Two Fashion Behemoths Head to the Delaware Court: Dissecting Tiffany's Complaint Against LVMH
Even for those who were not much interested in fashion, the botched M&A deal between LVMH Moët Hennessy Louis Vuitton ("LVMH") and Tiffany & Co. ("Tiffany") was the talk of the town. After the fallout, Tiffany promptly sued LVMH for breach of contract and LVMH has since filed an answer and counterclaim against Tiffany, setting the stage for an epic legal battle between the two fashion behemoths. (Tiffany retained Sullivan & Cromwell and LVMH Skadden.) Last month, the Delaware Chancery Court granted Tiffany's motion to expedite its lawsuit against LVMH, and a four-day trial is scheduled to begin on January 5, 2021. Today, I will try my best to explain in plain English two major claims Tiffany has put forth in its complaint and their legal basis. (This Reuters article provides a nice timeline of the events leading up to the pending litigation.)
Claim 1) LVMH failed to perform its contractual obligations in connection with obtaining antitrust clearances from the relevant regulatory authorities.
Tiffany claims that their merger agreement obligates LVMH to make reasonable best efforts to obtain antitrust clearances from the relevant regulatory authorities. That obligation is reflected in the Section 7.3(b)(i) of the merger agreement, which provides that LVMH is required to "do or cause to be done all things, necessary or advisable" to obtain antitrust clearances "as promptly as practicable". Tiffany points out that as of September 9, 2020 - more than 9 month after signing the merger agreement - LVMH has not filed its formal requests for antitrust approvals in the European Union and Taiwan in flagrant violation of its contractual obligations. Plus, Tiffany asserts that, with respect to Japan and Mexico, LVMH inexcusably delayed the process in each country by failing to promptly respond to further information requests.
The merger agreement also states that each party can unilaterally extend the outside date if the regulatory approvals are the sole issue impeding the consummation of the deal. (In M&A deals, each side can walk away from a deal free of penalties if the both parties agreed upon the outside date in advance.) In light of the concerted delays on the part of LVMH in securing the necessary regulatory approvals, Tiffany sent an notice of extension. LVMH disputed that Tiffany cannot exercise the right, when, in fact, the merger agreement expressly provides it.
Claim 2) LVMH's ill-founded claim of Material Adverse Effect (MAE) is a mere pretext for walking away from the deal.
What is Material Adverse Effect (MAE)? In most M&A transactions, there is a significant time gap between the signing and the closing. Because of that wide time window during which all sorts of things (including bad things!) can happen, a buyer wants a seller to make representations 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 essence, the buyer wants assurances from the seller in the form of representations and warranties that the business it intends to acquire will remain, more or less, the same in substance until the acquisition is finalized. In addition, as another safeguard, the seller and the buyer draft termination clauses that allow either party to terminate the transaction in case of a breach. However, not every breach is equal. What really blows up the deal is a triggering of a 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.
Here, Tiffany argues that the both sides have expressly agreed that "changes or conditions generally affecting the industries in which Tiffany & Co. and any of its subsidiaries operate" cannot be interpreted to constitute a violation of the MAE provision. Therefore, Tiffany maintains that LVMH's position that the global economic downturn caused by the COVID-19 pandemic should qualify as a MAE is baseless precisely because they carved that out as an exception. Tiffany contends that LVMH's real motivation was to renegotiate and ultimately lower the purchasing price in light of softening market conditions.
GOOD GUY vs. BAD GUY - Who's playing foul?
Tiffany reiterates multiple times in the complaint that it has duly complied with the operating covenants in the merger agreement. Covenants are promises to do (or refrain from doing) something. The interim operating covenants required Tiffany to "conduct its business in all material respects in the ordinary course of business". To live up to the covenants, Tiffany, in good faith, took all reasonable steps to mitigate the impact of the pandemic. It temporarily closed stores and made sure to avoid material supply chain disruptions. Tiffany also stresses that LVMH has never raised a single issue with how Tiffany has conducted its business over the duration of this on-going pandemic until the very last minute. The theme of the story this 114-page complaint attempt to narrate?: LVMH has consistently acted like a bad guy.
Tiffany requests the Court to order LVMH to perform its contractual obligations. One can definitely sense anger and frustration simmering in the complaint. At one point, Tiffany portrays Bernard Arnault, the CEO of LVMH, as "the wolf in cashmere", a ruthlessly aggressive man with his own playbook when it comes to acquisitions. Will the Court be sympathetic to Tiffany's plea? We only have several months left to find out the outcome.
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