Taubman/Simon: Debt Amendment Argument

Company search

Home Intelligence Dealscope Deals League Tables Proﬁles PE Portfolio ECM Alerts Menu

PROPRIETARY Taubman/Simon: debt amendment argument

Email Intelligence unlikely to affect damages claims, attorneys say

Analysis 25 SEP 2020 Print Intelligence

Grade: Strong evidence A twist in the litigation between Taubman Centers [NYSE:TCO] and Simon Property Group [NYSE:SPG] may not affect the former’s ability to claim signiﬁcant damages if it prevails in court, said a source familiar with the case and three corporate law attorneys. TARGET

Taubman Centers Inc. There is more nuance to assessing how Taubman’s recent amendment to some of its loans will impact Financial advisor the REIT’s request that Simon be compelled to perform the parties’ merger agreement, according to Goldman Sachs & Co. LLC the attorneys. Lazard Indianapolis-based commercial property REIT Simon in early June moved to terminate its USD 3.6bn Lawyer deal to acquire Bloomfield Hills, Michigan-based high-end mall owner Taubman Centers, citing a Honigman LLP material adverse effect and alleging that the target violated operating covenants in the merger Kirkland & Ellis LLP agreement. Wachtell, Lipton, Rosen & Katz Simon filed a complaint in the sixth circuit court in Michigan, seeking a declaration that Taubman has BIDDERS in fact suffered an MAE due to effects stemming from the COVID-19 pandemic and that the buyer Simon Property Group, Inc. terminated the agreement validly. Financial advisor Bank of America Taubman’s counterclaim seeks both specific performance of the merger contract and damages. The Lawyer case is set to be heard in November in Michigan’s Business Court by Judge James Alexander, who is Latham & Watkins LLP scheduled to retire at the end of this term. Paul Weiss Rifkind Wharton & Garrison LLP Michigan-based attorneys previously told this news service that the court is largely expected to look

OTHERS to Delaware, the pre-eminent jurisdiction for corporate disputes, as a guide. However, the issue is largely a matter of contract interpretation, which will depend on the Michigan court's fact-speciﬁc Land and Buildings Investment Management LLC analysis, as reported.

Earlier this month, Simon amended its complaint, saying that Taubman’s disclosure in last month’s More 2Q20 10-Q that it amended the terms of several loans is a further violation of the merger agreement.

Under the agreement, Taubman is required to seek Simon’s consent to “amend in any material respect the terms of, any Indebtedness,” subject to a series of exceptions. Further, as part of the loan amendments, “Taubman agreed to […] pledge its ownership interests in three unencumbered properties,” per Simon’s complaint. Taubman is required to also seek consent before agreeing to “encumber any shares of its [or its subsidiaries’] capital stock or other equity or voting interests.”

While the merger agreement says that Simon is not allowed to unreasonably withhold consent for such moves, Taubman did not inform Simon or seek its consent in any way, Simon’s complaint alleges. As such, since Taubman has allegedly breached a merger agreement that it claims is still binding both parties, the speciﬁc performance claim is moot, the complaint says.

In its response to Simon’s amended complaint, Taubman says that, following the buyer’s move to terminate the agreement, the seller “stated that seeking Simon’s consent or cooperation in performing its obligations under the merger agreement would be futile.” The complaint adds that, in court, Simon’s lead counsel said that Taubman does not “need our consent. They’re supposed to make their own decisions in the ordinary course.”

Even if Simon wins the argument that performance cannot be enforced, a damages claim could run into the billions, the source familiar with the case said. Taubman’s complaint seeks damages “based on the loss of premium” to common shareholders and the Taubman family. Taubman is currently trading at around USD 33.55 a share against a deal price of USD 52.50 a share in cash for common shares.

While Taubman does not concede the argument that it has violated the agreement in a way that renders speciﬁc performance moot, the leverage offered by the possibility of damages still leaves it in a potentially commanding position in the case either way, the source said.

Simon’s updated complaint claims that Taubman “also cannot terminate and seek to recover any purported damages.” The complaint points to a section of the merger agreement that says that Taubman reserves the right “in the event of a termination” to “pursue claims for damages,” and a prior section that says that Taubman “may not terminate” if the seller “is then in breach” of the contract. Per that section, Taubman may terminate if Simon has breached the agreement in an incurable manner.

Professor Robert Miller of the University of Iowa College of Law, who has published work on merger disputes related to the COVID-19 pandemic, pointed out that the heart of the case is still Simon’s MAE claim. However, much like cases that have been ﬁled in Delaware, the dispute has branched off along tangential issues of contract doctrine, he said.

“The seller’s position is that all the conditions to closing are satisﬁed, that it is ready and willing and able to close and that the buyer is wrongfully refusing to close,” Miller said. “The buyer’s position is that the conditions to closing are not satisﬁed, in particular the condition that Taubman has not suffered an MAE.”

