LVMH Moët Hennessy Louis Vuitton is expected to wage a legal battle of its own in response to the headline-making lawsuit that Tiffany & Co. filed against it this week in connection with their $16.2 billion deal-gone-awry. In a statement on Thursday, LVMH – which reached a deal in November 2019 to acquire Tiffany & Co. in what would be the Paris-based luxury goods giant’s biggest acquisition to date – revealed that it was “surprised by the lawsuit filed [against it] by Tiffany,” an action that it says is “totally unfounded” and “demonstrates the dishonesty of Tiffany in its relations with LVMH.”
In what it calls a legal initiative that was “clearly prepared by Tiffany a long time ago and communicated in a misleading way to shareholders and is defamatory,” LVMH stated on Thursday that it “will defend itself vigorously” against Tiffany’s action, which “is essentially based on the accusation by Tiffany that LVMH failed to take the reasonably necessary steps to obtain the various regulatory authorities’ approvals” – including from the European Union – “in a timely way.” Per LVMH, “This accusation has no substance,” noting in particular that “the filing in [the EU] will take place, as expected, in the following days and this is simply the result of the planning fixed by the European Commission, about which Tiffany is completely aware.”
Looking beyond Tiffany’s assertions, which accuse the Bernard Arnault-run LVMH of delaying the closing of the merger (presumably in order to get a better for itself or to undo the agreed-upon transaction in its entirety), LVMH foreshadows legal claims of its own. In the statement, it argues that its board “had the opportunity to examine the current economic situation of Tiffany and its management of the crisis,” finding that “the first half results and its perspectives for 2020 are very disappointing, and significantly inferior to those of comparable brands of the LVMH Group during this period.”
“LVMH will be, therefore, led to challenge the handling of the [COVID] crisis by Tiffany’s management and its Board of Directors,” LVMH continues, stating specifically that it considers “that this period is impacted by a Material Adverse Effect, that Tiffany did not follow an ordinary course of business, notably in distributing substantial dividends when the company was loss making and that the operation and organization of this company are not substantially intact.”
The occurrence of a Material Adverse Effect (“MAE”) – which typically includes an event or series of events in connection with which there has been a significant or material deterioration in the financial health of the target or in the stability of the target’s business between the signing of the agreement and the closing – often triggers a risk allocating clause in parties’ acquisition agreement, which permits a buyer to terminate a proposed transaction or agreement. That is precisely what LVMH argues is at play here, asserting that with the foregoing in mind, “The necessary conditions for the conclusion of the acquisition of Tiffany are not fulfilled.”
COVID and the MAE
While LVMH does not appear to have responded to Tiffany’s complaint yet or lodged a rival action if its own, when it does, it will not be the first time in the recent past that parties have squabbled over an MAE clause in light of the COVID-19 pandemic. Just months after Sycamore Partners agreed to acquire a 55 percent stake in Victoria’s Secret, the New York-based private equity firm revealed in a statement that it had “confirmed a mutual agreement with L Brands to terminate their transaction agreement, previously announced on February 20, 2020,” on the heels of Sycamore actively trying to bring an end to the deal, citing an array of “breaches” of the acquisition agreement by Victoria’s Secret parent company L Brands.
The agreement, which was announced in early May, not only voided the parties’ deal, it brought a swift end to three separate lawsuits filed by the parties in a matter of weeks. Getting their start on April 22, Sycamore filed suit against L Brands in a Delaware Chancery court, arguing that while the retail group was legally “required to operate the Victoria’s Secret business in the ordinary course consistent with past practice” until the deal closed (which was slated for the second quarter of 2020), it allegedly failed to uphold its end of the bargain when it “decided to close the lingerie brand’s U.S. stores, furlough the majority of its workers, and skip April rent payments.” In furtherance of its suit, Sycamore sought the court’s blessing to terminate on the deal that valued Victoria’s Secret at $1.1 billion.
More than that, counsel for Sycamore asserted that the onset of the “extraordinary” COVID-19 crisis brought a “material adverse effect” clause in the parties’ agreement into effect, thereby, enabling it to walk away from the deal without incurring a steep penalty.
L Brands responded to Sycamore’s complaint with a lawsuit of its own on April 23, asking the same court to uphold the terms of the deal, and asserting that “Sycamore’s current position is pure gamesmanship,” and “its invalid and improper termination” is little more than a quest to scoop up the Victoria’s Secret brand for less than the formerly-agreed upon price.
In terms of the MAE clause, L Brands called Sycamore’s bluff, arguing that “Sycamore ignores a fundamental problem with its apparent case of buyer’s remorse: at the time the parties negotiated the agreement, the world was already well aware of the existence of COVID-19,” and with that in mind, the parties’ contract included a provision in connection with the “material adverse effect” that “expressly carves out impacts resulting from pandemics.”
As the New York Times reported shortly after the parties began filing suit, “Sycamore’s lawsuit concedes that it can’t invoke the ‘material adverse event’ clause to justify terminating the contract, given the language that specifically excludes a pandemic.” With such an express carve out in mind, one that has proven novel and striking to many lawyers (save for those at Davis Polk, who drafted the deal), Charles Elson, the director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, told the paper that Sycamore’s argument would be a tough sell: “In a pandemic, you respond to a pandemic. Unless there was fraud or misconduct by L Brands management, it’s going to be very hard for them to get out of the deal.”
Potentially attempting to double-down in light of the potential weakness in its initial suit thanks to the pandemic exception, Sycamore filed a second complaint on April 24, in which it argued that if the parties’ deal was not already off the table, L Brand’s countersuit has formally “invalidated the financing that [Sycamore] had lined up” to acquire the company. Specifically, Sycamore argued that “L Brands’ claim for monetary damages against [it] and [its investors]” in connection with the lawsuit that it filed, “triggered the expiration and termination of financing commitments” in connection with their deal.
Ultimately putting their legal troubles and a soured deal out of the way by of a settlement, Sycamore confirmed in May that “neither party will be required to pay the other a termination fee or other consideration as a result of the mutual decision to terminate the agreement and settle the pending litigation.”
As for MAE clauses more generally, the recent global outbreak of the coronavirus is causing many buyers in mergers and acquisitions, including (or maybe, especially) in the highly-affected retail landscape, “to evaluate what effect, if any, the pandemic may have – or has already had – on the business and operations of the targets that they are seeking to acquire,” according to Robinson & Cole LLP’s Kathleen Porter, Anna Jinhua Wang, and Michael Wirvin. “One component of these evaluations will certainly be whether a public health crisis, such as COVID-19, is sufficient to trigger an MAE clause and permit a buyer to terminate a transaction in anticipation of deterioration of the target’s business and financial performance due to the pandemic.”
Porter, Wang, and Wirvin note that while “courts have largely been reluctant to find that MAEs have occurred and thus, allow buyers to terminate the agreements, in a recent case, the Delaware Court of Chancery determined that an MAE existed and that the buyer had validly terminated a merger agreement.” In its decision, the court held that an MAE must “substantially threaten” the earnings potential of the entire business of the target “in a durationally significant manner.”
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