Curtailing Contractual Wriggle-Out in the Shadow of Covid

Curtailing Contractual Wriggle-Out in the Shadow of Covid Presented by: Mrs. Moore Date: 28 October 2021 Sycamore Partners v L Brands (2020) - 20 February 2020: SP agreed to purchase 55% equity interest in Victoria's Secret retail brand from LB for $525 million, with closure of transaction scheduled for 2nd quarter (April-June) of 2020. - March 2020: following outbreak of Covid-19 pandemic & ensuing lockdown measures, LB compelled to close almost all its Victoria's Secret stores worldwide & either lay off or furlough most VS staff. - 22 April 2020: SP announced that it was terminating acquisition agreement citing nonsatisfaction of conditions precedent to deal closure & sought declaratory judgment from Delaware Court of Chancery that termination of acquisition agreement was valid. - Sycamore Partners: 'That these actions were taken as a result of or in response to the COVID-19 pandemic is no defense to L Brands' clear breaches of the Transaction Agreement.' - 4 May 2020: SP & LB mutually agree to terminate Victoria's Secret acquisition agreement. Tiffany v LVMH (2021) - 25 November 2019: LVMH entered merger agreement with luxury jeweler retailer Tiffany & Co, under which LVMH undertook to buy Tiffany for $16 billion ($135 per share in cash). - • 18 March 2020: following Covid-19 outbreak & enforced closure of several stores worldwide, Tiffany's share price fell to a low of $111. - 7 September 2020: LVMH announced that it was terminating merger agreement with Tiffany, citing material adverse change in the jeweler’s condition post-Covid as a valid basis for termination. - 9 September 2020: Tiffany filed suit against LVMH in Delaware Chancery Court alleging breach of contract & sought order compelling specific performance of merger agreement. - 21 September 2020: Delaware Chancery Court agreed to expedite trial to 5 January 2021. Which legal doctrine(s) could apply? - Frustration of contract? - Force majeure ('act of God')? - Material Adverse Change ('MAC')? - Ordinary Course ('OC')? Frustration of contract? - At common law, where an unforeseen/unforeseeable event occurs after formation of the contract, which is neither party's fault and renders the parties' performance under the contract radically different from how it was first envisaged, the contract will be regarded as frustrated. - The effect of frustration is to discharge the parties completely from continuing performance of their obligations under the contract (Taylor v Caldwell, 1863) (Note this is NOT the same as rendering the contract either void or voidable). BUT-just because a subsequent occurrence has rendered a contract commercially impracticable or otherwise highly disadvantageous for the one of the parties, does not in itself constitute frustration (Davis Contractors v Fareham, 1956). - Note that frustration will NOT apply in cases where a party's inability to perform is due in part to their own prior commercial decisions (The Super Servant Two, 1990). Force majeure? - 'Where a Force Majeure occurs, or is reasonably likely to occur, a party shall not be liable to the extent that it is delayed in or prevented from performing its obligations under this Agreement due to Force Majeure, and the obligations of the parties OR the party affected by the Force Majeure shall be suspended for the duration of the Force Majeure event, provided that the affected party: • Promptly notifies the other party of the Force Majeure event and its expected duration; • Uses reasonable endeavors to minimize the effects of the event of Force Majeure; and • Keeps the other party informed of the status of the event and its impact on the performance of the Agreement.' - 'If, due to Force Majeure, a party ... is or is likely to be unable to perform a material obligation OR any of its obligations under [the contract]..., the other party OR either party may terminate this Agreement on written notice OR the parties will renegotiate the Agreement in good faith to achieve, as nearly as possible, its original commercial intent.' • [Source: LexisPSL, 2020] What constitutes a MAC? - [source: LexisPSL, 2020] • 'A Material Adverse Change ["MAC"] means any change, event, circumstance or effect occurring before Completion that individually or taken in the aggregate is, or is reasonably likely to be, materially adverse to the business, operations, assets, position (financial, trading or otherwise), liabilities, profits or prospects of [the relevant company]' - [In re IBP, Inc. (2001); Akorn