NYT: THE CONTRACT THAT ANTICIPATED PANDEMIC
COMMON SENSE The Victoria’s Secret Contract That Anticipated a Pandemic
A buyout firm is trying to back out of its deal for Victoria’s Secret, citing the coronavirus. The contract’s wording will make that tricky.
By James B. Stewart
April 29, 2020, 5:00 a.m. ET
It’s no wonder the buyout firm Sycamore Partners is trying to back out of its $525 million deal to buy a majority of Victoria’s Secret from struggling L Brands.
Until now, the private equity firm has generated impressive returns for its investors and huge paydays for its executives even as its core retail businesses have been in precipitous decline. Sycamore owned a portfolio of brands that were once ubiquitous at America’s malls: Nine West, Anne Klein, Hot Topic, Jones New York. It bought the office supplies retailer Staples for $6.8 billion in[redacted]Even as those brands faded, Sycamore sold assets, slashed personnel and costs and paid itself huge dividends. One of the funds it manages generated annualized returns of 43 percent.
But with its agreement to buy Victoria’s Secret, Sycamore’s good luck may have run out — and now it is deploying some long-shot legal arguments in an attempt to wriggle out of the deal.
Sycamore signed the agreement on Feb. 20, one day after stock market indexes hit their all-time highs. Within days, investors awakened to the devastating potential of the coronavirus outbreak.
L Brands, the parent company of Victoria’s Secret, was already tarnished by widespread allegations of sexual harassment and the close relationship between its founder, Leslie Wexner, and the sexual offender Jeffrey Epstein. The coronavirus was a heavy new blow. Victoria’s Secret depends on sales at its stores, where customers try on lingerie and other intimate apparel. In mid-March, the company closed all its stores, as well as its online operation.
The day the Sycamore deal was announced, L Brands shares were more than $23 a share. A month later, on March 20, they traded for less than $10.
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On April 13, Mr. Morrow broached the notion of “adjusting” the purchase price “to take account of the Covid-19 situation.” After L Brands refused to discuss that, Sycamore declared that it was terminating the agreement and filed suit in Delaware, claiming L Brands had breached the terms of the deal. L Brands countersued, insisting that the agreement be enforced.
At first blush, Sycamore would seem to have a strong case. Most merger-and-acquisition agreements contain “material adverse change” or “material adverse event” clauses, which enable buyers to walk away if something unexpected — a so-called act of God — causes a precipitous decline in business conditions. And what would be considered more an act of God than a deadly pandemic?
Sycamore isn’t the only buyer trying to get out of deals, and some are much larger than the one for Victoria’s Secret. Gray Television withdrew its $8.5 billion offer for Tegna, the former broadcasting arm of Gannett; BorgWarner, an auto parts supplier, has threatened to scuttle its $3.3 billion merger deal with Delphi Technologies; SoftBank withdrew a $3 billion tender offer for shares of the office-sharing start up WeWork; and Volkswagen said it would delay its $2.9 billion bid for the truck maker Navistar. Whether any of them can legally invoke an act-of-God clause depends on the terms of each contract.
But Sycamore faces unusually daunting odds, thanks to clever drafting by L Brands’ lawyers at Davis Polk & Wardwell. In the acquisition agreement, the lawyers carved out specific exceptions to those acts of God, including a pandemic. That meant that even if a pandemic struck, Sycamore would be legally obligated to complete the deal.
“I’ve never seen a reference to a pandemic in that context,” said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, the state where the L Brands-Sycamore case is being litigated. “It’s going to be very tough for Sycamore to get out of that in Delaware. They read that, and they signed it.”
Corporate lawyers said references to pandemics had started creeping into merger agreements and other contracts around the time of the L Brands-Sycamore deal. By then, it was not hard to imagine that the novel coronavirus that had surfaced in China at the end of last year could cause economic upheaval. The city of Wuhan had already been shut down, and the first case of Covid-19 had been diagnosed in the United States. The virus was clearly spreading globally, with cases already reported in South Korea, the Philippines, Japan and Italy.
By all accounts, the L Brands-Sycamore contract was the product of hard-fought negotiations, but there’s no evidence that Sycamore’s lawyers at Kirkland & Ellis pushed back against the pandemic language. Should they have?
(Story continues at the New York Times.)