Unsurprisingly, in a similar way to the 2000-2002 dot-com bubble and the Financial Crisis of 2007-2008, Covid-19 has had a significant short-term impact on M&A activity. This consisted of an initial breakdown in activity in March, followed by a dramatic release of pent-up demand in Q3, with the total value of M&A deals worth more than $5 billion exceeding $450 billion. However, where the economic impacts of the Covid-19 pandemic diverges from previous financial crises, is in long term implications on M&A contracts. The pandemic has made deal protection mechanisms a top priority for buyers, in complete and incomplete transactions alike. High profile cases such as the LVMH and Tiffany dispute have brought great controversy to the matter, and is therefore certainly of relevance to aspiring lawyers of the future.
The primary issue in most M&A transactions has been with the “Material Adverse Change,” (MAC) clause. For those of you who don't know, this acts to protect the buyer in the period of time between the exchange of an agreement and completion, during which time adverse economic changes may alter the desirability of the deal. In other words, the MAC clause can allow the buyer to walk away from a deal if certain clauses are met. Such protections in recent years have fallen out of fashion and have been increasingly absent from contracts, but a careful buyer will have continued to use them. Therefore, for such buyers involved in an acquisition disturbed by the pandemic, the potential opportunity provided is undoubtedly attractive.
Of course, a party’s ability to invoke the MAC clause is entirely dependent on the specific wording of the agreement. For acquisitions signed since the emergence of Covid-19, generic MAC clauses are unlikely to warrant termination. This is because the deal was signed with knowledge of the potential risks the virus posed. Equally, in clauses that make provision of general underperformance, a convincing argument has to be made that the impact on a company has been “Disproportionate,” to “similar businesses.” In the economic downturn of the pandemic where most industries have suffered, proving that one business has been worse hit than another within the same industry is problematic. Norton Rose Fullbright recommends identifying specific and measurable effects to achieve termination - for example the closure of a named production or operational facility.
Tiffany’s and LVMH - What happened?
The recent acquisition of Tiffany’s by LVMH illustrates the complex and often subjective nature of MAC clauses, and why they have become so contentious during the pandemic. In November 2019, LVMH, the world’s largest luxury goods group, agreed to buy a majority stake in Tiffany’s for $16.2 billion. The completion of the deal was interrupted by the pandemic, which hit the luxury goods industry particularly badly. Since then, Tiffany has accused LVMH of breaching the “reasonable best efforts,” clause. In its complaint filed on 9th September 2020, Tiffany alleged that among the 10 largest transactions announced since the beginning of the 4th quarter of 2019, this was the only transaction yet to be formally filed for antitrust approval in the EU, evidencing LVMH’s delay of the deal. In response to such accusations, on 28th September LVMH countersued Tiffany for a series of buyer protection clauses within the contract. The countersuit claimed that the MAC clause made provision for LVMH to walk away from the deal, and that Tiffany had breached its covenants to operate in the ordinary course of business, paying out the highest possible dividend despite reporting heavy losses.
The problem has since been resolved, with LVMH renegotiating the price to $15.8 billion. However, was this a fair deal? I remain undecided. This was almost certainly an example of opportunism, albeit successful opportunism by LVMH, as they were able to reduce the purchase price by 3% from the originally agreed sum, despite the weakness of the legal grounds upon which they countersued. Although there were MAC clawbacks in the agreement, they were for specific events such as the Hong Kong riots, and were in no way related to a global pandemic. At the same time, Tiffany’s will still be pleased with the valuation they have received. The unprecedented changes to the luxury goods industry, which in Europe is bolstered by international travel, means Tiffany’s won't be the same business as it was pre-pandemic for a number of years. Whilst they could have continued with legal proceedings, and potentially been successful against the countersuit, in a post-pandemic world where demand for luxury goods has been stifled, their valuation is still high. Therefore they will be pleased to have closed the deal, which at times looked unlikely.
Indeed, the implications of such an example for future M&A contracts is that there will be a greater movement towards the use of MAC clawbacks. Although LVMH did include such clauses in its contract, and was also specific in the use of these, it serves to remind buyers that the inclusion of general clauses isn't enough. To protect themselves comprehensively, buyers need to be creative in specifically stating what they want protection from, a trend that is highly likely to develop in the aftermath of the pandemic. It will also be interesting to see how sellers react to increasingly expansive lists of buyer protection clauses, and what compromise will look like.