June 10, 2020 / 8:04 PM / 25 days ago

New COVID-19 deal litigation: Simon sues Taubman to ditch $3.6 billion mall merger

(Reuters) - Editor’s note: this story has been updated to change million to billion in the first paragraph.

COVID-19 continues to infect big M&A deals struck in the weeks before the pandemic wreaked havoc on U.S. businesses. On Wednesday, the mall owner Simon Property Group filed a declaratory judgment suit in Oakland County, Michigan, to terminate its $3.6 billion deal to acquire the luxury mall owner Taubman Centers, arguing that the pandemic has disproportionately damaged Taubman’s business.

The Feb. 9 merger agreement between Simon and Taubman contains a provision shifting the risk of a pandemic onto Simon. The agreement’s material adverse effect clause carves out the impact of a pandemic (as well as wars, natural disasters and widespread economic declines) on Taubman’s business. But Simon’s lawyers at Paul Weiss Rifkind Wharton & Garrison contend in the Michigan complaint that a different provision in the MAE clause overrides Taubman’s protection from the pandemic carveout. That clause says that a material adverse effect has occurred if a pandemic (or other excluded events) hits Taubman harder than its competitors.

“The COVID-19 pandemic has had, and will continue to have, a particularly devastating and disproportionate effect on Taubman compared with its competitors in the retail real estate industry, and has therefore caused an MAE,” the complaint said, citing reports from analysts and consultants on the virus’ outsized anticipated impact on luxury retailers.

Taubman said in an email statement that Simon’s attempt to squash the deal is “invalid and without merit.” The luxury mall owner said it “intends to hold Simon to its obligations under the merger agreement ... and to vigorously contest Simon’s purported termination and legal claims.” Among other remedies, Taubman said, it may sue Simon for money damages.

If Taubman takes the same litigation approach as other jilted targets, it will argue that Simon assumed the risk of a pandemic by agreeing to the MAE’s pandemic carveout and that mere buyer’s remorse is not an excuse to ditch the deal. I left messages at Kirkland & Ellis, which represented the Taubman board in the Simon deal, and Wachtell Lipton Rosen & Katz, which represented the company, but did not immediately receive a response.

Simon and Taubman are not in discussions to renegotiate deal terms, according to reporting by my Reuters colleague Jessica DiNapoli. Taubman shareholders were scheduled to vote on the Simon deal on June 25. The deal’s termination date is February 9, 2021, according to the merger agreement. As you know, the short runway for M&A transactions has been a factor in some deal litigation spawned by COVID-19. It’s not clear whether Simon’s new lawsuit will extend the termination date for the Taubman deal.

The Simon complaint cited four overarching reasons why the coronavirus is disproportionately devastating for Taubman’s luxury properties. Most of Taubman’s malls, it said, are indoor spaces anchored by high-end department stores, which will be slower to rebound than outdoor malls anchored by stores that have remained open during the pandemic; many of Taubman’s most successful properties are in tourist destinations and generate significant revenue from international travelers; high-end shoppers are likely to continue buying online rather than returning to malls; and some of Taubman’s key tenants, including Neiman Marcus and J.C. Penney, are already in Chapter 11.

The suit also alleged that Taubman violated the merger agreement’s representations and warranties by failing to operate in the normal course. Unlike other mall owners and retailers, including Simon, Taubman did not cut executives’ salary or bonuses and did not announce staff cuts or furloughs, according to the complaint. The suit also accused Taubman of drawing down $350 million from its credit line in March, at the beginning of the pandemic, allegedly leaving the company short of money to redevelop properties to accommodate new tenants and to respond to COVID-19 concerns.

That alleged breach, according to Simon, constitutes an independent rationale, aside from MAE, to terminate the deal. “Taubman has repeatedly violated the ordinary course covenant in the wake of the pandemic, causing serious and irreparable damage to its business,” the complaint said.

Every M&A case involved unique facts and contractual language, of course. A mere month ago, for instance, when L Brands was (successfully!) litigating to get out of its agreement to buy Victoria’s Secret, it argued that the lingerie chain failed to operate in the ordinary course by taking exactly the steps – furloughs and compensation cuts - that Simon now blames Taubman for failing to adopt.

But I suspect Simon’s arguments about COVID-19’s disproportionate effect on high-end commercial real estate will resonate beyond this lawsuit. For developers who count on luxury business, litigation could make tough times even more dangerous.

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