Analysis

The Clause At Center Of $16B Tiffany-LVMH Chancery Fight

By Benjamin Horney
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Law360 (September 15, 2020, 7:49 PM EDT) -- Tiffany's lawsuit alleging LVMH is unlawfully using COVID-19 to avoid completing their $16.2 billion merger gives the Delaware Chancery Court another chance to rule on what exactly constitutes a material adverse effect, and experts say the court is unlikely to determine LVMH can cite an MAE provision in its deal to walk away.

The complaint Tiffany & Co. lodged Sept. 9 in the Delaware Court of Chancery outlines the entire history of the deal with LVMH Moet Hennessy Louis Vuitton SA, from negotiation to fallout, in extreme detail. LVMH took issue with Tiffany's lawsuit, saying Sept. 10 that it intends to file a competing suit in Belgium.

According to Tiffany, the French luxury goods conglomerate relentlessly pursued an acquisition of Tiffany before the companies inked their agreement in November 2019 and remained bullish on the deal in the immediate aftermath of the COVID-19 outbreak, but eventually started taking steps to stall, including by failing to file for certain regulatory approvals.

"The Delaware Chancery Court is a premier venue for U.S. business litigation, so any time you see a case of this magnitude coming out of Chancery, it's significant," said Steve Blonder, a principal at Much Shelist PC whose practice focuses on litigation. "This is a bellwether case with respect to the coronavirus and what can go wrong in a transaction."

Tiffany claims the court must compel LVMH to "perform its obligations under the merger agreement," and lambasts as ludicrous LVMH's contention that the economic effects of the pandemic on Tiffany's business constitute a material adverse effect. MAE provisions are a standard feature of merger agreements that let parties terminate a transaction under very narrowly defined circumstances.

Norman Harrison, a managing director in Duff & Phelps' disputes practice working out of Washington, D.C., explained that in order for a party to successfully assert there has been a material adverse effect, it must prove there has been a decline in the target company's business that is disproportionate when compared with competitors. Additionally, it has to prove the negative impact on the target's business will be long-lasting.

"Those factors must be proven with great particularity," Harrison said. "When a party alleges that due to a recession or COVID or other unanticipated events, that a target company is no longer as valuable to the buyer, the target's loss of revenue, cash flows or market share, if comparable to those experienced by its competitors, may not be enough to establish a material adverse effect."

Tiffany's complaint details part of the actual MAE clause included in the LVMH deal, noting that the provision "explicitly excludes" multiple categories of events, including general effects on the industries in which the companies operate as well as "geopolitical conditions" and "the outbreak or escalation of hostilities (including the Hong Kong protests and the 'Yellow Vest' movement)." Those carved-out areas can still be leaned on by LVMH to terminate the deal, but only if it can prove any of them has had a materially disproportionate adverse effect on Tiffany relative to peers.

"MAE is a difficult hurdle," said Gregory Grove, a principal at Much Shelist. "It requires a significant change in the business or significant change from the business promised. A temporary or seasonal setback, or the fact that a single line of business, for example, in a large entity with many lines of business, has suffered grievous harm, may not rise to the level of an MAE."

Even if it were to be determined that the effects of the pandemic could constitute a material adverse effect as it relates to this deal, that still doesn't mean LVMH would necessarily be off the hook. LVMH in its current form has existed since 1987, and Louis Vuitton has been in business since 1854, meaning the company has experienced several massive events that can alter the deal-making landscape.

"If you're a globe-spanning company that has been around for over 100 years, you were around for the Spanish influenza of 1918, and more recently for SARS and other outbreaks of contagious disease," Grove said. "If you have the most sophisticated advisers in the world, your opponent may argue you could be reasonably expected to think about regional, or even global, health crises, especially if you're a retail business or dependent on the global supply chain."

The MAE clause is not meant to be an escape hatch for deals gone wrong, experts say, something the companies in this case most likely understand, considering their legal counsel. LVMH was advised in the deal agreement by Skadden Arps Slate Meagher & Flom LLP and received antitrust advice from Cleary Gottlieb Steen & Hamilton LLP. Tiffany, meanwhile, was guided in the deal by Sullivan & Cromwell LLP.

"When two parties enter into a transaction with a genuine desire to close, both sides have an incentive to make it difficult to walk away," Harrison said. "Clauses like MAE are typically heavily negotiated. In the absence of very specific circumstances, courts generally are disinclined to repudiate contracts."

Courts may be disinclined, but that doesn't mean they'll never side with the company saying there has been a material adverse effect. MAE claims were effectively used in a Chancery merger dispute for the first time in 2018, when Vice Chancellor J. Travis Laster found that global health care company Fresenius Kabi AG had a right to terminate a $4.3 billion merger with specialty drug developer Akorn Inc. based on Akorn's regulatory compliance problems and deal misrepresentations.

That decision doesn't portend a similar outcome for the case involving Tiffany and LVMH, however; it all depends on the specifics of the situation.

"It would be a fascinating development if the Chancery Court applied the framework of Akorn in a case alleging a COVID MAE and finds that the pandemic has had an impact of such magnitude and disproportionality that it could be deemed to constitute an MAE," Harrison said.

Meanwhile, the fight between Tiffany and LVMH is not the only current court case over a deal that will hinge on an MAE provision. 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 Simon's argument in part relies on the grounds of a material adverse change clause being triggered. MAC clauses are essentially synonymous with MAE clauses, and the two are mostly used interchangeably. That case was filed in the Sixth Judicial Circuit of Oakland County, Michigan.

While lawyers will eagerly await a ruling in the dispute between Tiffany and LVMH, the former's complaint suggests that the latter has potentially been stonewalling just to try and bring Tiffany back to the table so they can renegotiate a lower price.

"Most kinds of cases like this end up settling," Blonder said. "What happens is that one side is just using the dispute to cut a better deal. It's litigation as a business strategy to achieve a solution."

If the companies don't wind up settling and the case proceeds, the two sides will need to undergo depositions and discovery, which can quickly get expensive and is incredibly time-consuming.

"The parties may look at this at some point and say, 'There has to be a better way to figure this out,'" Blonder said.

Whatever the outcome, this may be one of the last cases that will hinge on a potential MAE as a result of the coronavirus pandemic, according to Harrison, for the simple reason of timing.

"It will probably be a relatively limited period of time in which we see those cases brought," Harrison said. "In deals that have been signed in more recent months, this issue is being addressed head on. With the passage of time, the number of pre-pandemic deals that haven't closed, or terminated by mutual agreement, will be a diminishing number."

--Additional reporting by Sierra Jackson and Andrew McIntyre. Editing by Aaron Pelc.

For a reprint of this article, please contact reprints@law360.com.

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