After a failed merger, LVMH and Tiffany will head to the courts next year

Last November, the French conglomerate LVMH, which owns Louis Vuitton and dozens of other fashion and lifestyle brands, struck a deal to acquire jewelry retailer Tiffany & Co. for $16.2 billion. Bernard Arnault, the CEO of LVMH, described Tiffany as an “American icon” that would “thrive for centuries to come” in the LVMH portfolio. If the deal had gone through, it would have been the biggest ever in the luxury sector. In an unfortunate turn of events, however, the deal went sour. Now, the French government is involved, and LVMH and Tiffany are planning to head to court.

So, what went wrong? Last month, LVMH announced that it received  an unsolicited letter signed by French Foreign Minister Jean-Yves Le Drian. The letter recommended that LVMH attempt to delay the acquisition until January 2021, as France and the U.S. were bickering over trade tariffs on luxury goods. Although the French government is not an LVMH stakeholder, a source from the French government described the letter as having “political value” and a goal to alert LVMH before the November 24th closing date. The letter could have been intended to protect LVMH’s business interests— an unusual move from the French government. However, some speculate that the letter was an attempt to discourage the U.S. from imposing retaliatory tariffs in response to French taxes on American technology companies.

LVMH may have had other motivations for pulling out of the deal: the pandemic and subsequent global recession has hit luxury retailers hard. In fact, speculation began in April that LVMH might try to back out of the acquisition because of COVID-19 after a private equity player tried to abandon its deal to buy Victoria’s Secret. At that time, Tiffany shares were only down 6% year to date–$9 lower than the LVMH bid–even though its U.S. and Canada stores were closed. After LVMH announced its plan to back out, Tiffany stock plunged 10%.

Now, LVMH and Tiffany are gearing up for an acrimonious court battle, with the trial date set for January in Delaware’s Chancery Court. Both companies are asserting claims against the other: Tiffany is suing LVMH for breach of the merger deal and failure to secure regulatory clearance for the deal in Europe or Taiwan, while LVMH is countersuing for Tiffany’s alleged mismanagement during the pandemic. If LVMH can show that Tiffany had suffered a “material adverse effect” due to COVID-19, then it will be able to walk away from the contract without any obligations. Tiffany wants to force LVMH to move forward with the acquisitions in accordance with the originally agreed-upon terms.

While Tiffany originally sought to have the trial start next month — before the acquisition contract’s “drop-dead” deadline of November 24th — the Delaware court agreed to fast-track legal proceedings in a four-day trial starting on January 4th. In the meantime, Joseph Slights, a Vice Chancellor of the Delaware Court of Chancery, has urged both sides to engage in “productive discussions to avoid the need for litigation.”