LVMH on Monday filed a countersuit against Tiffany in Delaware Chancery Court, calling the American jeweler's arguments "spurious" and "completely unfounded." Tiffany has already been in that court since Sept. 9 fighting LVMH's attempted withdrawal from their $16.2 billion merger agreement.
The Parisian luxury house said that a "material adverse effect" has occurred without a pandemic carve-out; that Tiffany mismanaged its business in violation of their agreement; that a letter from the French government "makes it impossible" to close the deal before its "outside date;" and that LVMH has met its own obligations.
Tiffany swiftly shot back in a press release Tuesday, needling its would-be suitor for filing a counterclaim "18 days after" it said it would; calling the suit "baseless and misleading;" accusing LVMH of orchestrating the French government's statement; and defending the strength of its own business, among other assertions.
The merger between two big luxury names was once touted by them and many analysts as good for both, but has devolved into a cross-Atlantic legal battle, with over-the-top rhetorical flourishes and even a little governmental intrigue.
So far, Tiffany has wielded a number of "multifaceted" arguments and appears to be on fairly solid ground, according to Alon Kapen, a partner at law firm Farrell Fritz. By contrast, a few months after reiterating its intention to buy Tiffany, LVMH appears to be scrambling to find ways to back out, said Kapen, who has reviewed Tiffany's previous court documents, though not anything filed this week beyond the companies' dueling press releases.
Tiffany has an answer for each in turn. The letter from the French government, cited by LVMH as an impediment to close the deal, is purported to have been solicited by LVMH itself according to the government minister who wrote it — something that Tiffany pointed out in its press release on Tuesday.
"Despite Tiffany's many requests, LVMH still has not provided Tiffany or the Court with a copy of the letter," Tiffany also said. "LVMH's seeking this letter was a clear violation of its obligations under the Merger Agreement, and Tiffany anticipates that more of LVMH's duplicity will come to light during the trial."
The letter, according to LVMH's description, notes that if the deal were postponed until January, it could be used as leverage in an ongoing tariff fight with the U.S. But that doesn't necessarily imply the deal should be called off, according to Kapen. "Even based on the version of the story that [LVMH] gave, it didn't sound like this was a prohibition on the closing of the deal," Kapen said.
Cowen analysts led by Oliver Chen cited legal experts in saying the French government letter isn't likely binding on LVMH and that the Delaware Court "has rarely ruled in favor of material adverse effect claims." Cowen still believes the deal would benefit both companies, and sees better than even chances (55%) that it would eventually go through at a lower price.
LVMH also appears to be scrambling to apply for more clearances in more countries in order to show good faith that it's doing so, contrary to Tiffany's assertion that it's dragging its feet, according to Kapen. "What they're really trying to do is take that argument away," he said.
The Parisian conglomerate's contention of a material adverse effect could be especially difficult to make. In order to trigger such a clause, which is standard in merger agreements, Tiffany would have had to suffer worse than industry peers. LVMH is saying that Tiffany can't use the pandemic as a "carve-out," or an exception to such a clause, because it didn't list a pandemic as a potential exception. Tiffany, for its part, argues that it hasn't suffered a material adverse effect, or "MAE," at all.
"Tiffany said they had one quarter of losses followed by the next quarter of profit, and they also say that the fourth quarter is not just expected to be profitable, but more profitable than even last year," Kapen said. "That doesn't look like an MAE, and that could be why LVMH didn't mention it in the first place a few weeks ago when they pointed to the letter from the French foreign minister."
Similarly, LVMH called out Tiffany's payment of "the highest possible dividends while the company was burning cash and reporting losses" as one example of "mismanagement of its business [that] constitutes a blatant breach of its obligation to operate in the ordinary course."
Tiffany's answer to the assertion was to say in its release Tuesday that paying dividends has been a longstanding tradition, even at times of crisis, that dividends were "expressly authorized" by the merger agreement and that as of Sept. 25, it "has more than $1.2 billion in cash and has no liquidity constraints."
"In any event, dating back to shortly after its 1987 IPO, Tiffany has never missed or reduced a dividend payment, even during recessions, financial crises and the September 11 attacks, spanning 131 consecutive quarters," Tiffany said.