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| The Victoria’s Secret Contract That Anticipated a Pandemic | The Victoria’s Secret Contract That Anticipated a Pandemic |
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| It’s no wonder the buyout firm Sycamore Partners is trying to back out of its $525 million deal to buy a majority of Victoria’s Secret from struggling L Brands. | It’s no wonder the buyout firm Sycamore Partners is trying to back out of its $525 million deal to buy a majority of Victoria’s Secret from struggling L Brands. |
| Until now, the private equity firm has generated impressive returns for its investors and huge paydays for its executives even as its core retail businesses have been in precipitous decline. Sycamore owned a portfolio of brands that were once ubiquitous at America’s malls: Nine West, Anne Klein, Hot Topic, Jones New York. It bought the office supplies retailer Staples for $6.8 billion in 2017. Even as those brands faded, Sycamore sold assets, slashed personnel and costs and paid itself huge dividends. One of the funds it manages generated annualized returns of 43 percent. | Until now, the private equity firm has generated impressive returns for its investors and huge paydays for its executives even as its core retail businesses have been in precipitous decline. Sycamore owned a portfolio of brands that were once ubiquitous at America’s malls: Nine West, Anne Klein, Hot Topic, Jones New York. It bought the office supplies retailer Staples for $6.8 billion in 2017. Even as those brands faded, Sycamore sold assets, slashed personnel and costs and paid itself huge dividends. One of the funds it manages generated annualized returns of 43 percent. |
| But with its agreement to buy Victoria’s Secret, Sycamore’s good luck may have run out — and now it is deploying some long-shot legal arguments in an attempt to wriggle out of the deal. | But with its agreement to buy Victoria’s Secret, Sycamore’s good luck may have run out — and now it is deploying some long-shot legal arguments in an attempt to wriggle out of the deal. |
| Sycamore signed the agreement on Feb. 20, one day after stock market indexes hit their all-time highs. Within days, investors awakened to the devastating potential of the coronavirus outbreak. | Sycamore signed the agreement on Feb. 20, one day after stock market indexes hit their all-time highs. Within days, investors awakened to the devastating potential of the coronavirus outbreak. |
| L Brands, the parent company of Victoria’s Secret, was already tarnished by widespread allegations of sexual harassment and the close relationship between its founder, Leslie Wexner, and the sexual offender Jeffrey Epstein. The coronavirus was a heavy new blow. Victoria’s Secret depends on sales at its stores, where customers try on lingerie and other intimate apparel. In mid-March, the company closed all its stores, as well as its online operation. | L Brands, the parent company of Victoria’s Secret, was already tarnished by widespread allegations of sexual harassment and the close relationship between its founder, Leslie Wexner, and the sexual offender Jeffrey Epstein. The coronavirus was a heavy new blow. Victoria’s Secret depends on sales at its stores, where customers try on lingerie and other intimate apparel. In mid-March, the company closed all its stores, as well as its online operation. |
| The day the Sycamore deal was announced, L Brands shares were more than $23 a share. A month later, on March 20, they traded for less than $10. | The day the Sycamore deal was announced, L Brands shares were more than $23 a share. A month later, on March 20, they traded for less than $10. |
| On March 25, L Brands executives briefed two Sycamore leaders — Peter Morrow, a managing director, and Adam Weinberger, a principal — on the company’s drastic efforts to contend with the crisis. Neither Sycamore executive objected, but the buyout firm was clearly getting cold feet. Mr. Weinberger expressed doubts that Sycamore could complete the Victoria’s Secret acquisition by the scheduled May 2 closing date, according to court filings. | On March 25, L Brands executives briefed two Sycamore leaders — Peter Morrow, a managing director, and Adam Weinberger, a principal — on the company’s drastic efforts to contend with the crisis. Neither Sycamore executive objected, but the buyout firm was clearly getting cold feet. Mr. Weinberger expressed doubts that Sycamore could complete the Victoria’s Secret acquisition by the scheduled May 2 closing date, according to court filings. |
| On April 13, Mr. Morrow broached the notion of “adjusting” the purchase price “to take account of the Covid-19 situation.” After L Brands refused to discuss that, Sycamore declared that it was terminating the agreement and filed suit in Delaware, claiming L Brands had breached the terms of the deal. L Brands countersued, insisting that the agreement be enforced. | On April 13, Mr. Morrow broached the notion of “adjusting” the purchase price “to take account of the Covid-19 situation.” After L Brands refused to discuss that, Sycamore declared that it was terminating the agreement and filed suit in Delaware, claiming L Brands had breached the terms of the deal. L Brands countersued, insisting that the agreement be enforced. |
