Barnard Arnault’s LVMH Moët Hennessy Louis Vuitton fired back at Tiffany Co.’s top brass in legal counterclaims Monday, saying chief executive officer Alessandro Bogliolo and crew should face “harsh realities” and not cushy “golden parachutes.”
The suit, filed Monday in Delaware’s Court of Chancery, extended the legal battle that began this month when LVMH said it wanted to walk away from the $16.2 billion acquisition it initiated and Tiffany sued.
And although Judge Joseph R. Slights 3rd tried to nudge the two sides together in the legal fight’s first hearing last week, suggesting “productive discussions” could help “avoid litigation,” the tone instead sharpened.
The countersuit hammers on Tiffany, describing the business as “devastated” by the coronavirus pandemic, “particularly ill-suited for the challenges ahead,” tied too closely to U.S. brick-and-mortar retail and to New York in particular and led by people poised to see mega paydays if the deal does go through.
“Tiffany’s management and board make these baseless allegations to try to resurrect the transaction: they all stand to profit far more if it proceeds than if Tiffany goes forward as a stand-alone company in its wounded state,” LVMH argued in its suit. “Tiffany’s ceo, Alessandro Bogliolo, alone stands to receive a change of control payout in excess of $44 million. His golden parachute is equivalent to Tiffany’s losses in the first half of 2020. Tiffany’s top five executives are in line to receive approximately $100 million collectively. On a stand-alone basis, Tiffany’s executives would never earn compensation like this and now, going forward, will instead have to face harsh realities and the shell of Tiffany’s former business.”
The payouts LVMH points to are tied to the executive’s employment contracts, which were negotiated prior to the company’s takeover deal.
LVMH said the Tiffany it pursued so heatedly last year is in fact gone.
“The business LVMH proposed to acquire in November 2019 — Tiffany & Co., a consistently highly profitable luxury retail brand — no longer exists,” the suit alleges. “What remains is a mismanaged business that over the first half of 2020 hemorrhaged cash for the first time in a quarter century, with no end to its problems in sight. The sharp decline in foot traffic in malls, which are at the heart of Tiffany’s retail strategy, will have a significant long-term detrimental impact on the company.”
The suit pointed out that LVMH logged losses from operations of $45 million in the first half, down from operating earnings of $345 million a year earlier.
And LVMH thinks it’s just downhill from here for the American jeweler.
“Tiffany’s recent woes are just the beginning of its troubles,” according to the suit. “The pandemic is still very active and far from over. New cases continue to surge; the number of sick people is increasing every day, with approximately 50,000 new daily cases in the United States, 50,000 in Europe and a stop-and-go situation in Hong Kong, Japan and Australia. Israel just implemented a second lockdown and numerous other countries are strengthening social distancing measures.”
LVMH also argued that “Tiffany is particularly ill-suited for the challenges ahead,” pointing to trends in luxury retail sales and the company’s reliance on retail, especially New York.
The suit also points, again, to the dividend payments that Tiffany made to shareholders as LVMH stood on the sidelines.
“In the face of the extraordinary headwinds of the pandemic, a prudently managed company would tighten its belt by, among other things, slashing dividends,” the suit said. “Most if not all of Tiffany’s peers did precisely that. But not Tiffany. At the same time it was experiencing devastating operational losses and huge negative cash flows, Tiffany showered investors with $70 million in dividends in the first quarter of 2020. As the pandemic continued, Tiffany issued another $70 million in dividends in the second quarter of 2020.”
In a statement, LVMH said it had “full confidence in its position that the conditions necessary to close the acquisition of Tiffany have not been met.”
LVMH maintains that Tiffany has suffered a material adverse effect under the terms of the contract, giving the suitor the right to walk away.
“The notable absence of a pandemic carveout in the definition of a material adverse effect in the Tiffany merger agreement is clear,” LVMH said. “It was common before COVID-19 for transactions to contain a pandemic carveout. In the course of the negotiation, Tiffany sought and received carveouts for highly specific events, such as ‘cyberattacks,’ the ‘Yellow Vest’ movement and the ‘Hong-Kong protests.’ Yet Tiffany did not obtain a carveout for public health crises or pandemics.”
LVMH, which ranks as the world’s largest luxury firm, also pointed again to a letter it received from the Minister of Europe and Foreign Affairs in France, which pulled the deal into a French-U.S. trade spat.
In the suit, LVMH argued that its hands were tied, noting that when the letter states, “[i]n order to support the steps taken vis-à-vis the American government, you should defer the closing of the pending Tiffany transaction.”
That “should,” LVMH said, is a translation of “il conviendrait,” which it notes is “understood to have a (polite) mandatory meaning under French law.”
Tiffany has previously sought to counter all these arguments, noting that its business was not disproportionately impacted by the pandemic, as required under the material adverse effect clause. The company also has a long history of paying dividends even through tough times and has raised suspicions about the letter from the French government, which drags the deal into the midst of a U.S.-French trade spat over a digital services tax.
Roger Farah, who negotiated the deal with Tiffany as chairman, previously said LVMH had “unclean hands” in the matter.