September 30, 2020

Breakup at Tiffany’s Part Deux: The Empire Strikes Back!

When Tiffany & Co. filed a lawsuit against LVMH seeking to stop the French luxury giant from backing out of its deal to acquire the company, LVMH declared that Tiffany’s claims were “unfounded” & promised a lawsuit of its own.  On Monday, it made good on that promise and filed an answer & counterclaim in the Delaware Chancery Court.

While we haven’t yet been able to track down a copy of LVMH’s answer & counterclaim (update: thanks to an advisory board member & loyal reader, we have a copy now), the company issued this statement summarizing its position. Here’s an excerpt addressing its contentions that Tiffany suffered a MAE & breached its operating covenants:

A Material Adverse Effect has occurred. The notable absence of a pandemic carveout in the definition of a Material Adverse Effect in the Tiffany Merger Agreement is clear. It was common before COVID-19 for transactions to contain a pandemic carveout. In the course of the negotiation, Tiffany sought and received carveouts for highly specific events, such as “cyberattacks”, the “Yellow Vest” movement and the “Hong-Kong Protests”. Yet Tiffany did not obtain a carveout for public health crises or pandemics. In contrast, hundreds of other merger agreements executed in the decade preceding the Merger Agreement contained express pandemic or epidemic carveouts. The pandemic, whose effects are devastating and lasting on Tiffany, has irrefutably caused a Material Adverse Effect. This clause alone would be enough to prevent the closing, but there are other arguments included below that reinforce LVMH’s position.

Tiffany breached its covenants to operate in the Ordinary Course of Business and to preserve its business organizations substantially intact. Tiffany’s  mismanagement of its business constitutes a blatant breach of its obligation to operate in the ordinary course. For instance, Tiffany paid the highest possible dividends while the company was burning cash and reporting losses. No other luxury company in the world did so during this crisis. There are many examples of mismanagement detailed in the filing, including slashing capital and marketing investments and taking on additional debt.

I’m not so sure that LVMH’s claim that pandemic carve-outs were “common” before the Covid-19 pandemic is on solid ground. They weren’t unheard of post-SARs, but we’ve seen anecdotal evidence that they appeared in only a small minority of deals involving U.S. targets prior to the current unpleasantness.

LVMH’s statement also says that the French government’s letter French government “directing” it to defer the closing of the deal “makes it impossible to close the transaction” before the drop dead date set forth in Section 9.2(a) of the Merger Agreement. However, that claim may have some baggage associated with it beyond the interpretive issue of whether that letter represents the kind of impediment that would permit LVMH to terminate the deal under the terms of the agreement.

Here’s why – the WSJ reported that LVMH sought the French government’s intervention to prevent the deal. LVMH denies that allegation, but according to the article, it was apparently made by “senior” French government officials. If LVMH did ask the French government to stop the deal, that might raise issues under Section 7.3(b) of the Merger Agreement, which obligates both parties to use their respective “reasonable best efforts” to take actions necessary to “consummate and make effective the transactions,”  That obligation extends to efforts to obtain “all consents, registrations, approvals, permits and authorizations necessary or advisable to be obtained from any Governmental Entity.”

Last week, Vice Chancellor Slights granted Tiffany’s motion to expedite the proceedings in the case, and set a trial date for January 5, 2021 – with apologies for ruining the holidays of the law firm associates involved in the case.  Stay tuned.

John Jenkins