Simon Properties’ lawsuit against Taubman Centers is one of the more interesting pieces of pandemic-related busted deal litigation. That case isn’t pending in Delaware, but in a Michigan state court — and it’s scheduled to go to trial in November. The case took another intriguing turn earlier this month, when Simon filed a supplemental complaint alleging that actions taken by Taubman subsequent to the lawsuit resulted in violations of the merger agreement that provided “separate and independent grounds” for Simon not to close the transaction.
Taubman’s amendment of its credit agreement in order to fend off a potential default is at the heart of Simon’s new allegations. Here’s an excerpt from Alison Frankel’s recent blog on the case:
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.
According to Simon, in exchange for eliminating the potential default, Taubman’s lenders extracted the proverbial pound of flesh, including obtaining a security interest in some of its most valuable properties, restricting additional borrowings and imposing an obligation on Taubman to apply 75% of the proceeds of asset sales or capital raises to repay obligations to the lenders.
This is an interesting claim, but as Alison notes, Taubman is likely to respond that it was contractually obligated to operate the business in a way that would preserve its value, and that renegotiating the credit agreement in order to avoid a default was critical to satisfying that requirement.
-John Jenkins, DealLawyers.com September 22, 2020