contract because of Cineplex's inactions rather than COVID-19.

The case was seen by some observers as potentially precedent-setting for other companies that may be embroiled in their own litigations over abandoned acquisitions and material adverse effects caused by the COVID-19 pandemic.

This report by The Canadian Press was first published Dec. 14, 2021.

Companies in this story: (TSX:CGX)

Tara Deschamps, The Canadian Press