While failing to close when a party has an obligation to close is a breach, a party claiming that it is not in fact under such an obligation is not committing a repudiation of the contract, Miller said. “If a seller says that, merely by claiming the closing conditions are not satisﬁed, the buyer has repudiated a contract, the seller is clearly wrong about that.”

As to Taubman’s argument that continuing to seek consent would be “futile,” the seller will have to argue and show that “the reason it did not ask the buyer is that the buyer would have unreasonably withheld its consent anyway.” In general, though, a party cannot seek to have a court order its counterparty to perform a contract while it has itself discontinued performing its obligations under that contract, Miller said. “You can’t have it both ways.”

Simon’s complaint alleges that Taubman has sought and obtained its consent on loan amendments in the past.

In an email interview, Robert Malionek, a partner in the commercial litigation practice of law ﬁrm Latham & Watkins, said that a “seller who decides not to seek consent with respect to certain covenants on a theory that it would be futile to do so, given that the seller is seeking speciﬁc performance, does so at its peril.”

The potential risk for a seller in such a case is that a court will enforce the entirety of the agreement, “which requires seeking consent, and thus the seller arguably would be in breach.”

Ryan Udell, chair of the corporate and securities group at law ﬁrm White and Williams, said that while there is little case law regarding a doctrine of futility in M&A disputes, there is a broad range of precedent on excusing performance in the event that a party is found to be in material breach of a contract. This area would be more well-trodden ground upon which to base a defense, he said.

In this case, if Simon is found to have materially breached the contract by improperly terminating the deal, then Taubman is “clearly not required to continue to perform” its obligations under that contract in the event it is seeking damages, Udell said.

In terms of seeking speciﬁc performance, the argument is more complicated, because this remedy assumes that the agreement will be enforced per its terms. Taubman appears to argue that it no longer needs to perform in order to obtain a performance remedy, claiming that Simon relinquished its rights under the agreement when it terminated the deal, Udell said.

The judge could accept that position, as the alternative of obligating Taubman to continue to indeﬁnitely abide by the contract may be impractical and may unfairly reward a potentially breaching party at the expense of the party seeking the remedy, the attorney said.

“In other words, why should Simon have an ongoing approval right over business operations of Taubman, including approving loan modiﬁcations? If Simon is right, the issue is moot and if Simon is wrong, then it breached the agreement and should not reap the beneﬁts under the agreement.”

Udell explained that similar principles are regularly employed in actions where contract recession is sought: the formal requirement of tendering consideration is downplayed. Simon, though, appears to argue that Taubman would have to perform in line with the contract if it sought for the contract to be enforced given the nature of the remedy and Taubman should not be able to require Simon to acquire the business under the terms in the agreement if Taubman has failed to comply with those terms.

Miller said that it is key to determining the outcome that Taubman changed its ﬁnancing agreements without seeking consent after Simon moved to terminate the contract.

The professor said that he agreed that Taubman could still be eligible to receive damages if a judge finds that Simon’s move, which came first, was a breach of the contract. However, he added that if Taubman breached by not seeking consent, “the seller would be giving up” the “possibility of specific performance.”

However, given that, in the event a court rules for Taubman to receive damages, Simon might be faced with the possibility of making an extraordinary payment without even the beneﬁt of taking ownership of the target, it might make sense for Simon to look to negotiate some kind of settled outcome in this hypothetical scenario, Miller said.

Latham’s Malionek cautioned that, while he believes it to be “primarily true” that Taubman has not risked the possibility of a damages award, there still could be risk that a court in a case like this “could conclude the seller has not performed its responsibilities under the [merger] agreement, and therefore cannot claim a breach for which damages may be awarded.”

Simon’s updated complaint connects the debt issue to the case’s core MAE issue, saying that “Taubman’s ability” to take “essential measures has been and will be signiﬁcantly constrained by the recent amendments.”

This news service has previously reported that Simon faces the task of not only proving that Taubman suffered an MAE, but that it did so in a manner that left it disproportionately affected compared to the rest of the industry. Given the wording of the merger agreement, the separate, incremental effect of the pandemic on Taubman over and above the rest of the industry must in itself constitute an MAE, as reported.

Simon faces an uphill task on this count, Miller said, adding that no court has yet issued a ﬁnding of disproportionate impact in a fully litigated MAE case.

Both parties have retained high-profile counsel. Simon’s lead litigator, Lew Clayton of law firm Paul, Weiss, Rifkind, Wharton & Garrison, won the first ever finding in Delaware that an MAE had occurred in the landmark Akorn v. Fresenius case. Taubman’s lead litigator, William Savitt of law firm Wachtell, Lipton, Rosen & Katz, has worked on major disputes like the fight between health insurers Anthem [NYSE:ANTM] and Cigna [NYSE:CI].

Simon and Taubman declined to comment.

by Jonathan Guilford

For support, contact [email protected]

Americas +1-866-5-MERGER EMEA +44 (0)20 3741 1111 Asia +852 2158 9790 Australasia +61 2 9513 2649

Our apps Corporate Site Terms and Conditions Privacy Policy Disclaimer Glossary