| At first blush, Sycamore would seem to have a strong case. Most merger-and-acquisition agreements contain “material adverse change” or “material adverse event” clauses, which enable buyers to walk away if something unexpected — a so-called act of God — causes a precipitous decline in business conditions. And what would be considered more an act of God than a deadly pandemic? | At first blush, Sycamore would seem to have a strong case. Most merger-and-acquisition agreements contain “material adverse change” or “material adverse event” clauses, which enable buyers to walk away if something unexpected — a so-called act of God — causes a precipitous decline in business conditions. And what would be considered more an act of God than a deadly pandemic? |
| Sycamore isn’t the only buyer trying to get out of deals, and some are much larger than the one for Victoria’s Secret. Gray Television withdrew its $8.5 billion offer for Tegna, the former broadcasting arm of Gannett; BorgWarner, an auto parts supplier, has threatened to scuttle its $3.3 billion merger deal with Delphi Technologies; SoftBank withdrew a $3 billion tender offer for shares of the office-sharing start up WeWork; and Volkswagen said it would delay its $2.9 billion bid for the truck maker Navistar. Whether any of them can legally invoke an act-of-God clause depends on the terms of each contract. | Sycamore isn’t the only buyer trying to get out of deals, and some are much larger than the one for Victoria’s Secret. Gray Television withdrew its $8.5 billion offer for Tegna, the former broadcasting arm of Gannett; BorgWarner, an auto parts supplier, has threatened to scuttle its $3.3 billion merger deal with Delphi Technologies; SoftBank withdrew a $3 billion tender offer for shares of the office-sharing start up WeWork; and Volkswagen said it would delay its $2.9 billion bid for the truck maker Navistar. Whether any of them can legally invoke an act-of-God clause depends on the terms of each contract. |
| But Sycamore faces unusually daunting odds, thanks to clever drafting by L Brands’ lawyers at Davis Polk & Wardwell. In the acquisition agreement, the lawyers carved out specific exceptions to those acts of God, including a pandemic. That meant that even if a pandemic struck, Sycamore would be legally obligated to complete the deal. | But Sycamore faces unusually daunting odds, thanks to clever drafting by L Brands’ lawyers at Davis Polk & Wardwell. In the acquisition agreement, the lawyers carved out specific exceptions to those acts of God, including a pandemic. That meant that even if a pandemic struck, Sycamore would be legally obligated to complete the deal. |
| “I’ve never seen a reference to a pandemic in that context,” said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, the state where the L Brands-Sycamore case is being litigated. “It’s going to be very tough for Sycamore to get out of that in Delaware. They read that, and they signed it.” | “I’ve never seen a reference to a pandemic in that context,” said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, the state where the L Brands-Sycamore case is being litigated. “It’s going to be very tough for Sycamore to get out of that in Delaware. They read that, and they signed it.” |
| Corporate lawyers said references to pandemics had started creeping into merger agreements and other contracts around the time of the L Brands-Sycamore deal. By then, it was not hard to imagine that the novel coronavirus that had surfaced in China at the end of last year could cause economic upheaval. The city of Wuhan had already been shut down, and the first case of Covid-19 had been diagnosed in the United States. The virus was clearly spreading globally, with cases already reported in South Korea, the Philippines, Japan and Italy. | Corporate lawyers said references to pandemics had started creeping into merger agreements and other contracts around the time of the L Brands-Sycamore deal. By then, it was not hard to imagine that the novel coronavirus that had surfaced in China at the end of last year could cause economic upheaval. The city of Wuhan had already been shut down, and the first case of Covid-19 had been diagnosed in the United States. The virus was clearly spreading globally, with cases already reported in South Korea, the Philippines, Japan and Italy. |
| By all accounts, the L Brands-Sycamore contract was the product of hard-fought negotiations, but there’s no evidence that Sycamore’s lawyers at Kirkland & Ellis pushed back against the pandemic language. Should they have? | By all accounts, the L Brands-Sycamore contract was the product of hard-fought negotiations, but there’s no evidence that Sycamore’s lawyers at Kirkland & Ellis pushed back against the pandemic language. Should they have? |
| Updated July 7, 2020 | |
