Law360 (August 17, 2020, 4:44 PM EDT) -- Simon Property Group Inc. is hoping to get out of its planned $3.6 billion acquisition of struggling indoor mall operator Taubman Centers Inc., and lawyers say the dispute — which may head to trial later this year — raises an unusual mix of retail, real estate and operational questions amid the COVID-19 pandemic.
Simon's argument in part relies on the grounds of a material adverse change clause being triggered. MAC clauses, sometimes alternately called material adverse effect clauses, allow parties to terminate agreements if some adverse change, as defined by the specific nature of the clause, occurs after the deal is signed, although the bar is high for convincing a court to call a deal off.
While the clauses are common in mergers and acquisitions agreements, the dispute between Simon and Taubman raises questions that don't commonly come up in M&A disputes, since Taubman owns 25 million square feet of real estate, most of which is indoor malls.
Among the points lawyers are sparring over is just how retail real estate is defined, and the outcome of the dispute will likely depend on how a judge comes down on that point. The case, though, also looks at the question of mall operation during the coronavirus pandemic.
Here, Law360 looks at the key things to watch as lawyers for Simon and Taubman argue their cases.
The Definition of Retail Is Front and Center
The parties' February purchase-and-sale agreement does provide an out for Simon in the form of a MAC clause, with the contract language stating Simon can call the deal off if Taubman has been disproportionately affected by a pandemic, which brings up the question of how to measure Taubman against other property owners.
The core issue is how retail is defined.
Simon argues that Taubman operates within a broad retail sector that includes grocery stores, open-air centers and indoor shopping malls. Since indoor shopping malls have been hit harder than those other areas of retail, Taubman has been disproportionately impacted and Simon has the right to exit the deal, Simon claims.
Taubman, though, argues that it operates within a more narrowly defined indoor mall sector, and so it has suffered the same losses as other players in that space. That means Simon does not have the right to terminate the deal, Taubman contends.
"You could see the court determining that the MAC clause does not apply because Taubman was not affected any greater than any other [indoor mall] holder," said Albert Valencia, a partner and chair of the real estate department at Ervin Cohen & Jessup LLP. "If the court compares Taubman to every other retail real estate owner, it might say Taubman was disproportionately affected."
The parties signed their agreement in February, when COVID-19 was on companies' radar but before the World Health Organization had declared it a pandemic, and before cases had started to surge in the United States.
Simon filed its suit to get out of the deal on June 10, and Taubman fired back a day later saying Simon could not walk away.
And while the MAC clause does mention a pandemic, Simon's lawyers are banking on the clause being vague enough to give the company an out.
"If the provision had said that Taubman would be compared to other real estate owners of indoor shopping malls, high-end indoor shopping malls, that's very specific," Valencia said. "If they had said that, that would lean heavily in their favor. Right now, Taubman would be in the clear."
The Bar in Court Is High
But Simon faces a high bar in convincing a judge to let the company out of the deal, since M&A matters are rarely called off on the grounds of MAC clauses and there's been only one major recent court ruling granting an out to a deal based on one.
The Delaware Court of Chancery in 2018 allowed Fresenius Kabi AG out of its 2017 $4.75 billion deal to buy Akorn Inc. due in part to concerns about the pharmaceutical company's compliance with U.S. Food and Drug Administration filing rules. The pharmaceutical company's income and revenue tanked in the months after the sale was signed.
Paul Weiss Rifkind Wharton & Garrison LLP, which helped Fresenius Kabi get out of that deal, is now hoping to help Simon get out of its deal. But experts say the bar is high.
"Generally speaking, courts want to cause parties to perform under their contracts absent extraordinary circumstances," said Ken Fields, a partner at Greenberg Glusker Fields Claman & Machtinger LLP.
Courts are worried about the precedent they could set by allowing a deal to be called off on the grounds of a MAC clause, experts say.
"It's quite rare for a deal to be called off by MAC clause," said John Sullivan, a partner at DLA Piper and co-chair of the firm's global real estate practice group. "What Taubman says is, 'This is just a case of buyer's remorse.' Courts worry about that."
Of course, the Simon-Taubman dispute arises amid a global health crisis, so within that framework, there is no precedent, and the pandemic is a wild card.
"The courts are going to be hesitant to let a party out of a deal unless it falls within the parameters," said Joel Deutsch, a partner at Jeffer Mangels Butler & Mitchell LLP. "Could anybody have really anticipated this? Maybe. Maybe not."
Still, the dispute may make its way to a trial later this year.
"You would have imagined the parties would have privately been able to reach an agreement," Valencia said. "It does seem as if they're posturing for what could very well be a long and expensive legal battle. Typically the courts frown upon this. They don't want a buyer to have an automatic out."
The Operation of Malls Is Being Called Into Question
While lawyers in the case are on the one hand arguing about the scope of retail, attorneys for Simon are also claiming that Taubman should have taken different operational steps at its malls during the initial months of pandemic.
"Simon is saying to Taubman, 'You didn't change your business. You continued business as usual and didn't lay people off. You didn't make the changes that others made,'" Deutsch said.
Simon agreed to pay $52.50 per share for Taubman. As of Monday, the company's share price hasn't gotten above $40 in more than a month.
Simon argues that had Taubman acted more quickly to close its malls, its share price would not have been as severely impacted. On this operational point, Simon is also comparing Taubman to its competitors.
"Comparing them to others in the field, you didn't do enough. That's what constitutes the material adverse change," Deutsch said, summarizing Simon's argument. "This is one shot that [Simon] can take. … If you're the buying company, you want to expand [the MAC clause] and make it as vague and as all-encompassing as possible."
Taubman's shareholders, though, recently approved the sale at a shareholder meeting, since that $52.50 price is attractive to Taubman, given the company's current share price.
"Taubman will say, 'We used business judgment to do what we thought … we should do,'" Deutsch said.
Representatives for Simon and Taubman couldn't be immediately reached for comment, and counsel couldn't be immediately reached for comment.
Simon is represented by Thomas Cranmer, A. Michael Palizzi and Larry Sayor of Miller Canfield Paddock and Stone PLC and by Lewis Clayton, Bruce Birenboim, Andrew Gordon, Brette Tannenbaum, Paul Paterson and Arianna Markel of Paul Weiss Rifkind Wharton & Garrison LLP.
Taubman is represented by Joseph Aviv, Jason Abel, Bruce Segal, Matthew Mrkonic, Adam Wenner and Patrick Rawsthorne of Honigman LLP and by William Savitt, Wayne Carlin and Peter Hein of Wachtell Lipton Rosen & Katz.
The special committee of the Board of Taubman is represented by Keefe Brooks and Steven Ribiat of Brooks Wilkins Sharkey & Turco PLLC and by Sandra Goldstein, Stefan Atkinson and John Del Monaco of Kirkland & Ellis LLP.
The case is Simon Property Group Inc. vs. Taubman Centers Inc., case number 2020-181675-CB, in the Circuit Court for the Sixth Judicial Circuit of Oakland County, Michigan.
--Additional reporting by McCord Pagan, Benjamin Horney and Vince Sullivan. Editing by Alanna Weissman.
For a reprint of this article, please contact email@example.com.