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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? |
| 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. |
| Updated June 5, 2020 | |
| The unemployment rate fell to 13.3 percent in May, the Labor Department said on June 5, an unexpected improvement in the nation’s job market as hiring rebounded faster than economists expected. Economists had forecast the unemployment rate to increase to as much as 20 percent, after it hit 14.7 percent in April, which was the highest since the government began keeping official statistics after World War II. But the unemployment rate dipped instead, with employers adding 2.5 million jobs, after more than 20 million jobs were lost in April. | |
| Mass protests against police brutality that have brought thousands of people onto the streets in cities across America are raising the specter of new coronavirus outbreaks, prompting political leaders, physicians and public health experts to warn that the crowds could cause a surge in cases. While many political leaders affirmed the right of protesters to express themselves, they urged the demonstrators to wear face masks and maintain social distancing, both to protect themselves and to prevent further community spread of the virus. Some infectious disease experts were reassured by the fact that the protests were held outdoors, saying the open air settings could mitigate the risk of transmission. | Mass protests against police brutality that have brought thousands of people onto the streets in cities across America are raising the specter of new coronavirus outbreaks, prompting political leaders, physicians and public health experts to warn that the crowds could cause a surge in cases. While many political leaders affirmed the right of protesters to express themselves, they urged the demonstrators to wear face masks and maintain social distancing, both to protect themselves and to prevent further community spread of the virus. Some infectious disease experts were reassured by the fact that the protests were held outdoors, saying the open air settings could mitigate the risk of transmission. |
| Exercise researchers and physicians have some blunt advice for those of us aiming to return to regular exercise now: Start slowly and then rev up your workouts, also slowly. American adults tended to be about 12 percent less active after the stay-at-home mandates began in March than they were in January. But there are steps you can take to ease your way back into regular exercise safely. First, “start at no more than 50 percent of the exercise you were doing before Covid,” says Dr. Monica Rho, the chief of musculoskeletal medicine at the Shirley Ryan AbilityLab in Chicago. Thread in some preparatory squats, too, she advises. “When you haven’t been exercising, you lose muscle mass.” Expect some muscle twinges after these preliminary, post-lockdown sessions, especially a day or two later. But sudden or increasing pain during exercise is a clarion call to stop and return home. | Exercise researchers and physicians have some blunt advice for those of us aiming to return to regular exercise now: Start slowly and then rev up your workouts, also slowly. American adults tended to be about 12 percent less active after the stay-at-home mandates began in March than they were in January. But there are steps you can take to ease your way back into regular exercise safely. First, “start at no more than 50 percent of the exercise you were doing before Covid,” says Dr. Monica Rho, the chief of musculoskeletal medicine at the Shirley Ryan AbilityLab in Chicago. Thread in some preparatory squats, too, she advises. “When you haven’t been exercising, you lose muscle mass.” Expect some muscle twinges after these preliminary, post-lockdown sessions, especially a day or two later. But sudden or increasing pain during exercise is a clarion call to stop and return home. |
| States are reopening bit by bit. This means that more public spaces are available for use and more and more businesses are being allowed to open again. The federal government is largely leaving the decision up to states, and some state leaders are leaving the decision up to local authorities. Even if you aren’t being told to stay at home, it’s still a good idea to limit trips outside and your interaction with other people. | States are reopening bit by bit. This means that more public spaces are available for use and more and more businesses are being allowed to open again. The federal government is largely leaving the decision up to states, and some state leaders are leaving the decision up to local authorities. Even if you aren’t being told to stay at home, it’s still a good idea to limit trips outside and your interaction with other people. |
| 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. |
| 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. |
| 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.) |
| Taking one’s temperature to look for signs of fever is not as easy as it sounds, as “normal” temperature numbers can vary, but generally, keep an eye out for a temperature of 100.5 degrees Fahrenheit or higher. If you don’t have a thermometer (they can be pricey these days), there are other ways to figure out if you have a fever, or are at risk of Covid-19 complications. | Taking one’s temperature to look for signs of fever is not as easy as it sounds, as “normal” temperature numbers can vary, but generally, keep an eye out for a temperature of 100.5 degrees Fahrenheit or higher. If you don’t have a thermometer (they can be pricey these days), there are other ways to figure out if you have a fever, or are at risk of Covid-19 complications. |
| The C.D.C. has recommended that all Americans wear cloth masks if they go out in public. This is a shift in federal guidance reflecting new concerns that the coronavirus is being spread by infected people who have no symptoms. Until now, the C.D.C., like the W.H.O., has advised that ordinary people don’t need to wear masks unless they are sick and coughing. Part of the reason was to preserve medical-grade masks for health care workers who desperately need them at a time when they are in continuously short supply. Masks don’t replace hand washing and social distancing. | The C.D.C. has recommended that all Americans wear cloth masks if they go out in public. This is a shift in federal guidance reflecting new concerns that the coronavirus is being spread by infected people who have no symptoms. Until now, the C.D.C., like the W.H.O., has advised that ordinary people don’t need to wear masks unless they are sick and coughing. Part of the reason was to preserve medical-grade masks for health care workers who desperately need them at a time when they are in continuously short supply. Masks don’t replace hand washing and social distancing. |
| 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. |
| If you’re sick and you think you’ve been exposed to the new coronavirus, the C.D.C. recommends that you call your healthcare provider and explain your symptoms and fears. They will decide if you need to be tested. Keep in mind that there’s a chance — because of a lack of testing kits or because you’re asymptomatic, for instance — you won’t be able to get tested. | If you’re sick and you think you’ve been exposed to the new coronavirus, the C.D.C. recommends that you call your healthcare provider and explain your symptoms and fears. They will decide if you need to be tested. Keep in mind that there’s a chance — because of a lack of testing kits or because you’re asymptomatic, for instance — you won’t be able to get tested. |
| “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.” |