A group of Farfetch creditors are urging a court in the Cayman Islands to wind up the fashion e-commerce platform and investigate its rapid and still-largely-unexplained decline on the basis that it owes them upwards of $400 million. Petitioner Wilmington Trust is not only seeking to be repaid for the ownership of more than 50 percent of Farfetch 3.75 percent convertible notes, which were issued by the company in April 2020 in furtherance of its efforts to raise more than $1 billion in capital. It is calling on the court to carry out a “substantive and independent investigation” into potential wrongdoing by the company and its founder – and only remaining director – José Neves.
Setting the stage in the winding-down petition that it lodged with the Financial Services Division of the Grand Court of the Cayman Islands on February 2, Wilmington Trust asserts that it is acting on behalf of Ad Hoc Group, whose members hold the nearly $405 million in Farfetch convertible notes, which Farfetch has “acknowledged” that it cannot repay, thereby, making the company insolvent.
As an initial point, Wilmington Trust asserts that the Cayman Islands-incorporated Farfetch Limited is “the ultimate holding company” of the Farfetch Group with “intermediate holding and operating companies in the United Kingdom, United States, and other jurisdictions.” Following “expansion and a number of acquisitions,” Wilmington Trust asserts that “the business of the Farfetch Group now comprises a global retail platform for the luxury fashion industry, a number of other e-commerce platforms, a number of fashion and beauty product labels, and London department store, [Browns].”
Fast forward to December 18, 2023 and Wilmington Trust claims that Farfetch issued a press release (the “December 2023 Announcement”) stating that it needed additional liquidity and had entered into a deal that would give it access to $500 million bridge loan made from Coupang-affiliated entities. This was swiftly followed by an announcement that Farfetch would be acquired in full by Korea retail group Coupang.
At least a few issues stand out here, according to Wilmington Trust …
> It “does not appear that any proper marketing process was run for the business of the Farfetch Group” prior to the December 2023 Announcement;
> The deal to sell Farfetch to Coupang, which was finalized on January 30, appears to have been reached without “any proper process to market the relevant business,” and was reached before the end of the period in which [it] could have accepted another acquisition offer;
> The December 2023 Announcement and subsequent sale of Farfetch to Coupang were exclusively “executed by Neves on behalf of both [Farfetch] and a number of its subsidiaries,” as on December 18 or so, all of Farfetch’s independent directors resigned, leaving Neves as the sole remaining director;
> “The entire acquisition process …. ignored obligations to the company’s creditors and stakeholders.” In particular, Neves entered into a deal with Coupang “to the detriment of [Farfetch], and its creditors and shareholders” because as a result of the sale of Farfetch, Coupang-owned entity Surpigue LP “received the whole the value of the Farfetch Group and the Term Loan Lenders … received early repayment and payment of a very material consent fee.” Meanwhile, “other creditors of the Farfetch Group, including holders of the [convertible] notes, will receive no return on their investments, and instead hold worthless debt in a company that will be liquidated,” and Farfetch shareholders “will lose the whole of their investment;”
> There are “serious deficiencies in the company’s governance and management,” as demonstrated by the lack of explanation from the company as to why the Coupang sale was structured as “a distressed sale of the Farfetch business in circumstances where, as recently as August 2023, the company and its business appeared to be in good financial health;” and
> Farfetch has not provided “any justification or explanation for agreeing to enter into [the agreement with Coupang] (including how doing so is said to be in the interests of the company or its creditors), by which it agreed to support the Coupang sale and to … effectively write-off over $1 billion of debt.”
TLDR: Wilmington Trust contends that “in the absence of any information being provided by [Farfetch] which may suggest otherwise,” it seems that Neves “struck a bargain to transfer the business and value of the Farfetch Group to Surpique LP … in exchange for him remaining involved with or in control of [Farfetch] at the expense of the company and its shareholders.”
Given that there are instances in which “the reasons for [Farfetch’s] failure are completely opaque,” and in light of the fact that the company “has entered into unjustified value-destructive steps (including the Coupang sale)” and “currently does not have a functioning or independent board of directors,” Wilmington Trust argues that there is “a real and urgent need” for independent liquidators to be appointed by the Court in order to investigate the circumstances of Farfetch’s “apparent rapid and unexplained failure, and manage [its] affairs in the interests of its creditors … [in order to] prevent the dissipation, misuse or misapplication of [its] remaining assets, pending [such] investigations.”
THE BIGGER PICTURE: The striking new filing comes amid the continued unraveling of Farfetch. Over the past couple of weeks, partner Neiman Marcus Group revealed that it would bring its commercial partnership with Farfetch to a close, while Kering has reportedly pulled its brands from the Farfetch marketplace, with the group’s deputy CEO of operations and finance Jean-Marc Duplaix saying this month that Farfetch “is not a strategic partner for us,” per WWD.
At the same time, at least a couple of class action cases have been waged against Farfetch, accusing it and its former executives of making “materially false and misleading statements regarding [Farfetch’s] business, operations, and prospects” and artificially inflating the value of the company, which was previously traded on the New York Stock Exchange.
Share
