Simon Property Group, Inc. (“Simon”) wants out of a deal to acquire its competitor, Taubman Centers, Inc. (“Taubman”), due to the COVID-19 pandemic.

Simon, the buyer, is an Indiana-based company that owns malls, outlets, and shopping centers. Its last 10-K filed with the Securities and Exchange Commission states that it had an interest in more than 200 properties in the United States. For example, in Texas, Simon owns The Galleria in Houston, Katy Mills, Grapevine Mills, Houston Premium Outlets in Cypress, and The Domain in Austin, among others.

Taubman, the seller, is a Michigan-based company that also owns malls, outlets, and shopping centers. Its portfolio includes shopping centers in the United States and Asia, including the Beverly Center in Los Angeles, the International Place Market in Waikiki, the Starfield Hanam in South Korea, and The Mall of San Juan in Puerto Rico.

This is not the first time that Simon and Taubman have been in the news together – in fact, these two companies have a colorful history. In 2003, Simon unsuccessfully attempted a hostile takeover of Taubman. Of interest, Michigan M&A law was changed to prevent the takeover. As The New York Times reported, “Michigan’s governor signed a bill that effectively changed the state’s takeover laws after heavy lobbying by the Taubmans.”[1]

On February 9, 2020, Simon and Taubman entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which Simon agreed to acquire an 80% interest in Taubman for approximately $3.6 billion in cash, with the Taubman family retaining a 20% interest in the company. On June 10, 2020 (a brisk four months later), Simon notified Taubman that Simon was terminating the Merger Agreement pursuant to its terms and simultaneously filed a declaratory judgment action in Michigan seeking a declaration that Simon validly terminated the Merger Agreement based on two grounds: (1) Material Adverse Effect (“MAE”), and (2) breach of covenant.

Material Adverse Effect Claim

In its complaint, Simon argued that the Merger Agreement gives Simon the right to terminate the deal if Taubman was “disproportionately affected” by a “pandemic” as compared to other participants in the “retail real estate industry.”

The MAE language in the Merger Agreement specifically addresses pandemics and includes the following language: “Any effect, change, event or occurrence that, individually or in the aggregate, has a material adverse effect on the business, assets, liabilities, results of operations or financial condition of such Persons and its Subsidiaries [of Taubman]… [including] changes in Applicable Law… pandemics… to the extent such effect, change, event or occurrence has a disproportionate adverse effect on such Person and its Subsidiaries, taken as a whole, as compared to other participants in the industries in which such Person and its Subsidiaries operate.”

Simon claimed that Taubman had been disproportionately impacted by the COVID-19 pandemic, compared to other retail real estate owners, because a vast majority of Taubman’s malls are indoors and located in “densely populated areas,” and in response to COVID-19, many people are avoiding enclosed/confined spaces and are instead shopping online. In addition, Simon alleged that Taubman’s “high end” malls are heavily dependent on both national and international tourism, an industry that has been devastated by the pandemic and is not expected to recover for “many years” to come. Simon also contended that Taubman’s malls feature “far more high-end stores” than its counterparts, that sales of designer merchandise have plummeted during the “COVID-19 fueled recession,” and that many retailers have been “significantly” impacted by the pandemic, including Nordstrom, Saks Fifth Avenue, and Neiman Marcus (which filed for bankruptcy in May 2020), which will “significantly” impact rent.

Breach of Covenant Claim

In its complaint, Simon also sought confirmation that it is able to terminate the Merger Agreement because Taubman violated its contractual covenant to conduct its business in the “ordinary course of business” and that it failed to protect the value of its business by not making “essential cuts in operating expenses and capital expenditures.”

The conduct of business covenant in the Merger Agreement contains the following language: “[Taubman] shall, and shall cause each of its Subsidiaries to, use commercially reasonable efforts to… conduct its business in the ordinary course of business consistent with past practices and, during 2020, in accordance with its operational budget delivered by [Taubman] to [Simon] prior to the execution of this Agreement.”

Simon alleged that other retail real estate owners (such as itself) reduced their expenses by “furloughing and laying off large number of employees,” “drastically” cutting property operating expenses, and “significantly reducing” and “even eliminating” executive compensation. Simon argued that Taubman, on the other hand, failed to take timely action to furlough employees, lay off staff, or cut executive compensation to reduce expenses, and is incurring “enormous debt” to finance those expenses.

Taubman issued press releases and filed an answer and counterclaim in response to Simon’s actions, seeking the right to specific performance and monetary damages. Taubman believes that Simon’s “purported termination of the Merger Agreement is invalid and without merit,” and it intends to “vigorously contest Simon’s purported termination and legal claims.” Taubman alleged that the Merger Agreement was signed when Simon was fully aware of the COVID-19 pandemic and is having a “classic case of buyer’s remorse.”

It is reported that this case could be heard as early as November. The history between the parties and the fact that the case is in Michigan – Taubman’s home turf – make this a case to follow. In addition, the court’s interpretation of the MAE and conduct of business covenant breach allegations make this a case to follow for M&A practitioners who are navigating M&A transactions in the midst of the continuing COVID-19 pandemic.

[1] Sherri Day and Andrew Ross Sorkin, Simon Group Gives Up Hostile Bid for Taubman Centers, The New York Times, October 9, 2003, https://www.nytimes.com/2003/10/09/business/simon-group-gives-up-hostile-bid-for-taubman-centers.html.

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