The Telltale Saga of Victoria's Secret

*** The writing does not, and is not intended to, constitute legal advice by any means***

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Victoria's Secret is in flames. Last year, the brand cancelled its famed runway show dotted with its angels as the annual sales, let alone the rating, dropped significantly. (Speaking of angels, the era when models screamed on Instagram when they were chosen as angels is now largely gone.) The brand is under a barrage of criticism for its lack of diversity, both size- and ethnicity-wise. (It was quite bemusing see its latest campaign with no Asian models when the company is so eager to capture the Asian markets, China in particular, to make up for its dwindling sales in the United States.) Adding to this growing list of concerns is its latest fallout with Sycamore, a private equity to which L Brands, a parent of Victoria's Secret, is selling its 55-percent stake for $525 million. The announced deal in February is yet to close and may never be.

As with many commercial transactions, there is a time gap between the signing and the closing. Because of that time window during which all sorts of things can happen, a buyer wants a seller to make representations and warranties (commonly referred to as "reps and warranties"). The former provides a snapshot of the business at the time of signing while the latter promises the continuance of that snapshot at the time of closing. In addition, the seller and the buyer, during their negotiations, draft termination clauses, which allow either of the parties to walk away from the deal if there's a breach. However, not every breach is equal. What really blows up the deal is a "materially adverse effect" (MAE) provision. What is deemed "material" is up to the contracting parties and a different understanding of what constitutes a material breach often gives rise to litigation.

Sycamore wants to hold Victoria's Secret liable for its decision to close its brick-and-mortar stores and skip the corresponding rent payments for April as a response to the governmental shutdown order. One may wonder why Sycamore is picking up a fight with Victoria's Secret regarding its decision-making authority when the deal is not finalized. However, Sycamore, as a buyer, has a legitimate interest in how the company it is acquiring is performing. So it is common in this type of commercial transaction to insert a "change-of-control" provision (i.e. not allowing the target company's C-level employees to be replaced without its approval upon notice) or a "dividend suspension" provision (not permitting the target company to dole out dividends because of its effect on the share price). In this regard, Sycamore is acting in its best interests. Victoria's Secret vigorously defends that the decision was borne out of unprecedented circumstances that lie outside its control. COVID-19 was surely unforeseeable, so it remains to be disputed in court whether the decision to shutter can trigger the MAE termination clause.

For the present moment, it is Victoria's Secret that stands to lose tremendously because the incoming cash from Sycamore was seen as a lifeline to its declining lingerie business. It is also telling that Sycamore is not making any comment on the matter. (On the other hand, Victoria's Secret made a press release saying it intends to stay with the deal.) This saga of Victoria's Secret is revealing. With the current situation unfolding, fashion retailers are hit hard. Neiman Marcus, a department store, will soon file bankruptcy. It would be interesting to see what kinds of realignments would surface in the coming years, if not months.