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Law360 (April 22, 2020, 1:23 PM EDT) -- A Sycamore Partners affiliate sued the parent company of the Victoria's Secret and PINK retail chains in Delaware's Chancery Court on Wednesday, claiming that — pandemic or not — the sellers breached a $525 million go-private sale contract by shutting down all their stores worldwide in March.
The parent company of Victoria's Secret was hit with a suit Wednesday alleging it breached a $525 million go-private sale contract when it closed all its stores worldwide. (Getty)
"That these actions were taken as a result of or in response to the COVID-19 pandemic is no defense to L Brands' clear breaches of the transaction," Sycamore said in its complaint. It said it seeks a finding "that the conditions precedent to closing have not been
satisfied, and cannot be satisfied."
Sycamore said it terminated the deal Wednesday based on L Brands' "material and incurable breaches" of the transaction and the seller's reported statement that it "has no obligation to renegotiate the purchase price or any other economic terms of the pending transaction."
L Brands, which also owns Bath & Body Works and most recently reported nearly $13 billion in yearly revenues, did not immediately respond to a request for comment. The company announced temporary closings on March 17 but several days later said the shutdowns and worker furloughs would be extended indefinitely, although online sales would continue.
At the time, L Brands said it was not able to predict when the stores would reopen, but was monitoring the situation.
The complaint said Sycamore's counsel notified L Brands on April 2 that it had neither "consented to nor acquiesced" to the store closings and had concerns about satisfaction of conditions for closing the deal. L Brands replied the same day that it had not breached the agreement, Sycamore said.
According to the suit, L Brands faced a debt covenant default on May 2 and might have closed stores to stockpile cash in order to weather the COVID-19 crisis and avoid a default and debt acceleration.
The suit and termination declaration followed additional inquiries and an alleged declaration by L Brands that it "has no obligation to renegotiate the purchase price or any other economic terms of the pending transaction."
Sycamore asserted that the merger agreement included a material adverse effect termination trigger, defined as anything that would "prevent, materially delay or materially impede" L Brands' performance of its obligations.
While the agreement excluded pandemic-related material adverse effects on the financial condition of the business, assets or results of operations, Sycamore argued that "the various carve-outs do not apply" to the first section allowing termination for failure to perform all requirements for closing.
"The transaction agreement is clear that the risk of L Brands' failure to operate the Victoria's Secret business in the ordinary course consistent with past practice between signing and closing, even in the face of events such as the COVID-19 pandemic, is to be expressly and completely borne by L Brands," Sycamore said.
Compounding Sycamore's concerns, the suit said, were L Brands' moves to slash new merchandise acquisitions. That development, "coupled with L Brands' failure to dispose of existing out-of-season, obsolete and excess merchandise, has saddled the Victoria's Secret business with a stock of merchandise of greatly diminished value," according to the complaint.
The seller also failed to pay rents for Victoria's Secret's more than 1,000 stores in the United States, Sycamore said, damaging important business relationships.
Under the agreement, Bath & Body Works was to become a standalone public company, with the sold segments having a $1.1 billion enterprise value.
SP VS Buyer LP is represented by Gregory P. Williams, Raymond J. DiCamillo, Brock E. Czeschin, Daniel E. Kaprow, Angela Lam and Megan O'Connor of Richards Layton & Finger PA and Robert B. Ellis and Michael S. Biehl of Kirkland & Ellis LLP.
Counsel information for L Brands was not immediately available.
The case is SP VS Buyer LP v. L Brands Inc., case number 2020-0297, in the Court of Chancery of the State of Delaware.
--Editing by Marygrace Murphy.
For a reprint of this article, please contact reprints@law360.com.
