Busted Deals: Simon/Taubman’s Twist On “Ordinary Course” Claims
I received news of Simon Property Group’s decision to terminate its $3.6 billion deal with Taubman Centers in my inbox last week. I knew that the termination and accompanying lawsuit was newsworthy, but thought readers would be better served if I waited to blog about it until someone more insightful than I weighed in on the dispute.
Admittedly, that isn’t a high bar, but in any case it didn’t take long for someone to easily clear it, because Steven Davidoff Solomon (aka the “Deal Professor”) recently provided his take in the NYT DealBook. Here’s an excerpt:
Simon has terminated the merger agreement and sued in a Michigan court to get out of the transaction, making some familiar arguments. It contends that Taubman has suffered a material adverse change, or MAC, to its operations. Simon also says that Taubman, like so many other companies these days, breached their agreement’s requirement to run business according to the “ordinary course.”
But here’s the twist.
Simon is not arguing, as Sycamore did when it got out of buying a stake in Victoria’s Secret, that Taubman violated the covenant by shutting. Instead, Simon claims that Taubman didn’t shut operations aggressively enough, by cutting employee salaries and the like.
A MAC clause lets a buyer walk away if the target is affected by an unexpected event with long-term significance. The clause in this deal excludes pandemics, but only to the extent that everyone in the industry is affected. Simon argues that Taubman has been hurt more than its peers.
The conduct of business covenant begins on p. 44, and the definition of “Material Adverse Effect” appears on p. 82. As the Deal Professor pointed out, it specifically carves out pandemics. He didn’t mention that it also specifically carves out volcanoes and tsunamis, which I’ve never seen before — but if you buy into the parade of horribles laid out in a Deutsche Bank report, that kind of language may become a best practice (along with a carve for solar flares!).
There’s a redacted copy of the complaint that Simon filed in Michigan, and there’s Taubman’s press release responding to Simon’s termination notice, which it contends is “invalid and without merit.” Prof. Steven Davidoff Solomon says that the Michigan venue presents a bit of a wild card, since there’s less likelihood of a quick trial and resolution than there would be with a case filed in Delaware. Since May retail sales jumped nearly 18%, perhaps a potentially longer schedule might provide both sides with some room to maneuver.
-John Jenkins, DealLawyers.com June 18, 2020
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