The Ontario judge who ruled in Cineplex Inc.'s favour in a case against its former suitor Cineworld Group PLC found testimony from the U.K. theatre giant's executives was contradicted by their text messages and other internal documents.
Judge Barbara Conway said in a decision that Cineworld CEO Mooky Greidinger, his brother Israel Greidinger and chief financial officer Nisan Cohen testified that they had intended to close the $2.18-billion Cineplex deal up until they accused Cineplex of alleged breaches last summer.
However, Conway says their communication "paints a very different picture" of executives, who were considering calling off the deal as early as mid-March and by the third week of April had no intention of proceeding with paying $34 per share.
"By March, the pressure was on Cineworld to reconsider the transaction. Its share price was collapsing," Conway wrote in her judgment filed Tuesday.
"Investors sent panicked emails to Cineworld's executives, urging Cineworld to reconsider and walk away from the Cineplex deal."
For example, Steven Levey of ION Asset Management, one of Cineworld's largest shareholders, asked Cohen on March 2 whether his company was thinking of walking away from the deal or at least renegotiating.
"Based on where the market is now, there is clearly a case for paying a much lower price," Levey wrote.
"There is no way that you would pay that price today. NO WAY."
Coehn replied, "We understand and analyzing all options, step by step."
Cohen testified that Cineworld was not considering its options, but trying to placate Levey. Conway did not agree.
Furthermore, she found Cineworld was long considering dropping the deal because it was facing liquidity concerns and having trouble increasing a revolving credit facility by $110 million.
Israel Greidinger testified that many potential lenders for the facility didn't want to increase their exposure to Cineworld during the pandemic and several, including Citizen Bank, continued to seek confirmation that the deal would not proceed.
Cohen told the lenders he would explain the situation over the phone, but not in writing.
"Considering all of the evidence, I cannot accept the testimony of Messrs. Greidinger and Cohen that Cineworld remained intent on closing the transaction at $34 per share throughout the relevant period," Conway said.
The executives ended up in front of a court after Cineworld walked away from its planned takeover of Cineplex in June 2020, alleging Cineplex was responsible for "material adverse effects."
Cineplex called it a case of "buyer's remorse" and sued for more than $2.18 billion in damages. Cineworld filed a counter claim valued at about $54.8 million.
Conway found Cineplex was not guilty of the alleged breaches and awarded the company damages of $1.24 billion, though Cineworld has since vowed to appeal the decision.
Following Conway's decision, Cineplex's stock price closed up 11.6 per cent to $13.14 in Toronto, while Cineworld's dropped by nearly 40 per cent to 27.50 pounds on the London Stock Exchange.
Cineworld felt it was free to walk away from the deal because it claimed 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 clause frequently appearing in acquisition agreements because it helps companies terminate a deal and limit their risks, if other parties make dramatic moves that upend their operations.
Cineplex argued it followed an "ordinary course" for the industry during the pandemic. Deferred payments to landlords, film distributors and suppliers were the norm for the industry during COVID-19 and the delays did not hamper relationships with studio and real estate executives, Cineplex said.
It also pointed out the deal had a clause exempting outbreaks of illness or changes affecting the motion picture theatre industry from being considered "material adverse effects."
Conway agreed and said that Cineplex cannot be seen as defying ordinary course commitments because pandemic mandates issued by the government stymied its normal operations.
The economics of the deal did not change because of the deferrals and spending reductions, but because of the pandemic, she wrote.
"Because of the pandemic, Cineplex was no longer the attractive deal to Cineworld at $34 per share that it had been," she said.
"However, that was the systemic risk that Cineworld assumed when it agreed to exclude the pandemic from the definition of Company Material Adverse Effect."
This report by The Canadian Press was first published Dec. 15, 2021.
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