COVID-19 MAE cases keep ending with revised deals. That wouldn’t happen without litigation

On The Case

Alison Frankel

(Reuters) - On Sunday night, literally on the eve of a scheduled trial in state court in Michigan, the mall operator Simon Property and the luxury mall developer Taubman Centers settled litigation over the deal they originally announced in February. Simon, as you know, claimed in June that it was entitled to walk away from its $3.6 billion deal to acquire an 80% stake in Taubman because COVID-19 disproportionately affected Taubman’s business, triggering the material adverse event clause in their M&A agreement. Taubman said the agreement specifically shifted COVID-19 risk to Simon. We’ll never know which side would have prevailed in court, but Simon is paying 18% less per share for its stake, saving hundreds of millions of dollars.

Its case is the latest COVID-19 MAE dispute to settle before any ruling on whether the pandemic really did have a material affect on a target’s business. Buyers have cited COVID-19 to invoke MAE clauses in at least a half-dozen cases in the U.S., primarily in Delaware Court of Chancery. To the best of my knowledge, none of those cases has resulted in a decision on the merits of the MAE claim. (There has been one ruling on a COVID MAE claim, but it was in the United Kingdom, in last month’s Travelport Ltd & Ors v WEX Inc.)

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A couple of buyers – Sycamore Partners in the Victoria’s Secret case and Comtech Communications in the Gilat Satellite deal – have walked away in MAE settlements. (Comtech agreed to pay a $70 million breakup fee. Sycamore paid nothing.) Others, like Simon, renegotiated deal terms after weeks or months of litigation, but before dispositive court rulings. Louis Vuitton shaved about $425 million from its $16 billion deal to acquire Tiffany. The private equity fund Advent cut its price for the cybersecurity firm Forescout from $33 to $29 per share. Simon seems to have gotten the biggest price cut resulting from COVID-19 MAE litigation.

Watching these COVID-19 MAE cases end via negotiation before courts have issued decisions on whether there’s anything to the claims made me wonder: If both parties know the endgame is revised deal terms or a negotiated breakup fee why go through the expensive rituals of litigation? Wouldn’t it be more efficient to skip the whole litigation detour and go straight to settlement talks?

I asked that question to a bunch of extremely well-informed folks on Monday: former Delaware Chief Justice Leo Strine, now of counsel at Wachtell, Lipton, Rosen & Katz; law professors Lawrence Hamemesh of Widener and Ann Lipton of Tulane; MAE analytics experts David Denis and Gaurav Jetley; and an M&A deal lawyer who spoke on background. They suggested a variety of reasons for why some M&A buyers and sellers resort to litigation. But the unifying theme of their comments was that even if MAE litigation rarely produces judicial decisions assessing claims, the process isn’t mere theater.

I should say first that lots of MAE threats are resolved without litigation. It’s not at all uncommon for a buyer to inform a target that it believes the acquired company has experienced a material downturn and to demand a price renegotiation. Those negotiations don’t always lead to public litigation. When Denis, a professor in the MBA program at the University of Pittsburgh, studied price renegotiation in deals impacted by MAEs for a 2012 paper, Material Adverse Change Clauses and Acquisition Dynamics, he did not distinguish between litigated cases and those in which the parties revised deal terms without litigation. Denis, whose study found that MAE invocations resulted, on average, in 15% price reductions for M&A buyers, said he could imagine scenarios in which litigation ended up benefiting the target company because, say, an unexpected event increased demand for its products or services.

Jetley, an M&A valuation expert at Analysis Group, said his data on MAE repricing in the last seven years shows smaller price reductions than Denis’ study: an average 7.5% rather than 15%. (Jetley also found that six acquirers in the 11 MAE invocations he examined dropped deals instead of revising the acquisition price.) Jetley said MAE clauses are typically ambiguous as a matter of design. So claiming an MAE, he said, is never simple. “If you’re going to invoke it,” he said, “it’s going to be torture.”

For buyers, the threat of MAE litigation is leverage, especially after Delaware Chancery Court ruled for the first time, in 2018’s Akorn v. Fresenius, that an acquiring company was entitled to walk away from a deal because the target had experienced an MAE. “It's a way to force the target to the bargaining table,” said Lipton, the Tulane prof, by email. “The target may not want to roll the dice or live with prolonged uncertainty even if the odds are in its favor.”

Delaware law professor Hamermesh said that just bringing an MAE case can be a boon to buyers if the target’s business continues to decline. Litigation, he said, extends uncertainty for the company being acquired. That can mean extra pressure on the operating business, which might work to the buyer’s benefit in renegotiations of the deal price. “Time is on the buyer’s side,” he said.

Judges might not be thrilled about buyers using their courts more for leverage than to obtain actual decisions on their claims, Hamermesh said. Interestingly, though, longtime Delaware jurist Strine suggested in an email that court deadlines in MAE proceedings can force buyers to “face reality.” Strine noted that MAE provisions – which he calls “renegotiation clauses” – often lead to peaceable re-pricing agreements. But when the buyer and seller end up in court, Strine said, “the guarantee of a prompt trial and, as important, swift resolution to appeals limits the time for games playing.”

Shareholder pressure can be a factor pushing either or both sides into litigation. If a buyer’s shareholders are clamoring for a cut in the deal price for a target company, Hamermesh said, the buyer might feel like it has to assert the MAE in court. Conversely, a target might be worried that its shareholders will accuse its board of breaching their duties if it agrees to cut the price its acquirer must pay without forcing the buyer to file suit.

There are a lot of strategic considerations, in other words, for buyers and targets considering when - or whether! - to sue over MAEs. So even though the cases are almost never resolved in court, they’re going to cost a lot in legal fees.