Consequences of COVID-19: The Ongoing Merger Battle Between Tiffany & Co. and LVMH
What began as a promising acquisition by French luxury goods company LVMH of American jeweler Tiffany & Co. has escalated into a full-blown merger battle, with LVMH seeking to pull out of the deal entirely by utilizing a narrow contract provision that justifies terminating a transaction.[1] Back in November 2019, LVMH announced that a $16.2 billion, all-cash deal had been reached with Tiffany & Co., who would be joining a group of more than 70 luxury brands owned by the French conglomerate.[2] The deal was expected to close in mid-2020.[3]. However, in September 2020, LVMH stated it would not be able to go through with the deal, with the company’s board of directors citing economic hardships that target company Tiffany & Co. suffered after the outbreak of COVID-19.[4] LVMH claimed that Tiffany had suffered economic disruptions in the wake of the COVID-19 pandemic sufficient to trigger the material adverse effect provision, which consequently prevents the deal from closing.[5]. Shortly thereafter, Tiffany filed a lawsuit in the Delaware Court of Chancery, a preeminent forum for merger and acquisition disputes.[6] Tiffany’s lawsuit refuted the proposition that LVMH can avoid finalizing the deal by claiming that Tiffany had suffered a material adverse effect due to COVID-19, and sought an order compelling LVMH to complete the deal.[7]
At the center of the dispute is the material adverse effect (“MAE”) provision. MAE provisions are a standard feature of merger agreements that let parties terminate a transaction under narrowly defined circumstances.[8] These provisions present two merging companies with an opportunity to define the parameters of the target company’s acceptable status before the merger.[9] To get out of performance by way of an MAE provision, a party must prove that there has been a decline in the target company’s business, and that the negative impact on the business will be long lasting.[10] LVMH contends that the economic effects of the COVID-19 pandemic on Tiffany’s business constitute a material adverse effect, and thus allow LVMH to withdraw from the transaction.[11] While LVMH claims that Tiffany was particularly vulnerable to economic hardship from the pandemic due to its largely store-based presence and reliance on tourist foot traffic,[12] Tiffany reported that it sustained a loss only in the first quarter of 2020, with sales subsequently bouncing back.[13] The Chancery Court has previously held that “[a] short-term hiccup in earnings should not suffice; rather the Material Adverse Effect should be material when viewed from the longer-term perspective of a reasonable acquiror.”[14] Thus, it remains to be determined whether Tiffany has suffered a material adverse effect long-lasting enough to justify LVMH’s withdrawal from the transaction.
In September 2020, LVMH filed a 241-page answer to Tiffany’s Chancery suit, arguing that Tiffany had suffered “devastating and lasting” harm from the pandemic that created a material adverse effect and fatally violated the merger contract.[15] Additionally, LVMH’s answer stated that the company faced an order from the French government barring any closing before January 6, 2021, due to French concerns over U.S. tariff policies and actions.[16] However, because the merger contract states that November 24, 2020 is the outside date of closing, LVMH asserts that they have no choice but to comply with the French government, which effectively prevents the parties from closing the transaction.[17] Tiffany & Co. hit back at LVMH’s countersuit, and characterized the arguments as an attempt to avoid paying the agreed upon price.[18]. Tiffany & Co. argues that they have acted in full compliance, and are confident that a judge will compel specific performance and the deal will go through.[19]
With a fast-track trial set to begin on January 5, 2020, it remains to be seen whether the Court will mandate the merger despite LVMH’s claims. This merger battle will undoubtedly have large implications for similarly situated companies[20], and will provide guidance on how the adverse effects of the COVID-19 pandemic can alter these large transactions.
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