In the wake of COVID-19, a number of buyers have resorted to force majeure (aka act of God) clauses to withdraw from deals. But, as the New York Times recently reported, this was not an option for the buyer of Victoria’s Secret because of a salient exception in the acquisition agreement.
According to the Times, the buyer, Sycamore Partners, a private equity firm, and the seller, L Brands, signed the agreement on February 20, one day after the stock market indexes hit their all-time highs. Lawyers for L Brands, the seller, even then had the foresight to include specific exceptions to acts of God, “including a pandemic.” Therefore, a pandemic would not be an excuse for the buyer to walk away from the $525 million deal. Courts take contracts seriously and are not inclined to find loopholes where none exist, particularly where both parties are sophisticated deal-makers and represented by sophisticated lawyers.
How could L Brand’s lawyers know and why didn’t the buyer’s lawyers push back? Contract lawyers are supposed to anticipate unforeseeable events, the Times article says, while noting that no one at that moment knew how devastating COVID-19 would be to the economy.
Once the effect of the virus started to become evident, the buyer engaged in negotiations with the seller to “adjust” the purchase price. When these talks went nowhere, the buyer filed suit in Delaware, creating a number of other arguments for why it should not have to go through with the deal. The buyer was aware that it could not use force majeure as an affirmative defense.
The Times quotes Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, saying he had never seen a reference to a pandemic “in that context.” The law firm representing L Brands (Davis Polk & Wardwell) “earned its fee,” Elson added.
In a later development, on May 4, the New York Times reported that the parties mutually agreed to terminate the deal. An L Brands executive said retailers faced an “extremely challenging business environment” and the company would rather focus on “navigating this environment” than “engaging in costly and distracting litigation to force a partnership with Sycamore.”