Victoria Secret Agreement
But with his agreement to buy Victoria`s Secret, Sycamore`s happiness could be exhausted – and now he`s using some long-awaited legal arguments to get out of the deal. In its press release, Sycamore stated that „neither party will be obliged to pay the other a termination fee or other consideration as a result of the mutual decision to terminate the contract and settle the outstanding dispute.“ In its publication, L Brands also announced its intention to relocate Victoria`s Secret to a separate company. Sycamore also referred to parts of the agreement between the two parties in the complaint and stated that Victoria`s Secret` parent company, L Brands, had agreed that it „does not change company guidelines, practices, principles or methods.“ But Sycamore has an unusually frightening chance thanks to the brilliant designs of L Brands` lawyers at Davis Polk and Wardwell. In the acquisition agreement, lawyers identified specific exceptions to these acts of God, including a pandemic. This meant that sycamore, even if a pandemic had struck, would have a legal obligation to conclude the agreement. Sycamore signed the agreement on February 20, a day after stock indexes hit record highs. Within days, investors woke up to the devastating potential of the coronavirus epidemic. Corporate lawyers stated that references to pandemics crept into merger agreements and other contracts at the time of the L Brands-Sycamore agreement. Until then, it was not hard to imagine that the new coronavirus, which appeared in China at the end of last year, could cause economic upheaval.
The city of Wuhan had already been closed, and the first case of Covid-19 had been diagnosed in the United States. The virus has spread widely around the world, with cases already reported in South Korea, the Philippines, Japan and Italy. Although it initially responded to the filing by arguing that Sycamore`s termination of the transaction was invalid and would pursue all remedies to assert its contractual rights, including the right to a „specific performance“ for a judge who would force the conclusion of the transaction, L Brands agreed to terminate the transaction as part of a forward-looking strategy to increase long-term shareholder value. Instead, the complaint argues that L Brands did not conduct the Victoria`s Secret business in a manner consistent with previous practices, in violation of the agreement with Sycamore. He states that Victoria`s Secret angered most employees, rented and did not fill out unusual goods that were all at odds with the company`s previous conduct and would have had the effect of harming the Victoria`s Secret brand. „The fact that these measures were taken accordingly or in response to the COVID 19 pandemic is not a defence of L Brands` overt violations of the transaction agreement,“ Sycamore said in the notification. „In particular, L Brands has agreed that the requirement for the applicant to complete the transaction is that L Brands meet all of its core commitments (in accordance with the transaction agreement) that it must meet on or before the closing date.“ On April 13, Mr. Morrow raised the notion of „adjustment“ of the purchase price „to take into account the situation of Covid-19.“ After L Brands refused to discuss it, Sycamore said it denounced the agreement and filed a complaint in Delaware, claiming that L Brands had violated the terms of the agreement.
L Brands responded and insisted that the agreement be implemented. At first glance, Sycamore seems to have a strong argument. Most merger and acquisition agreements contain clauses on „significant negative changes“ or „significant adverse events,“ which allow buyers to leave when something unexpected – what is called an act of God – causes a sharp decline in trading conditions.