v Fresenius (2018); Channel Medystems v Boston Scientific Corp (2019)] • According to the Delaware Chancery Court, to be 'material' an MAE must 'substantially threaten the overall earnings potential of the [relevant company] in a durationally-significant manner' - E.g. of MAC (or in this case MAE) clause in asset-acquisition transaction, as used in Sycamore Partners' deal to acquire Victoria's Secret from L Brands: - MAE = 'any state of facts, circumstance, condition, event, change, development, occurrence, result or effect (i) that would prevent, materially delay or materially impede the performance by Parent of its obligations under this Agreement or Parent's consummation of the transactions contemplated by this Agreement; or (ii) that has a material adverse effect on the financial condition, business, assets, or results of operations of the Business, excluding, in the case of clause (ii), any state of facts, circumstance, condition, event, change, development, occurrence, result or effect to the extent directly or indirectly resulting from ... (H) pandemics...' Ordinary Course (‘OC')? - An Ordinary Course (or 'OC') clause in an M&A or asset- acquisition transaction requires the vendor to seek the purchaser's consent for any significant changes to the running of the business. - E.g. of OC clause from Victoria's Secret acquisition contract: - L Brands 'shall and shall cause its Subsidiaries to conduct the Business in the ordinary course consistent with past practice.' (para 4) => if covenant breached, purchaser given right NOT to close transaction on premise that a condition precedent to closing has been violated by vendor. (para 5) How should MAC/OC clauses be interpreted? - ICS v West Bromwich Building Society (1998): • Lord Hoffman's modern 'factual matrix' approach to contract interpretation first established • Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which could reasonably have been available to the parties in the situation in which they were at the time of the contract. • [This] includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man' The meaning which a document (or any other utterance) would convey to a reasonable man is not the same as the [purely literal) meaning of its words - Lord Hoffman's 'factual matrix' approach to contract interpretation was most notably applied to a MAC clause (in the context of a debt financing agreement) by Blair Jin 2013 Groupo Hotelero case. - What about section 3 of the Unfair Contract Terms Act ('UCTA') 1977, which subjects exclusion/limitations clauses in respect of liability for breach of contract to the Act's s 11 'reasonableness' test? - BUT: UCTA s 3 is unlikely to apply to MAC/OC clauses given that the commercial agreements which they form part of are typically negotiated reciprocally (albeit under conditions of relative bargaining power disparity) as opposed to being on standard-form terms + the usual business-to-business nature of these arrangements means that a judicial finding of unreasonableness for UCTA s 3 purposes is unlikely to be made in most cases. (Zakrzewski, 2011) What about the contra proferentem rule? - 'Verba cartarum fortius accipiuntur contra proferentem' ('The words of deeds are to be taken more strongly against the one who put them forward') (Sir Edward Coke, 1628) - 'When the words of a contract are ambiguous, the rule requires us to choose the meaning that is less favorable to the party who put forward the wording.' (McCunn, 2019) - • 'The basis of the contra proferentem principle is that a person who puts forward the wording of a proposed agreement may be assumed to have looked after his own interests, so that if the words leave room for doubt about whether he is intended to have a particular benefit there is reason to suppose that he is not. (Tam Wing Chuen v Bank of Credit and Commerce Hong Kong (1996), per Lord Mustill) Is there a public policy case for resurrecting the contra proferentem rule in relation to contractual 'wriggle-out' attempts today? - "Contract law as a regulating instrument. (Collins, 2002) - "Contracting parties should NOT be at liberty to escape the adverse consequences of bad bargains. (Davies, 2020) - Upholding legal certainty in commercial transactions & facilitating long-term business planning. (Hayek, 1960) - Mitigating negative externalities arising from scupper transactions. (esp. Covid-related insolvency & unemployment risk) - Contra proferentem as a new (or, rather, old!) 'precautionary principle for contract law in a post-Covid economic world?