Tiffany is one of the most storied jewellery brands in American history. Merely mentioning the company’s name conjures up images of Audrey Hepburn looking into the dimly lit windows of its flagship store on 5th Avenue in Manhattan in the cinematic classic “Breakfast at Tiffany’s” (whilst simultaneously trying to block out images of Mickey Rooney in yellowface). With a reputation like that, is it any wonder that LVMH paid $16 billion for the American icon? Unfortunately, the pandemic has a knack for turning quite a few diamonds to brass, and LVMH now has a severe case of buyer’s remorse.
While we had touched on this topic in a previous article, it is useful to revisit the story’s facts now that it is getting more attention. It can provide helpful insight into the course of pandemic litigation and the future of contract drafting.
A Whirlwind Romance
The largest-ever takeover in the luxury sector’s history was agreed under very different circumstances last year. LVMH wanted to increase its market share in the so-called “hard luxury” segment of the market, consisting chiefly of watches and jewellery. According to a report published by Bain before the pandemic hit, this sector had been expanding faster and growing at an annual rate of 9%. In seeking to do this, LVMH could hardly find a more suitable candidate than Tiffany. Its chief executive, Bernault Arnault, had long coveted buying the jewellery outfit. After some back and forth, he agreed to pay $135 a share for the company, a 37% premium on its previous share price, hoping to restore the brand’s reputation among younger buyers. It appeared to be a match made in designer heaven. History had other plans.
Within weeks of the takeover agreement, the global economy came to a grinding halt, with China, the world’s largest luxury market, the first to enter lockdown. According to the FT, analysts now expect total sales to contract by up to 35% this year, with fine jewellery sales down by 7%, and recovery not expected until 2023. Naturally, Mr. Arnault began to regret paying such a high premium for a company whose prospects no longer looked bright.
By June it was evident that LVMH was looking for the door after a story appeared in a fashion trade publication, WWD, reporting concerns among its board of directors about the deal. In the face of the pandemic’s effect on the global economy, and the wave of protests over racial injustice in America ruining any attempt to get the economy moving again, the deal was looking increasingly unappetising. However, Tiffany, having capitalised on the sellers’ market in November, would have refused to renegotiate the deal.
This state of events led to Mr. Arnault (also known as the “the wolf in cashmere”) trying every play in the book to force Tiffany back to the negotiating table. First, they waited to see if Tiffany would breach its debt covenants, which would have allowed LVMH to call for renegotiation under the terms of their agreement. However, Tiffany was able to amend the terms of its debt to give it some financial breathing space. Next, LVMH waited as long as possible to file for antitrust approval from European officials, leading to Tiffany accusing the company of purposefully dragging its feet to run the clock out of the deal’s agreed closing deadline. LVMH has now filed the necessary paperwork, seemingly abandoning this tactic. However, Mr. Arnault still had an ace up his sleeve, which he appears to have drawn earlier this month.
On the 9th of September 2020, LVMH’s legal team proceeded to inform Tiffany that it was pulling out of the deal following an extremely convenient request from the French government to delay completion until January, which would have lapsed the deadline agreed upon in the acquisition contract. This action was necessary to support the government’s efforts in a trade war with America over its proposed digital tax. While it is hard to grasp how this helps in that effort, LVMH believes that the request is legally binding. Bloomberg has subsequently published an article accusing Mr Arnault of soliciting the letter himself from the French Foreign Minister. Tiffany promptly filed a lawsuit the next day, accusing LVMH of purposely delaying matters and looking for a pretext to get out of the deal.
The Kind Men in the Nice Suits
Tiffany’s lawsuit seeks an order requiring LVMH to complete the agreement before the drop-dead date. They allege that LVMH recent actions shed light on the true motives behind their contrived delays and missed deadlines and that it has breached its promises under the merger agreement to seek prompt antitrust clearance. Instead, they have dragged their feet in the hopes that the deal falls through, or Tiffany reduces its asking price to something more palatable. Tiffany also alleges that LVMH is using the pandemics industry-wide effect as a Material Adverse Effect (MAE) worthy of terminating the agreement. Most purchase agreements contain MAE clauses, which serve to allocate the risk to the buyer and the seller of an adverse change affecting the target between the signing and closing of a transaction. They provide that for this to work, the MAE would have to be specific to Tiffany, which is proven false by its projected earnings provided to LVMH in August, showing a forecasted increase in revenues in the 4th quarter. Even then, it was agreed upon by the parties that such a decrease in revenue would not amount to a Material Adverse Effect.
LVMH subsequently announced an intention to countersue, accusing Tiffany of mismanagement during the pandemic. They allege that Tiffany’s decision to pay a dividend to its shareholders as it was loss-making did not follow an ordinary business course, constituting a Material Adverse Change (MAC). They assert that this decision significantly reduced the value of a company. The two sides are scheduled to meet in the Delaware commercial contracts court in January next year, with LVMH being represented by Skadden, Arps, Meagher, and Flom and Tiffany by Sullivan and Cromwell.
Buyer’s remorse has become the theme for this year in the M&A space, with the Tiffany/LVMH deal only the latest in a line of cancelled mergers/acquisitions. Among the other deals that have fallen through the floor are L Brands’ agreement to purchase Victoria Secret and Kohlberg & Co’s contract to buy a cake decorations wholesaler from Snow Phipps Group for $550 million. This trend will likely result in more work for litigation departments in law firms, as lawyers debate whether the pandemic amounts to a MAC/MAE allowing companies to back out of proposed mergers and takeovers.
The year’s events will also undoubtedly lead to a change in how lawyers draft contractual clauses and carve-out provisions, which have tended to use more general language in the past. This forces litigators to pour over the contracts’ text and persuade judges that their interpretation of the clause is convincing. Such general language clauses are likely to change after the pandemic, with lawyers probably seeking to specify deal-breaking elements with more preciseness to avoid protracted, expensive, legal proceedings. It may not be a novel thing for future contracts to include clauses covering black swan events to protect clients in case of unprecedented events.
One thing is for sure, though; a lot of young associates are going to be working late nights over the upcoming Christmas holidays in preparation for their clients’ day in court.