SS M&A Litigation Outlook - Flipbook - Page 29
ln re Nine West LBO Sec. Litig., (Continued)
No. 20 MD. 2941 (S.D.N.Y. Dec. 4, 2020)
Summary
In 2014, Sycamore Partners Management LP
(Sycamore) acquired The Jones Group (Jones) in
a leveraged buyout. The merger provided for five
different components: (1) Jones would merge with a
Sycamore affiliate and become “Nine West Holdings”
(Nine West); (2) Sycamore would contribute at least
US$395 million in equity to Nine West; (3) Nine
West would increase its debt from US$1 billion to
US$1.2 billion; (4) Jones shareholders would receive
US$15 per share; and (5) two high-end brands, along
with another business unit, would be sold to other
Sycamore affiliates for less than fair market value.
The Jones board approved the merger unanimously.
Before the deal closed, however, Sycamore changed
the terms, contributing less equity and causing Nine
West to incur more debt. Following the closing of
the deal, several stockholders filed suit. Nine West
created a special litigation committee (SLC) to
investigate the claims; the SLC recommended the
company not pursue the stockholder claims, which
were subsequently settled.
Four years after the merger closed, Nine West
filed for bankruptcy. Nine West’s litigation trustee
and indenture trustee filed suit against the former
officers and directors of Jones, alleging breach
of fiduciary duties, aiding and abetting breach
of fiduciary duty, fraudulent conveyance, unjust
enrichment, and violations of state law, all in
connection with the 2014 merger. Both the officers
and directors moved to dismiss. The court granted in
part and denied in part the motions.
The court began its analysis by addressing several
procedural arguments the defendants made.
• First, the court found that the litigation trustee was
not a “Releasing Person” under the settlement,
and thus the 2014 settlement of the stockholder
derivative claims did not release any claims he had
against the officers and directors.
• Second, the defendants argued that the litigation
trustee’s claims were barred by res judicata based
on the 2014 litigation. The court disagreed, finding
that the stockholder claims and the litigation
trustee’s claims pursued different interests.
The 2014 stockholder claims alleged that the
defendants sold the company for too little, while
the litigation trustee alleged that the defendants
distributed too much money to shareholders,
thereby bankrupting the company. Therefore, the
shareholders that brought the derivative claims did
not represent the interests of the litigation trustee.
• Third, the court found that as a matter of
applicable state law, the conclusion of the
company’s special litigation committee bore only
on the stockholder claims, not claims asserted by
the company or the litigation trustee.
Moving on to the defendants’ substantive
arguments, the court denied the director defendants’
motion to dismiss the claims for breach of fiduciary
duty and aiding and abetting breach of fiduciary duty
against the directors. The court considered whether
the litigation trustee had rebutted the application
of the business judgment rule by alleging either (1)
that the majority of the board was interested in the
transaction, or (2) the directors did not approve
the transaction in good faith after a reasonable
investigation. The court found that the litigation
trustee failed to plead that the directors were
interested in the transaction.
adequately pleaded that the multiple steps of the
LBO transaction “collapse into a single integrated
plan” and that the harm – potential insolvency –
was “foreseeable.” The court also found evidence
of recklessness, thereby precluding the application
of the company’s exculpatory clause. However, the
court granted the non-director officers’ motion to
dismiss the fiduciary duty claims, finding that the
litigation trustee failed to allege that the officers had
the ability to halt the transaction.
As for the remaining claims, the court also found
that the fraudulent conveyance claims against
the officers could go forward against certain
officers, while the claims against others were timebarred. The officers’ motion to dismiss the unjust
enrichment claims was uncontested, and therefore
the court dismissed those as well.
However, the court concluded that the litigation
trustee successfully pleaded that the directors failed
to conduct a reasonable investigation into whether
the 2014 transaction “as a whole” would render Nine
West insolvent. Rejecting the argument that the
director defendants had no obligation to investigate
the impact of post-closing transactions that they
would not be asked to authorize on Nine West’s
solvency, the court found that the litigation trustee
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