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In what corporate law experts said is the first lawsuit to use the Sept. 11 terrorist attacks as a rationale for ending a merger, USA Networks Inc. is asking the Delaware Court of Chancery to void its acquisition of National Leisure Group Inc. on the grounds the incident has fundamentally altered the economics of the agreement. “The events of Sept. 11, as well as their aftermath and foreseeable effects, have had and could reasonably be expected to have a hugely negative impact on NLG’s business, assets, condition, financial performance and result of operations,” USA Networks said in the eight-page suit. Also cited is Costco Wholesale Corp.’s decision to terminate its business with National Leisure. USA Networks argued that the contract does not require it to close the transaction if National Leisure loses a “material customer” such as Costco. USA Networks said National Leisure executives conceded that the loss of the Costco contract was material in a Sept. 27 letter. In that document, the officers specifically exempt Costco from their certification that no “material adverse effects” have occurred since the deal was struck in July. USA Networks filed the suit Oct. 3, though it was not disclosed until Oct. 4. The New York media company is represented by David McBride and Martin S. Lessner, partners in the Wilmington, Del., law firm of Young, Conaway, Stargatt & Taylor. They declined to comment. Officials for Woburn, Mass.-based National Leisure did not return calls for comment to their Massachusetts and Arizona offices. The company provides technology and fulfillment services to travel Web sites and other retailers and was purchased in May 2000 by Softbank Capital Partners and General Catalyst Group, according to its Web site. Softbank managing general partner Ronald Fisher did not return calls for comment. But he told Reuters that USA Networks has no basis to terminate the merger, which was set to close Sept. 28. USA Networks announced the National Leisure deal July 16 in conjunction with its planned acquisition of up to 75 percent of Expedia Inc., an online travel agency. USA Networks Chairman Barry Diller said at an analysts conference Oct. 2 that the company remained committed to the Expedia deal. He did not mention National Leisure. The case is expected to be assigned to a Chancery Court judge Oct. 9 because the judges are attending a conference this week and the court is closed Oct. 8 for Columbus Day. National Leisure has 20 days to respond to the suit, though extensions can be granted. Legal experts said the suit could establish a precedent for what types of events a “material adverse change” clause covers. And the outcome, they added, could depend on the contract phrasing, which has not been made public. This would be the second major merger-related case this year centering on such clauses. The Chancery Court ruled in June that Tyson Foods Inc. could not use a downturn in IBP Inc.’s business as an excuse to void their merger agreement. Lawrence Hamermesh, a professor at Widener University School of Law in Wilmington, said the Tyson decision is a warning for USA Networks. The company must show that the material adverse change provision in its agreement with National Leisure was intended to apply to acts of terrorism, not just that a downturn in the travel business has hurt National Leisure’s financial prospects. “The Chancery Court will not let the material adverse change clause be used as a pretext for buyer’s remorse,” he said. Though it’s hard to predict without analyzing the contract and court papers, one Delaware corporate lawyer said USA Networks has the edge. “This is a changed circumstance that neither side could have anticipated,” he said. “It would not be fair to make USA Networks pay for National Leisure’s losses.” The road to litigation began Sept. 28. National Leisure sent USA Networks a letter saying all the conditions to the merger had been satisfied and demanding that the deal close Oct. 5. USA Networks responded with a letter dated Oct. 3, saying it had the right to end the deal because National Leisure violated the contract. Copyright (c)2001 TDD, LLC. All rights reserved.

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