| The coronavirus can stay aloft for hours in tiny droplets in stagnant air, infecting people as they inhale, mounting scientific evidence suggests. This risk is highest in crowded indoor spaces with poor ventilation, and may help explain super-spreading events reported in meatpacking plants, churches and restaurants. It’s unclear how often the virus is spread via these tiny droplets, or aerosols, compared with larger droplets that are expelled when a sick person coughs or sneezes, or transmitted through contact with contaminated surfaces, said Linsey Marr, an aerosol expert at Virginia Tech. Aerosols are released even when a person without symptoms exhales, talks or sings, according to Dr. Marr and more than 200 other experts, who have outlined the evidence in an open letter to the World Health Organization. | |
| Common symptoms include fever, a dry cough, fatigue and difficulty breathing or shortness of breath. Some of these symptoms overlap with those of the flu, making detection difficult, but runny noses and stuffy sinuses are less common. The C.D.C. has also added chills, muscle pain, sore throat, headache and a new loss of the sense of taste or smell as symptoms to look out for. Most people fall ill five to seven days after exposure, but symptoms may appear in as few as two days or as many as 14 days. | Common symptoms include fever, a dry cough, fatigue and difficulty breathing or shortness of breath. Some of these symptoms overlap with those of the flu, making detection difficult, but runny noses and stuffy sinuses are less common. The C.D.C. has also added chills, muscle pain, sore throat, headache and a new loss of the sense of taste or smell as symptoms to look out for. Most people fall ill five to seven days after exposure, but symptoms may appear in as few as two days or as many as 14 days. |
| Scientists around the country have tried to identify everyday materials that do a good job of filtering microscopic particles. In recent tests, HEPA furnace filters scored high, as did vacuum cleaner bags, fabric similar to flannel pajamas and those of 600-count pillowcases. Other materials tested included layered coffee filters and scarves and bandannas. These scored lower, but still captured a small percentage of particles. | Scientists around the country have tried to identify everyday materials that do a good job of filtering microscopic particles. In recent tests, HEPA furnace filters scored high, as did vacuum cleaner bags, fabric similar to flannel pajamas and those of 600-count pillowcases. Other materials tested included layered coffee filters and scarves and bandannas. These scored lower, but still captured a small percentage of particles. |
| A commentary published this month on the website of the British Journal of Sports Medicine points out that covering your face during exercise “comes with issues of potential breathing restriction and discomfort” and requires “balancing benefits versus possible adverse events.” Masks do alter exercise, says Cedric X. Bryant, the president and chief science officer of the American Council on Exercise, a nonprofit organization that funds exercise research and certifies fitness professionals. “In my personal experience,” he says, “heart rates are higher at the same relative intensity when you wear a mask.” Some people also could experience lightheadedness during familiar workouts while masked, says Len Kravitz, a professor of exercise science at the University of New Mexico. | A commentary published this month on the website of the British Journal of Sports Medicine points out that covering your face during exercise “comes with issues of potential breathing restriction and discomfort” and requires “balancing benefits versus possible adverse events.” Masks do alter exercise, says Cedric X. Bryant, the president and chief science officer of the American Council on Exercise, a nonprofit organization that funds exercise research and certifies fitness professionals. “In my personal experience,” he says, “heart rates are higher at the same relative intensity when you wear a mask.” Some people also could experience lightheadedness during familiar workouts while masked, says Len Kravitz, a professor of exercise science at the University of New Mexico. |
| The steroid, dexamethasone, is the first treatment shown to reduce mortality in severely ill patients, according to scientists in Britain. The drug appears to reduce inflammation caused by the immune system, protecting the tissues. In the study, dexamethasone reduced deaths of patients on ventilators by one-third, and deaths of patients on oxygen by one-fifth. | The steroid, dexamethasone, is the first treatment shown to reduce mortality in severely ill patients, according to scientists in Britain. The drug appears to reduce inflammation caused by the immune system, protecting the tissues. In the study, dexamethasone reduced deaths of patients on ventilators by one-third, and deaths of patients on oxygen by one-fifth. |
