Genesco v. Finish Line

Summary

Trial to enforce a merger agreement. Athletic clothing retailer Finish Line won a bidding war with Foot Locker to purchase footwear retailer Genesco, agreeing to pay $1.5B. Finish Line subsequently refused to complete the deal, claiming both fraud and a Material Adverse Change (MAC) in conditions. Genesco sued Finish Line and UBS to require them to complete the deal.

Genesco asserted there was no MAC, because the economic downturn that Finish Line complained of had begun months earlier and had caused a 34% drop in Genesco's operating income before the deal was signed. Further, there was nothing occurring at Genesco that would cause a long-term problem. Genesco asserted there was no fraud, because there was no proof that Genesco made any misrepresentation to anyone, nor did Genesco fail to provide information.

The defendants claimed a material adverse change, fraud in the inducement, and securities fraud, any of which would be sufficient to terminate the agreement.

According to the defendants, a MAC was appropriately declared based on a 61% decline in earnings over two quarters, and a 54% decline over three quarters, with declines in EBIT and same store sales every month -- much worse performance than its competitors.

Fraud in the inducement, the defendants claimed, should be found based on dozens of specific conversations that inaccurately reflected what was going on in the business, and a decision by Genesco's CFO not to disclose earnings numbers that would have revealed millions of dollars in losses compared to the prior year.

The Chancellor found no MAC and no fraud, and ordered specific enforcement of the merger agreement.

Outcome

Judge Lyle ruled that Finish Line breached its merger agreement with Genesco by not closing the $1.5 billion deal to buy the company and that it cannot invoke a termination clause in the agreement.