Illustration: Aïda Amer/Axios

A Delaware judge this afternoon will hear arguments on a case that could help determine the fates of dozens of pending mergers that were signed prior to the pandemic. It also could permanently change how future investment agreements are written.

The big question: Must the parties have explicitly identified "pandemic" in claiming a material adverse effect, or are the results of the coronavirus pandemic included under changes arising from "national or international political or social conditions?"

This is the case we first discussed on Monday, whereby The Carlyle Group is backing out of a $900 million investment for a 20% stake in corporate travel agency American Express GBT. Both the suit and countersuit have now been unsealed:

Both sides agree that American Express GBT's business has been severely damaged. The devil is in the details:

  • Carlyle will argue that plenty of merger agreements explicitly carve out "pandemics" from being a legitimate reason for buyers to bail, just as they might also carve out acts of war or terrorism. In fact, the law firm representing American Express GBT has done so in other deals. Its absence from this agreement, in Carlyle's view, is proof that it's an illegitimate defense.
  • American Express GBT will argue that a "pandemic" itself isn't the defining issue. Instead, it's the "national or international political or social conditions" that have arisen from this specific pandemic, including broad international travel restrictions and hotel closures that go far beyond what's occurred in past pandemics.
  • In short: Carlyle believes in more narrow, tailored language. American Express GBP went for the umbrella.

Plus, there are three other interesting ingredients here, again mostly involving differences of interpretation.

  • American Express GBT CEO Greg O'Hara had repeatedly, and publicly, said that a pandemic would be devastating for his business. Yet he never sought pandemic-specific language in this agreement. To Carlyle, that's an admission that it doesn't apply. To American Express GBT, it's proof that they expected it to apply.
  • Duration can a key piece of proving MAE, and both sides agree that the economic harm here will be measured in years, not months. But this deal included a 10-year lockup, and Carlyle co-founder David Rubenstein told CNBC yesterday that he expects people to get back to life as usual once there’s a vaccine. If this comes up, don’t be surprised if Carlyle instead relies on CEO surveys that suggest business travel has been permanently altered.
  • Carlyle is being joined in its suit by Singapore sovereign wealth fund GIC, a major Carlyle limited partner that was participating as a co-investor. None of the other institutional co-investors are claiming MAE, nor are the deal’s lenders. American Express GBT likely views this as proof that Carlyle is an outlier. Carlyle likely views this as everyone else letting the biggest dog do the dirtiest work.

The bottom line: Every financial crisis has its seminal legal cases. For 2020, one of them begins today at 2pm ET.

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