| The coronavirus emergency relief package gives many American workers paid leave if they need to take time off because of the virus. It gives qualified workers two weeks of paid sick leave if they are ill, quarantined or seeking diagnosis or preventive care for coronavirus, or if they are caring for sick family members. It gives 12 weeks of paid leave to people caring for children whose schools are closed or whose child care provider is unavailable because of the coronavirus. It is the first time the United States has had widespread federally mandated paid leave, and includes people who don’t typically get such benefits, like part-time and gig economy workers. But the measure excludes at least half of private-sector workers, including those at the country’s largest employers, and gives small employers significant leeway to deny leave. | The coronavirus emergency relief package gives many American workers paid leave if they need to take time off because of the virus. It gives qualified workers two weeks of paid sick leave if they are ill, quarantined or seeking diagnosis or preventive care for coronavirus, or if they are caring for sick family members. It gives 12 weeks of paid leave to people caring for children whose schools are closed or whose child care provider is unavailable because of the coronavirus. It is the first time the United States has had widespread federally mandated paid leave, and includes people who don’t typically get such benefits, like part-time and gig economy workers. But the measure excludes at least half of private-sector workers, including those at the country’s largest employers, and gives small employers significant leeway to deny leave. |
| So far, the evidence seems to show it does. A widely cited paper published in April suggests that people are most infectious about two days before the onset of coronavirus symptoms and estimated that 44 percent of new infections were a result of transmission from people who were not yet showing symptoms. Recently, a top expert at the World Health Organization stated that transmission of the coronavirus by people who did not have symptoms was “very rare,” but she later walked back that statement. | So far, the evidence seems to show it does. A widely cited paper published in April suggests that people are most infectious about two days before the onset of coronavirus symptoms and estimated that 44 percent of new infections were a result of transmission from people who were not yet showing symptoms. Recently, a top expert at the World Health Organization stated that transmission of the coronavirus by people who did not have symptoms was “very rare,” but she later walked back that statement. |
| Touching contaminated objects and then infecting ourselves with the germs is not typically how the virus spreads. But it can happen. A number of studies of flu, rhinovirus, coronavirus and other microbes have shown that respiratory illnesses, including the new coronavirus, can spread by touching contaminated surfaces, particularly in places like day care centers, offices and hospitals. But a long chain of events has to happen for the disease to spread that way. The best way to protect yourself from coronavirus — whether it’s surface transmission or close human contact — is still social distancing, washing your hands, not touching your face and wearing masks. | Touching contaminated objects and then infecting ourselves with the germs is not typically how the virus spreads. But it can happen. A number of studies of flu, rhinovirus, coronavirus and other microbes have shown that respiratory illnesses, including the new coronavirus, can spread by touching contaminated surfaces, particularly in places like day care centers, offices and hospitals. But a long chain of events has to happen for the disease to spread that way. The best way to protect yourself from coronavirus — whether it’s surface transmission or close human contact — is still social distancing, washing your hands, not touching your face and wearing masks. |
| A study by European scientists is the first to document a strong statistical link between genetic variations and Covid-19, the illness caused by the coronavirus. Having Type A blood was linked to a 50 percent increase in the likelihood that a patient would need to get oxygen or to go on a ventilator, according to the new study. | A study by European scientists is the first to document a strong statistical link between genetic variations and Covid-19, the illness caused by the coronavirus. Having Type A blood was linked to a 50 percent increase in the likelihood that a patient would need to get oxygen or to go on a ventilator, according to the new study. |
| If air travel is unavoidable, there are some steps you can take to protect yourself. Most important: Wash your hands often, and stop touching your face. If possible, choose a window seat. A study from Emory University found that during flu season, the safest place to sit on a plane is by a window, as people sitting in window seats had less contact with potentially sick people. Disinfect hard surfaces. When you get to your seat and your hands are clean, use disinfecting wipes to clean the hard surfaces at your seat like the head and arm rest, the seatbelt buckle, the remote, screen, seat back pocket and the tray table. If the seat is hard and nonporous or leather or pleather, you can wipe that down, too. (Using wipes on upholstered seats could lead to a wet seat and spreading of germs rather than killing them.) | If air travel is unavoidable, there