April 23, 2020

Big MAC Attack: Sycamore Partners Seeks to Exit L Brands Deal

Yesterday, Sycamore Partners filed a declaratory judgment action in Delaware Chancery Court seeking to terminate its agreement to buy a majority stake in L Brands’ Victoria’s Secret business. To make a long story short, the parties entered into their deal in February, then Covid-19 happened & L Brands took the kind of draconian actions with its Victoria’s Secret business that many other retailers did – it shut stores, furloughed workers, imposed significant pay reductions, slashed new merchandise receipts and didn’t pay its April rents.

Sycamore contends that these actions breached several of L Brands’ reps and warranties & violated interim operating covenants and that, as a result, certain closing conditions cannot be satisfied. Those closing conditions relate to L Brands’ compliance with its covenants and the requirement that its reps & warranties continue to be true and correct, except for failures to be true and correct that have not resulted in  a “Material Adverse Effect.”

At first blush, MAE-based argument sounds like it might be a loser – the Transaction Agreement contains a specific carve-out for “the existence, occurrence or continuation of any pandemics . . .” (p. 10).  But Sycamore doesn’t rely on the part of the MAE definition that contains that exclusion. Instead, it points to the highlighted language in the Transaction Agreement’s definition of a MAE:

any state of facts, circumstance, condition, event, change, development, occurrence, result or effect (i) that would prevent, materially delay or materially impede the performance by Parent of its obligations under this Agreement or Parent’s consummation of the transactions contemplated by this Agreement; or (ii) that has a material adverse effect on the financial condition, business, assets, or results of operations of the Business, excluding, in the case of clause (ii), any state of facts, circumstance, condition, event, change, development, occurrence, result or effect to the extent directly or indirectly resulting from … (H) pandemics…

Sycamore argues that the pandemic exclusion does not apply to the highlighted part of the definition, and that as a result, “any state of facts, circumstance or event” that would prevent or materially impede L Brands performance of its contractual obligations constitutes a Material Adverse Effect causing a failure of the closing condition.

The language that Sycamore points to isn’t necessarily unusual, but as Berkeley’s Steven Davidoff Solomon tweeted, it’s an aspect of a MAC clause that has never been litigated in Delaware.  In Alison Frankel’s article on the case, she quotes Michigan’s Albert Choi as commenting that “the apparently limited scope of the pandemic carve-out ‘seems to make (Sycamore’s) arguments stronger.’”

L Brands issued a press release responding to Sycamore’s complaint, and to nobody’s surprise, it thinks Sycamore is all wet. L Brands’ position is that “Sycamore Partners’ purported termination of the Transaction Agreement is invalid,” and the press release says that it will “vigorously defend the lawsuit and pursue all legal remedies to enforce its contractual rights, including the right of specific performance.”

Whether Sycamore wants out of any deal & is willing to fight this out in court – or whether this is just part of an intricate price renegotiation dance – remains to be seen.  But whatever happens, my guess is that we’re going to see more cases like this as the economic impact of the Covid-19 crisis deepens.

John Jenkins