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Contract Interpretation and the Victoria's Secret Deal that Wasn't


In a previous post, I discussed the likely effect of a MAC clause on the attempt of Sycamore Partners to end the deal with L Brands to purchase the Victoria’s Secret brand. On Monday, the parties announced that the deal was off. As Carleton English reports in Barrons, the announcement of the uncoupling resulted in L Brands stock dropping 17%.


Frankly, I was surprised that the deal ended so soon and without a nasty trial, and suspected that Sycamore must have paid a hefty termination fee. In fact, neither will pay a termination fee. So, what happened? Maybe L Brands decided it would rather spend the money on saving the brand than legal fees. Or – and of more interest to the readers of this blog - maybe it had something to do with the perils of drafting and negotiating a complicated and lengthy contract. As you may recall, the MAC clause specifically excluded pandemics. According to this article by Richard Collings in Adweek, however, Sycamore looked to a clause elsewhere in the agreement – “a provision of the deal separate from the MAE clause” - and argued that L Brands was obligated to continue operating Victoria’s Secret in a manner that was consistent with the way it had operated it in the past. So, this seems to be a tale of two contract clauses and how to reconcile their meaning.


If this case had gone to trial, the court would have had to resort to some trusty interpretation guidelines. Fortunately, I just prerecorded my session on interpretation for my summer course. The interpretation “rule” that I think is appropriate here is, An effort should be made to harmonize the provisions so that none will be rendered meaningless. If a pandemic isn’t enough to make you change the way you do retail business, then I’m not sure that a MAC clause excluding pandemics has any purpose and is the definition of meaningless. There would be no need to exclude any changed circumstances, including pandemics, if the “business per usual” clause covered those situations. The better way to interpret the “business per usual” clause is to consider its purpose, which is to prevent target companies from intentionally engaging in bad faith activities that would reduce the value of the company before it transfers ownership (e.g. giving executives huge salaries, selling assets to friends at huge discounts, etc). Shutting down Victoria Secret stores in response to the pandemic was clearly not that.

Another interpretation rule that might be helpful here, If there are two ways to interpret a contract term, courts prefer the way that would result in a valid contract rather than one that is invalid or results in a forfeiture. Interpreting the “business as usual” clause as relative, meaning “business as usual in extraordinary times” would preserve the deal rather than allow Sycamore to escape it.


In the end, we’ll never know how a court would have interpreted this contract, but the case does remind us of the importance of reviewing contracts carefully to avoid conflicting provisions – particularly when the contracts are lengthy and complex.


(originally posted at ContractsProfBlog)

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© 2019 by Nancy S. Kim