Diamonds Are Forever, Deals Are Not: Fraught Mergers and Frustration of Contract in the Age of COVID-19

Colin Sylvester

 

Last November, the French fashion conglomerate LVMH Moët Hennessy Louis Vuitton (“LVMH”) entered into a merger agreement with Tiffany & Co. (“Tiffany”), the American luxury jewelry retailer.[1] LVMH agreed to purchase the American jeweler for $135 per share in cash, with a total transaction value of $16.2 billion.[2] When the deal was announced, Bernard Arnault, LVMH’s Chairman and Chief Executive Officer, claimed “[t]he acquisition of Tiffany will strengthen LVMH’s position in jewelry and further increase its presence in the United States.”[3] The merger was approved by the boards of both companies, and Tiffany’s Board of Directors recommended shareholders vote to approve the merger at the next shareholder meeting.[4]

The deal was to be consummated by mid-2020.[5] However, it remains incomplete “[a]fter a succession of events. . . undermine[d] the acquisition of Tiffany & Co.”[6] What happened? According to a September 2020 press release from LVMH, the company received a letter from the French government on August 31, 2020, directing them to delay the deal in response to potential U.S. tariffs on French imports.[7] This, in combination with Tiffany’s request to extend the deal’s “Outside Date” from November 24, 2020 to December 31, 2020, prompted LVMH to conclude they “[would] therefore not be able to complete the acquisition of Tiffany & Co.”[8]

Noticeably absent from LVMH’s press release is any mention of COVID-19. The restrictions and public safety measures enacted in response to the pandemic has harmed nearly every sector of the global economy, but luxury good sales have been particularly hard hit; according to a Boston Consulting Group analysis, sales in this industry are projected to contract between 25 and 45 percent in 2020.[9]

The French conglomerate’s desire to get out of “a deal that would have been the biggest ever in the luxury industry”[10] has been countered by a fierce legal challenge from Tiffany, which has filed a complaint in the Delaware Court of Chancery seeking enforcement of the agreement.[11] Specifically, Tiffany alleges:

LVMH has breached the Merger Agreement by, among other things, (i) failing to do or to cause to be done all things, necessary or advisable to obtain the required antitrust clearances as promptly as practicable, and (ii) failing to carry out its obligations under the Merger Agreement in good faith and in a manner designed to ensure Tiffany received fairly the benefits of its bargain.[12]

Tiffany’s suit rests, in part, on a theory of frustration.[13] At common law, the doctrine of frustration is applied to contractual agreements between parties when “[one] party is perfectly capable of performing. . . but the party’s reason for doing so no longer exists.”[14] In most instances, “frustration is commonly asserted by a buyer. . . since the payment of money is seldom impossible but the purpose for performing the contract. . . may no longer exist.”[15] Conversely, sellers tend to rely on the doctrines of impossibility or impracticability in suits where buyers renege on their promise to perform.[16] While Tiffany’s argument asserting frustration of purpose as the target in a transaction is slightly unorthodox, the court may be receptive to the specific factual allegations that LVMH failed to take even the most basic steps to secure antitrust compliance.

This is not the first merger agreement to unravel in the wake of COVID-19; Sycamore Partners’ acquisition of Victoria’s Secret collapsed earlier this year in May.[17] What is significant about this particular deal? Two aspects of the LVMH-Tiffany dispute are worth following because of what they may entail for future pandemic-related litigation.

The first aspect is the role of the French government and the letter allegedly sent to LVMH expressing the need to delay the deal in response to trade policy concerns. Jean Jacques Guiony, LVMH’s Chief Financial Officer, rebuffed the implication that the company turned to the French government as a way to escape their obligations under the deal, claiming on a call with reporters that “[the letter] was fully unsolicited.”[18] The veracity of this claim, and others, are likely to be challenged in the ensuing litigation. In a broader sense, observing how the Chancery Court considers this fact will be important moving forward. Establishing a precedent by which companies can point to directives from government as a “get out of jail free card” may prove harmful for mergers agreed upon just prior to COVID. Seeing as buyer’s remorse may be felt more acutely in the current economic environment, acquirers may jump at a new opportunity for recourse in escaping their obligations.

The second aspect of the case to watch is the Chancery Court’s response to LVMH’s claims of mismanagement. LVMH countersued after Tiffany’s filed its initial complaint, alleging their target paid the “highest possible dividends” in a turbulent economic environment “while the company was burning cash and reporting losses.”[19] Should the Court allow LVMH’s mismanagement claim to stand, future litigants – now evaluating deals with the benefit of hindsight – may attempt to raise similar arguments in the event of a contractual dispute.

 

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[1] Press Release, LVMH Moët Hennessy Louis Vuitton, LVMH Reaches Agreement with Tiffany & Co. (Nov. 25, 2019).

[2] Id.

[3] Id.

[4] Id.

[5] Id.

[6] Press Release, LVMH Moët Hennessy Louis Vuitton (Sept. 9, 2020).

[7] Lauren Hirsch & Elizabeth Paton, Tiffany’s $16 Billion Sale Falls Apart in Face of Pandemic and Tariffs, N.Y. Times (Sept. 9, 2020), https://www.nytimes.com/2020/09/09/business/lvmh-tiffany-deal-lawsuit.html.

[8] Press Release, LVMH Moët Hennessy Louis Vuitton (Sept. 9, 2020).

[9] See Hirsch & Patton.

[10] Amelia Lucas & Lauren Thomas, LVMH Scraps $16.2 billion deal with Tiffany, CNBC (Sept. 9, 2020, 2:38 PM), https://www.cnbc.com/2020/09/09/lvmh-scraps-16point2-billion-deal-with-tiffany.html.

[11] Complaint at 1, Tiffany v. LVMH Moët Hennessy-Louis Vuitton SE, No. 2020-0768 (Del. Ch. Sept. 9, 2020).

[12] Id. at 110—11.

[13] See Hirsch & Patton.

[14] 14 Corbin On Contracts § 77.1 (2020).

[15] Id.

[16] Id.

[17] See Hirsch & Patton.

[18] Id.

[19] David Dawkins, LVMH Outline Legal Defense Plans as Billionaire Bernard Arnault Works to Spike $16 Billion Tiffany Deal, Forbes (Sept. 29, 2020), https://www.forbes.com/sites/daviddawkins/2020/09/29/lvmh-outline-legal-defense-plans-as-billionaire-bernard-arnault-works-to-spike-16-billion-tiffany-deal/#489276a92c9e.