(Reuters) - Covering M&A litigation in the COVID-19 era can be a little like shopping in a luxury mall – your attention is constantly being diverted by something new. One minute it’s Victoria’s Secret. The next it’s Tiffany and Louis Vuitton. Shiny objects abound.
I used the shopping mall analogy advisedly. Remember the busted $3.6 billion merger in which the mall operator Simon Property Group was to acquire the luxury mall developer Taubman Centers? Their Feb. 9 contract, signed in the early days of COVID-19, anticipated the possibility of a pandemic: The merger agreement’s material adverse effect clause shifted the risk of a viral outbreak onto Simon, the acquirer. Nevertheless, in June, Simon sued Taubman to terminate the deal, alleging that Taubman’s high-end properties were so disproportionately hurt by COVID-19 that, despite the deal agreement’s risk-shifting provision, the target company had experienced an MAE. Taubman soon thereafter filed a countersuit to force Simon to complete the merger or, alternatively, pay Taubman damages for the premium its shareholders would have received if the deal went through.
The litigation is taking place in Oakland County Superior Court in Michigan, outside of the Delaware Chancery Court spotlight for M&A litigation. Lawyers in the case, led by Paul Weiss Rifkind Wharton & Garrison for Simon and Wachtell Lipton Rosen & Katz for Taubman, have mostly engaged in the discovery disputes.
But with the case headed for a Nov. 16 trial date, Simon added an interesting new twist to the case: It asserted in an amended complaint last week that after the litigation was well under way, Taubman breached the very merger agreement it is asking the court to enforce. According to Simon’s new theory, even if Taubman is right and Simon improperly attempted to terminate the deal in June, Taubman’s own subsequent actions preclude enforcement of the merger agreement.
The new allegation is based on Taubman’s renegotiation of credit facilities that provide $1.625 billion in liquidity to the company. As Taubman explained in its quarterly filing with the Securities and Exchange Commission in August, COVID-19 risk prompted the company to reach new agreements with its lenders that include “a secured interest in certain unencumbered assets.” According to Simon’s new complaint, Taubman’s renegotiated deal with lenders will “substantially reduce its financial and operational flexibility,” granting the banks a mortgage on two of Taubman’s most valuable properties if the company’s finances deteriorate.
Simon alleges that its merger contract with Taubman required Taubman to get Simon’s approval before making material changes in the operation of its business. The renegotiated credit facility agreements, Simon asserts, are a material change, and Taubman didn’t even notify Simon before entering the new deals with lenders. Therefore, according to Simon, Taubman violated the M&A agreement. That alleged breach, it argued in the new complaint, provides an independent reason for Oakland County Circuit Court Judge James Alexander to release Simon from the deal to buy Taubman.
A Taubman spokesman declined to provide a statement on Simon’s amended complaint.
We’ve seen lots of COVID-19 deal litigation contending that targets breached M&A agreements by failing to operate their businesses in the ordinary course. But I can’t remember another disillusioned acquirer asserting that a target company committed an entirely new breach of operating covenants after the onset of litigation, thus – in Simon’s view – providing the acquirer with a whole new reason to ditch the deal.
Taubman, of course, can argue that its amended agreements with its lenders were the epitome of good management. The merger agreement it signed with Simon and is trying to enforce in court in Michigan required Taubman to operate the business in a way that would retain the value of the enterprise. I expect Taubman to claim that it renegotiated its credit facility to do just that. Moreover, the early record of the case shows that Simon disagreed with many of Taubman’s key operating decisions leading into Simon’s termination of the deal, which could lend weight to potential arguments by Taubman that it would have been pointless to consult Simon on renegotiations with its lenders, particularly after Simon claimed the merger deal was off.
What would be really interesting would be a split decision from the Oakland County judge, finding that Simon was not entitled initially to walk away from the merger but that Taubman subsequently breached the deal agreement.
The Detroit suburbs of Oakland County, Michigan may not be epicenter of big-time M&A dealmaking. But there’s going to be a lot of attention focused there in November.
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