LVMH Vs. Tiffany Heats Up
One day into the messy breakup of LVMH Moët Hennessy Louis Vuitton’s $16.2 billion deal to buy Tiffany & Co. and the sparks continue to fly.
LVMH said on Wednesday it was walking away from the deal following what it said was a request from the French government, which is mired in a trade dispute with Washington. But it changed the emphasis on Thursday, accusing the iconic American jeweler of “dishonesty” and mismanagement during the coronavirus crisis.
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While Tiffany was clearly preparing for a case of cold feet from LVMH, which WWD reported in June was taking a fresh look at the deal, the French luxury giant took exception to the 114-page lawsuit Tiffany quickly filed against it in Delaware’s Court of Chancery on Wednesday. LVMH said the legal action was “communicated in a misleading way to shareholders and is defamatory.”
The suit is aimed at compelling LVMH to “abide by its contractual obligation under the merger agreement.”
LVMH said it was surprised by the legal action, which it deems “totally unfounded.”
“LVMH will defend itself vigorously. The long preparation of this assignment demonstrates the dishonesty of Tiffany in its relations with LVMH. This action is essentially based on the accusation by Tiffany that LVMH failed to take the reasonably necessary steps to obtain the various regulatory authorities’ approvals in a timely way,” the statement said. “This accusation has no substance and LVMH will demonstrate this to the Delaware Court. On this matter, the filing in Brussels [for the European Union] will take place, as expected, in the following days and this is simply the result of the planning fixed by the European Commission, about which Tiffany is completely aware. It is legitimate to expect this authorization will be obtained in October.”
LVMH also reiterated its disappointment in Tiffany’s management during the coronavirus crisis, which has put a strong dent in luxury sales and consumer appetite, and vowed to challenge it and its board of directors on this failing.
“The first-half results and its perspectives for 2020 are very disappointing, and significantly inferior to those of comparable brands of the LVMH Group during this period,” it said. “LVMH considers, among other things, that this period is impacted by a Material Adverse Effect, that Tiffany did not follow an ordinary course of business, notably in distributing substantial dividends when the company was loss making, and that the operation and organization of this company are not substantially intact.”
Material Adverse Effect clauses are typical in large merger and acquisition deals in case a change in circumstances significantly reduces the value of a company.
“LVMH therefore confirms that the necessary conditions for the conclusion of the acquisition of Tiffany are not fulfilled,” LVMH added.
The tone has been sharp on both sides — indicating what could be a knock-down, drag-out brawl (conducted in well-appointed suits and with white shoe lawyers).
Tiffany chairman Roger Farah, who stepped into the role of negotiator when LVMH came calling last fall, did not appear to be pulling punches on Wednesday when the American company filed its suit and he addressed the notion that it was geopolitics over French’s digital services tax that was nixing his deal.
“This supposed official French effort to retaliate against the U.S. for proposed new tariffs has never been announced or discussed publicly; how could it possibly then be an effort to pressure the U.S. into revoking the tariffs?” Farah said. “Furthermore, as we are not aware of any other French company receiving such a request, it is all the more clear that LVMH has unclean hands.”
Multiple press accounts have cited French officials as saying the request sent to LVMH to delay closing of the deal until after the deadline was non-binding.
The next shoe to drop would seem to be the LVMH countersuit.
Shares of Tiffany stabilized Thursday, inching back up 0.4 percent to $114.36 as investors took measure of where the luxury battle lines were being drawn.
That’s well below the $135 a share LVMH agreed to pay for Tiffany, but also seems to reflect a certain hope on the part of investors that some kind of deal could still get done — either by LVMH or another suitor.
Much will depend on the merger contract the two sides negotiated last year and how it is viewed through the lens of the courts, where potentially LVMH chief Bernard Arnault, Farah and other prominent names on both sides could be called on to testify.
In its lawsuit, Tiffany builds an argument around what it says are LVMH’s contractual obligations to seek the necessary regulatory approvals for the deal.
“Despite this express contractual obligation, as of Sept. 9, 2020 — more than nine months after signing the merger agreement — LVMH has yet even to file its formal requests for antitrust approvals in the European Union (“EU”) and Taiwan, and the transaction has yet to receive clearance in both Japan and Mexico as a result of LVMH’s inexcusable delay in responding to the reviewing authorities’ requests for information in those countries,” Tiffany argued.
Tiffany’s complaint has essentially sought to make the case that the alleged delays by LVMH in promptly applying for antitrust approvals shows the luxury company attempting to back out of the deal and perhaps renegotiate the price.
Merger deals generally require the parties involved to make “reasonable best efforts” in reaching the closing deadline for the deal. In this case, the parties had aimed to close the deal by mid-2020, and the “drop dead” date under the merger agreement was moved to Nov. 24, according to the complaint. Whether the parties have reasonably acted to complete the transaction can be a question for the court, which will rest on its interpretation of some of the special contract terms at issue.
Fundamentally, such arguments raise the question of whether a party’s course of conduct in a case was in bad faith, which can involve a high burden of proof, said Alan Behr, partner at Phillips Nizer LLP, who is not involved in the case and spoke generally.
“That is the kind of claim that is…heavily fact-based, involving a lot of discovery, and ultimately goes to trial, a lot of testimony, to prove or disprove an allegation that somebody was not behaving in the correct way anticipated by the parties in a good faith manner to conclude a transaction,” Behr said.
“You would have to go back and look at what was committed to in writing that was in some way breached,” he added. “And that is so highly variable by deal, and that is something that will have to come out in the course of this litigation.”
Tiffany’s suit seeks “specific performance,” that is, it is asking the court to compel LVMH to close the deal based on the purchase price that was agreed to in the merger agreement. If not, the company is seeking damages.
In the meantime, more fireworks are expected.
