A structured and leveraged buyout may violate fiduciary duties | Spilman Thomas & Battle, SARL

M&A and bankruptcy lawyers

The majority of M&A and bankruptcy professionals are aware of the increased utilization of leveraged buyouts (“LBOs”) through public companies as well as private equity companies in conjunction with the debt buyout process. Highly organized liquidation or restructuring both within BKHQ – file bankruptcy and outside bankruptcy. The setting. A recent decision in the Southern District of New York requires additional caution when deciding whether or not to go ahead with these transactions.

The case in In the In Nine West LBO Securities Litigation is a complicated procedural backstory. The underlying issue is that The trustee for the Nine West Litigation Trust (the “Trust”) which was created as a result of the 2018 onhow to file bankruptcy by Nine West, has filed several claims against directors, officers and investors of the retail firm that is known as The Jones Group (the “Company”). These claims stem from the merger of the Company and an affiliate of the private investment business Sycamore Partners Management, LP (“Sycamore”) to create Nine West Holdings, Inc. (“Nine West”).

The details surrounding the merger are expected to be complicated. The court outlined however, the merger includes five components which would take place simultaneously. First the company and an affiliate of Sycamore would join together to create Nine West. Then, Sycamore and another private equity firm would provide $395 million of cash into Nine West. The third, Nine West would increase its debt by 1 billion up to 1.2 billion. Fourthly, Jones Group shareholders would receive cash dividends of $15 per share, which amounts to the total amount value of 1.2 billion. Fifth, the business would be able to sell two brands and a company unit (the “Cutters”) in exchange for less the fair market value.

Board of directors

Board of Directors of the business was able to approve the merger, however there’s some confusion about how and when the board of directors approved the addition of debt as well as the selling of the cutting companies. The court emphasized how the documents governing the merger took all of these transactions as one deal and the fact that the company’s board of directors actively participated in the process of reviewing and preparing the merger. documents supporting additional debt as well as the spin-off business sales.

The transaction was made more complicated when Sycamore altered the terms of the deal. Sycamore cut the amount of equity contributions to 120 million dollars and then put in a new loan that will raise Nine West’s debt by $1.55 billion. 1.55 billion (instead of the originally planned 1.2 billion). This led to the company being able to pay an outside company, Citigroup Global Markets (“Citigroup”) advised members of the directors’ board that Nine West was able to be able to support a debt-to- EBITDA ratio that was 5.1 times its projected EBITDA for 2013. The new debt has pushed this ratio to 6.6 to 7.8 (depending the fact that management or Sycamore’s figures were accurate). The officers and directors of the company were in agreement with the deal and were heavily involved in its implementation. It is not surprising that Nine West was rebranded as Nine West filed for bankruptcy within four years of the merger.

The result of the deal, however, Nine West, including its creditors as well as the unsecured creditors, were thrown out. Contrary to the situations that are commonly encountered when the unsecured creditors tend to be content to recoup some breadcrumbs however, they’ve sought to hold executives and the directors at the business accountable. In the process, they have pleaded various charges of breaching fiduciary duties as well as aiding and abetting their breach fraud, fraudulent transfers, and unfair enrichment, to name a few. The actual record of the transactions, obviously is well-established as of now. Based on the evidence the court ruled against all motions for dismissal of claims of breach of fiduciary duty as well as the demands for assistance and support for the directors of the business. The agents however were able to avoid this outcome by granting their motions to dismiss.

Litigation for breach of fiduciary duty

The court permitted the filing of a breach of fiduciary duty suit against directors despite the stringent safeguards typically provided by the rule of business judgment and despite the company’s regulations which exclude the possibility of liability in all but rare instances. The court ruled that the directors had enough evidence to draw a conclusion that based on a an investigation of reasonable quality that the complicated array of mergers could cause the company to be insolvent. In relation to the articles the court decided that a thorough examination of the history of valuation had identified enough “red warnings” that directors had been, at minimum, negligent in their decision-making process regarding the deal.

In reality, the thorough decision can provide some clues regarding how officers and directors can be better able to scrutinize transactions in order to stay clear of the implications of the decision. If the Directors had followed the path (refusing to disregard valuation discrepancies as well as the effect of spin-off actions) It is highly unlikely to be the case that Sycamore could have been able to conclude the transaction. In the end, the objective was straightforward. Similar to many private equity-financed LBOs, Sycamore convinced the company to sell its most profitable assets, with significantly less leverage. It also gave it the chance to double its profits through its bankruptcy. The company that holds the assets remaining. If the officers and directors follow the rules of the court it’s hard to imagine that Sycamore has made a significant profits from the deal.

The ruling isn’t going to stop people from trying to get the financial benefits of LBOs. In the end, the ruling is an alert to executives and directors, or they are offered better insurance or consider for a long time the need to approve these transactions. We are sure, however that this decision will provide a new place for disputes between officers and directors in the future.

Source link