Covid-19’s Effect on M&A Part 2: LVMH and Tiffany & Co.

An acquisition by LVMH Moët Hennessy-Louis Vuitton SE and related entities (“LVMH”) of Tiffany & Co. (“Tiffany”) resulting in a bitter dispute due to the Covid-19 pandemic was recently resolved. The dispute highlights the broad extent of complications that the Covid-19 pandemic has imposed on merger and acquisition (“M&A”) transactions.

The near breakdown of a gigantic merger had the potential to become significant in creating legal precedent for M&A deals during the pandemic. As Bloomberg Law notes, aside from LVMH’s pending purchase of Tiffany, and Sycamore Partners’ terminated purchase of Victoria’s Secret from L Brands Inc., only a very small number of M&A deals terminated since the beginning of the pandemic actually resulted in lawsuits between the parties.

The general issue under dispute was whether a target company can require a buyer to fulfill its obligations under a merger agreement (“Merger Agreement”) when the buyer seeks to terminate the agreement by pointing to: (i) the target company’s alleged mismanagement and (ii) government-sanctioned delays imposed on the deal during the Covid-19 pandemic.

The specific issues were: (i) whether the Material Adverse Effect (“MAE”; sometimes also referred to as “Material Adverse Change” or “MAC”) clause in the Merger Agreement between LVMH and Tiffany contemplates a pandemic and (ii) whether government-sanctioned shutdown and its subsequent effects on Tiffany’s business can both be interpreted to invoke a breach of the Ordinary Course of Business covenant.

On November 24, 2019 Tiffany and LVMH entered into a Merger Agreement in what would be the luxury sector’s biggest deal ever, providing for the acquisition of Tiffany by LVMH. LVMH agreed to pay $16.2 billion to purchase Tiffany in an effort to bolster its jewelry and watch lineup, which already includes legacy brands such as Hublot and TAG Heuer, and boost its presence in the United States, which accounts for roughly a quarter of its revenue. However, on September 9, 2020, LVMH called off its acquisition, citing delay of the closing date. The deal was expected to be completed by June 2020, with an August merger deadline that could be extended until November 24, 2020. The delay, according to LVMH, resulted from a letter from the French Foreign Affairs Minister requesting the acquisition be delayed until January 6, 2021, due to a threat from the U.S. government to impose tariffs on certain French products.

On September 9, 2020, the same day that LVMH called off its acquisition, Tiffany filed a lawsuit in the Delaware Court of Chancery against LVMH to enforce the Merger Agreement. Tiffany argued that LVMH is in breach of its obligations relating to obtaining antitrust clearance and contests LVMH’s argument that it can avoid completing the acquisition by claiming Tiffany breached its obligations under the Merger Agreement, or has undergone a Material Adverse Change. Tiffany also refuted LVMH’s suggestion that the transaction breached LVMH’s obligations to the government of France. Tiffany further argued that LVMH should bear all antitrust-clearance risk and all financial risk related to adverse economic conditions. Finally, Tiffany contended that LVMH is additionally required to secure all required regulatory clearances as promptly as practicable; however, as of August 24, 2020, LVMH had not filed for antitrust approval in several of the required jurisdictions.

LVMH filed an opposition, requesting the court put the case on hold for as long as six (6) or seven (7) months and arguing that Tiffany was “seeking to manufacture an emergency where none exists”. Furthermore, LVMH pointed to the letter from the French Foreign Affairs Minister stating that LVMH “should defer the closing of the pending Tiffany transaction until January 6, 2021” in order to support the French Foreign Affairs Minister’s stated intent to “take measures in order to dissuade the American authorities from putting these tariff sanctions into effect.”

In response, Tiffany accused LVMH of stalling the transaction by intentionally delaying applications for antitrust clearance, seemingly so it could buy time to renegotiate the price in light of the pandemic. LVMH argued that Tiffany’s drop in business has created a Material Adverse Effect that provides grounds for invalidating the Merger Agreement. However, a review of the MAE clause in the Merger Agreement indicated that the clause features both affirmative and negative provisions, from which conspicuously absent is any explicit mention of a global pandemic. However, potentially sound arguments could be made in LVMH’s favor that the Covid-19 outbreak may well have been captured by items enumerated in the affirmative provisions in the Merger Agreement, as well as by several exclusions from the provisions.

Tiffany argued that it maintained strong financials during the pandemic when compared to LVMH and other firms in the luxury goods industry. As well, Tiffany took the position that it expected its favorable financial results to continue, stating that “LVMH’s allegations regarding mismanagement are both untrue and legally irrelevant.” In addition, Tiffany stated that they “have already returned to profitability and expect to remain profitable for the balance of the year, with fourth quarter profits actually exceeding those of the fourth quarter of 2019.” Further, Tiffany argued that the “the only standard under the Merger Agreement is whether Tiffany has breached its covenants—and we have not.” Tiffany also maintained that the Merger Agreement did not excuse LVMH from completing the merger merely because a government minister has requested that LVMH breach the Merger Agreement.

Tiffany was seeking to expedite the Delaware proceedings to obtain a ruling prior to the November 24, 2020 merger deadline. However, on October 28, 2020, the parties agreed to modify the purchase price and proceed with the acquisition, resolving the dispute. Tiffany accepted a lower share price of $131.50, down from the original price of $135 and equating to savings of roughly $430 million for LVMH.

Questions remain as to why LVMH was prompted to pursue such a hard-fought dispute with Tiffany for what resulted in a relatively modest price cut. As the sector’s recovery may now be in danger due to the second round of lockdowns being implemented across Europe and potentially North America in the coming weeks, further uncertainty remains about the deal’s impact on LVMH and Tiffany’s respective businesses.

LVMH’s attempted plan to terminate its acquisition of Tiffany followed numerous deals that have been canceled and/or renegotiated around the world since March 12, 2020, the date on which the World Health Organization declared the pandemic. However, few of these disputes have actually ended up in litigation. This dispute had the potential to be significant in creating legal precedent for M&A deals during the Covid-19 pandemic. Nonetheless, it highlights the broad extent of complications that M&A deals have experienced as a result of the pandemic.