are some steps you can take to protect yourself. Most important: Wash your hands often, and stop touching your face. If possible, choose a window seat. A study from Emory University found that during flu season, the safest place to sit on a plane is by a window, as people sitting in window seats had less contact with potentially sick people. Disinfect hard surfaces. When you get to your seat and your hands are clean, use disinfecting wipes to clean the hard surfaces at your seat like the head and arm rest, the seatbelt buckle, the remote, screen, seat back pocket and the tray table. If the seat is hard and nonporous or leather or pleather, you can wipe that down, too. (Using wipes on upholstered seats could lead to a wet seat and spreading of germs rather than killing them.) |
| If you’ve been exposed to the coronavirus or think you have, and have a fever or symptoms like a cough or difficulty breathing, call a doctor. They should give you advice on whether you should be tested, how to get tested, and how to seek medical treatment without potentially infecting or exposing others. | If you’ve been exposed to the coronavirus or think you have, and have a fever or symptoms like a cough or difficulty breathing, call a doctor. They should give you advice on whether you should be tested, how to get tested, and how to seek medical treatment without potentially infecting or exposing others. |
| No one knew then that Covid-19 would bring the global economy to a near halt or that malls and stores would be closed. Still, scenarios like that are what contract lawyers are supposed to anticipate, however unlikely they might seem. | No one knew then that Covid-19 would bring the global economy to a near halt or that malls and stores would be closed. Still, scenarios like that are what contract lawyers are supposed to anticipate, however unlikely they might seem. |
| “It’s hard for Sycamore to argue they should be excused from the deal,” said Gail Weinstein, a partner at Fried Frank who has written about “material adverse event” clauses in contracts. “The pandemic was at the forefront of everyone’s minds. Even before that, it was public knowledge that a pandemic was likely to happen sometime.” | “It’s hard for Sycamore to argue they should be excused from the deal,” said Gail Weinstein, a partner at Fried Frank who has written about “material adverse event” clauses in contracts. “The pandemic was at the forefront of everyone’s minds. Even before that, it was public knowledge that a pandemic was likely to happen sometime.” |
| Mr. Elson noted, “I’d say Davis Polk really earned its fee.” | Mr. Elson noted, “I’d say Davis Polk really earned its fee.” |
| A spokesman for Kirkland & Ellis declined to comment, as did a spokeswoman for L Brands. | A spokesman for Kirkland & Ellis declined to comment, as did a spokeswoman for L Brands. |
| Sycamore’s lawsuit concedes that it can’t invoke the “material adverse event” clause to justify terminating the contract, given the language that specifically excludes a pandemic. Nor does the lawsuit fault L Brands for closing its stores, which it did under government orders. | Sycamore’s lawsuit concedes that it can’t invoke the “material adverse event” clause to justify terminating the contract, given the language that specifically excludes a pandemic. Nor does the lawsuit fault L Brands for closing its stores, which it did under government orders. |
| Instead, the suit contends that L Brands failed to run the Victoria’s Secret business in a manner consistent with past practices, in breach of the agreement with Sycamore. It points to the fact that Victoria’s Secret furloughed most employees, failed to pay rent and didn’t replenish out-of-fashion merchandise, all of which were at odds with the company’s previous behavior and supposedly hurt the Victoria’s Secret brand. | Instead, the suit contends that L Brands failed to run the Victoria’s Secret business in a manner consistent with past practices, in breach of the agreement with Sycamore. It points to the fact that Victoria’s Secret furloughed most employees, failed to pay rent and didn’t replenish out-of-fashion merchandise, all of which were at odds with the company’s previous behavior and supposedly hurt the Victoria’s Secret brand. |
| L Brands stressed in its court filing that it was doing its best to address an unprecedented health and economic crisis and that Sycamore was taking similar steps with the retail brands it already owns. | L Brands stressed in its court filing that it was doing its best to address an unprecedented health and economic crisis and that Sycamore was taking similar steps with the retail brands it already owns. |
| Mr. Elson predicted that Sycamore’s argument would be a tough sell. “In a pandemic, you respond to a pandemic,” he said. “Unless there was fraud or misconduct by L Brands management, it’s going to be very hard for them to get out of the deal.” | Mr. Elson predicted that Sycamore’s argument would be a tough sell. “In a pandemic, you respond to a pandemic,” he said. “Unless there was fraud or misconduct by L Brands management, it’s going to be very hard for them to get out of the deal.” |