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Cineplex accuses Cineworld of bad faith in day one of hearings over abortive takeover

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TORONTO — Cineplex Inc. says a U.K. theatre giant acted in bad faith by delaying a takeover deal of the Canadian company and hoping it would default during the pandemic, a judge heard at the opening of its trial against Cineworld Group PLC.

Toronto-based Cineplex is seeking to recoup $2.18 billion in damages from Cineworld after the company walked away from the December 2019 deal amid a strict COVID-19 lockdown in June 2020.

"Cineplex did what all other affected businesses, including Cineworld and its other peers, did," Alan Mark, a lawyer representing Cineplex, said in opening remarks Monday in the case being heard by the Ontario Superior Court of Justice.

"These actions were consistent with Cineplex's obligations under the arrangement agreement to preserve the value of its business during the interim period."

Cineworld is arguing it had the right to terminate the agreement without payment 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.

The trial is expected to be a test case for pandemic-era litigation as the two companies argue about each other's actions during the pandemic that led to plummeting revenues and changed the cinema landscape.

Mark alleged Cineworld never stated it took issue with Cineplex's actions until it filed to break its deal with the Canadian company.

He added that Cineplex's leadership team was in constant discussion with Cineworld as the two companies weathered the pandemic.

Mark further alleged that Cineworld would not discuss its integration plans with Cineplex in writing, and only spoke over the phone to avoid any paper trail of their plans.

"What Cineworld was pinning its hopes on, was that Cineplex would eventually not be able to manage its liquidity without running afoul of the debt sealing covenant," Mark said.

"They were playing for time, and in fact that's what they told their insiders that they were doing."

However, Cineworld argued that Cineplex's actions regarding deferring payments started taking place before lockdowns were first implemented by Canadian governments.

Paul Steep, a lawyer representing Cineworld, argued that Cineplex changed course in business operations not because of the pandemic, but because they were nearing the debt ceiling covenant that would cancel the agreement.

Under the takeover deal, Cineplex was allowed to have up to $750 million in debts.

Cineworld's legal team showed emails between Cineplex executives worrying about debt levels that were rising above $700 million in early March, before lockdowns first hit Canada.

"I'm lying awake at night worrying about our cash balances," wrote Susan Campbell, senior vice president of finance, in one email to CFO Gord Nelson dated March 2.

"Cineplex's deviations were of a type that transferred risk and obligations onto Cineworld that they expressly did not bargain for," said Steep.

Cineplex has said it plans to call its first witness, Cineplex CFO Gord Nelson, following Cineworld's remarks.

The case won't change Cineworld's decision to scrap the Cineplex deal, but legal and entertainment experts say it will offer a window into the future of Canadian movie-going and may inspire further suits.

This report by The Canadian Press was first published Sept. 13, 2021.

Companies in this story: (TSX:CGX)

Salmaan Farooqui, The Canadian Press

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