It was a whirlwind affair. The Manhattan socialite and the sophisticated Parisian. Tiffany & Co. (NYSE: “TIF”) and LVMH, Moët Hennessy Louis Vuitton SE (OTC: “LVMUY”), announced their engagement, via joint press release, on November 25, 2019 and set a date in 2020. The proposed combination valued Tiffany’s stock at $135 per share in an all-cash deal, yielding an implied aggregate transaction value of approximately $16.2 billion. The holidays were magical, and all seemed well with the world.
But 2020 arrived and brought with it unforeseen developments around the globe. Tiffany’s Madison Avenue neighbor, Brooks Brothers, filed for bankruptcy on July 8, 2020 and Tiffany & Co. itself experienced significant declines in its business, with global sales down 45% for the fiscal quarter ended April 30 and down 29% for the quarter ended July 31. Tiffany & Co. lost over $32 million during the first six months of its fiscal year. LVMH stated publicly that Tiffany’s business had been “devastated” by the coronavirus. Things soured quickly, and the erstwhile happy couple ended up in Delaware Chancery Court. As Michael Douglas’ famous character, Gordon Gekko, quipped in Oliver Stone’s 1987 film, Wall Street, “Exit visas are imminent.”
Tiffany filed first, on September 9th, with a complaint seeking specific performance of the deal and alleging that LVMH was dragging its feet in pursuing required regulatory approvals, enlisting the help of the French government to delay closing, and misinterpreting the material adverse effect (MAE) clause in the acquisition agreement. In short, it was Tiffany’s position that LVMH’s actions amounted to a “blatant attempt to evade its contractual obligation to pay the agreed-upon price.” In addition to naming LVMH as defendant, Tiffany’s complaint also named as additional defendants the special purpose acquisition subsidiaries formed for the transaction, Breakfast Acquisition Corp. and Breakfast Holdings Acquisition Corp. (See what they did there?).
LVMH’s recriminations were aired in its opposition to Tiffany’s motion for expedited proceedings filed in Chancery Court on September 16, 2020 and in a countersuit filed with the court on September 28, 2020, in which LVMH alleged that Tiffany’s “spurious arguments” were “completely unfounded” and that “Tiffany’s mismanagement of its business constitutes a breach of its obligation to operate in the ordinary course.” Just for good measure, it also alleged that Tiffany & Co. had been “burning cash.”
The case is pending, but there are key terms from this tale that can be applied now. Below is a list of five provisions that are almost always negotiated in a definitive agreement for an acquisition transaction, any of which may end up determining the outcome of the Tiffany v. LVMH case.
Material Adverse Effect (MAE) Provisions. The MAE clause could end up being the centerpiece of this case. While MAE provisions are very common in definitive agreements for M&A transactions, they must be finely tuned. During what period must an MAE occur? Are there quantitative thresholds or tests written into the definition? Does the MAE clause trigger a right to terminate or merely a potential price adjustment? Does it apply to the buyer’s business too, or just that of the seller? What if the seller can cure the issue or things otherwise start to improve on their own? Does the agreement’s definition of MAE specifically reference (or exclude) things like pandemics? The Tiffany agreement did not explicitly reference pandemics (then again, most of us were not quite as focused on global pandemics in late 2019 as we are now). For more on this topic, please see this recent Wyrick Robbins client note on MAE clauses and the L Brands / Sycamore Partners transaction.
Outside Date. Most M&A agreements include an outside date, also sometimes referred to as a “drop dead date” (which one imagines might be the preferred name in the Tiffany case). Typically, these provisions permit either party to terminate the agreement unilaterally without “cause” or reliance on any MAE standard if the transaction has not closed by a specified date. But, how far out that date is set and whether there are any provisions for its extension (automatic or otherwise) can become crucial in a transaction like the LVMH / Tiffany deal, where a party with a fight on its hands to prove the existence of a MAE, may just decide to wait out the drop dead date. But can it do so in good faith, and are the facts and circumstances leading to the delay in closing really beyond the control of the party that now wants to kill the deal? Thoughtful consideration of the outside date provisions in a definitive agreement cannot be overlooked, and a date that seems like it is well into the future may be here sooner than imagined. The outside date in the Tiffany case is November 24, 2020, which was extended from the original outside date of August 24, 2020. The validity of the extension is contested, and so time is of the essence. Tiffany’s motion for expedited proceedings may ultimately decide the case.
Required Approvals. Larger transactions and those in regulated industries often require prior approval or non-objection from government regulators, and definitive agreements typically require the receipt of all such approvals as a condition to close. There are 10 such governmental approvals required in order to close the Tiffany & Co. transaction. But what are the obligations of the parties to pursue these approvals? Does the definitive agreement require the filing of regulatory applications by a specified deadline or otherwise impose a “best efforts” or “commercially reasonable” standard for pursuing regulatory approvals? Is the seller required to cooperate in the preparation of those applications? Does the seller have a right to approve applications prior to filing, and if so, is there a “reasonable satisfaction” or other standard written into that language or is approval in the seller’s sole discretion? Of course, all of the same questions may also apply with regard to shareholder approvals, meetings of shareholders and proxy solicitation materials.
LVMH agreed to use its “reasonable best efforts to obtain all regulatory clearances as transparently and promptly as practicable.” How transparent were LVMH’s actions in the instant case, and could a party use its best efforts to obtain regulatory approvals while at the same time encouraging some governmental agency or other third party to intervene? Could any failure on the part of LVMH to promptly file for EU antitrust approval (as has been alleged by Tiffany & Co. and unequivocally denied by LVMH) present complications under the “reasonable best efforts” standard?
Conditions to Close. The definitive agreement in the LVMH / Tiffany deal includes a number of required conditions that must be satisfied in order for the transaction to close, including one that requires:
No Governmental Entity shall have enacted, issued, promulgated, enforced or entered any Law (whether temporary, preliminary or permanent) or temporary restraining order, preliminary or permanent injunction or other Order, in each case, that is in effect and enjoins, prevents or otherwise prohibits, materially restrains or materially impairs or makes unlawful consummation of the transactions contemplated by this Agreement.
There is obviously a lot to argue about here, and it’s compounded in the Tiffany v. LVMH case by Tiffany’s allegation that LVMH approached the French government in a deliberate effort to obtain just such an edict. Does the definitive agreement require the parties to try to resolve government intervention of this nature or otherwise continue to work in good faith to close the transaction? Does the government’s stance on the matter come within the scope of the specific language, i.e., is it a “Law” or an “Order” that “materially impairs” the transaction? Counsel may spend months arguing the merits of differing interpretations of a provision that was drafted in a matter of hours. Add to that, the additional complication that communications from the French government are, of course, written in French, and translations are themselves subject to interpretation.
Forum Selection and Choice of Law Provisions. The Tiffany agreement provides that the definitive agreement and the transactions it contemplates will be governed by Delaware law and that any action arising out of or otherwise relating to the definitive agreement must be adjudicated in the Court of Chancery of the State of Delaware (assuming it has subject matter jurisdiction). In this case, where the clock is ticking on the “outside date,” imagine the likely effect of a delay for procedural arguments over the proper venue and governing law for the case. Anything less than an airtight forum selection clause and choice of law provision in a case like Tiffany v. LVMH where the timeline is extremely compressed could end up deciding the outcome of the transaction.
In fact, the wording of any of these provisions in the definitive agreement could have a direct bearing on the outcome of the multi-billion dollar Tiffany v. LVMH case. While the resolution of that dispute may not be known for some time, these five lessons can be applied immediately when negotiating and drafting definitive agreements for M&A transactions.