Hogan Lovells Publications | Quarterly Corporate and M&A Decisions Update | February 2021

2020 Q4 Decisions Update

In re Nine West LBO Sec. Litig., 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.

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 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 time-barred. The officers’ motion to dismiss the unjust enrichment claims was uncontested, and therefore the court dismissed those as well.

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