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Sycamore Partners’ lawsuit this week seeking to terminate its agreement to buy a majority of Victoria’s Secret holds lessons for future dealmaking in the coronavirus era. 

For one, future deals will likely include language to keep agreements from falling apart even in a pandemic, attorneys said.  

“Every time something goes to litigation, you’re thinking, next time I’m drafting, I have to make sure of X,” said Staci Jennifer Riordan, who leads the fashion practice at Nixon Peabody LLP, and is the vice-chair of the firm’s litigation department. Riordan isn’t involved in the Victoria’s Secret deal, and spoke generally. 

“Anytime we litigate something, it helps to tighten up our deals,” she said. “We will see some tightening in the M&A space, in terms of how the contract is written, and when you can get out of it.” 

In its complaint filed Wednesday in Delaware Chancery Court, Sycamore argued that the lingerie retailer’s parent company, L Brands, had taken a number of “voluntary” steps beyond just that it had to close Victoria’s Secret stores because of mandated COVID-19 shutdowns. 

Those steps included L brands’ decisions to furlough most of Victoria’s Secret’s employees, and to reduce the base compensation of its executives, as well as not paying April rents, Sycamore argued. The firm also took issue with the retailer’s management of inventory, saying it had “drastically reduced” taking in new merchandise, according to the complaint. 

Although many companies have taken similar measures during the crisis, it boils down to an expectation that Sycamore argues is codified in the contract: that a retailer carving out a part of its business for sale has essentially agreed to conduct business in a way that is part of the normal course. L Brands has said it plans to fight the suit and work toward completing the deal. 

Contracts generally have rigorous enforcement power under normal circumstances, but it remains to be seen how courts will respond to such arguments during an unprecedented global crisis, Riordan said. 

“We’ve never had anything like this, that’s affected every single industry across the world, [and] when our economy is so different now,” she said.

“At the end of the day, the courts have power and equity to say what’s fair and reasonable, but [judges’] perception of what’s fair and reasonable is going to be broader [now] than what we’ve seen in the past,” she added.  

What this means for dealmaking going forward, especially in a time of anticipated consolidations in the industry, is that the pandemic must be a bigger factor in the contract language, attorneys said.

That can include a wider range of pandemic exclusions that would apply to the kind of “material adverse events” and “material adverse changes” that such deal contracts usually contemplate. 

“In negotiations now, many of us are taking a hard look at pandemic exclusion provisions to make sure in the event that the pandemic is recurring, we’re covered,” said Nanette Heide, a partner in Duane Morris LLP’s corporate practice group. 

On Thursday, analysts at Wells Fargo wrote that they viewed Sycamore’s suit more as a negotiating strategy to reduce the price or postpone the closing date.

“We do see potential risk to closing, but we’d put it at 75/25 that the deal goes through,” the analysts wrote. 

A representative for Sycamore declined to comment.

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