J. Crew $10 Million Settlement of TPG Buyout Suit Falls Apart, Lawyer Says

J. Crew Group Inc.’s $10 million settlement of an investor lawsuit over the proposed takeover by private-equity firms TPG Capital and Leonard Green & Partners LP fell apart, a lawyer for the shareholders said.

J. Crew officials undermined a deal in which the clothier agreed to extend the period to solicit competing offers to the $3 billion buyout bid, Stuart Grant, a lawyer for J. Crew shareholders objecting to the buyout, claimed in a court filing. The accord included a $10 million payment to plaintiffs.

Executives of New York-based J. Crew have “sent the signal to the world that they are investing all resources in closing the deal with TPG as soon as possible and nobody else should bother to bid for J. Crew,” Grant said yesterday in a letter to Delaware Chancery Court Judge Leo Strine in Wilmington.

Shareholders had filed complaints questioning whether J. Crew Chief Executive Officer Millard Drexler, who began negotiating with the buyout firms months before the deal became public, got a fair price from TPG and Leonard Green.

The parties agreed in a settlement announced Jan. 18 that TPG and Los Angeles-based Leonard Green would accept a smaller $20 million payment if J. Crew accepted a competing offer.

The original $27 million fee, equal to about 1 percent of the purchase price, was already lower than the typical breakup fee. TPG and Leonard Green offered $43.50 a share for J. Crew on Nov. 23.

Record Date

J. Crew officials’ decision to set a so-called record date for investors eligible to vote on a final buyout offer, and the release of proxy information before the Feb. 15 deadline negotiated as part of the settlement, showed the company wasn’t committed to seeking other bids, Grant said in the letter.

Those acts show the company favors the TPG and Leonard Green offer and doesn’t want to “attract other bidders to maximize the value for J. Crew’s shareholders,” he said.

Disgruntled J. Crew investors will press ahead with their claims and seek a “significant monetary recovery after a trial,” Grant said in the letter. The investors allege in the lawsuits that Drexler and other company executives, who stand to make millions of dollars off the buyout, failed to properly shop the company around to get the highest bid

“The memorandum of understanding with the Delaware plaintiffs announced on Jan. 18 is a binding agreement and the company will challenge any attempt to change or revoke it,” Margot Fooshee, a spokeswoman for J. Crew, said in an e-mailed statement today. J. Crew “honored its obligations under the agreement, including by extending the go-shop period.”

Litigation Threatened

Fooshee said the company intended to move forward with its planned shareholder vote on March 1. Owen Blicksilver, a spokesman for Fort Worth, Texas-based TPG, declined to comment.

If shareholders’ lawyers refuse to conclude negotiations over the settlement, the defendants will file breach-of-contract claims, Gregory Williams, a lawyer representing J. Crew’s directors, wrote in a letter to Strine today.

J. Crew, TPG and other defendants will seek “money damages, including amounts sufficient to compensate for all losses arising out of” investors’ decision to renege on the agreement, Williams said.

J. Crew rose 1 cent to $43.43 at 4:15 p.m. in New York Stock Exchange composite trading.

TPG previously owned J. Crew and hired Drexler in 2003 to run the company. He has said he will stay as CEO if the buyout offer succeeds.

The offer for J. Crew was the largest of the 77 deals in the retail apparel industry last year, according to data compiled by Bloomberg. In the nine deals for which data are available, bidders paid a median of nine times earnings before interest, taxes, depreciation and amortization. TPG and Leonard Green’s offer implied a multiple of 8.1.

The case is In Re J. Crew Shareholders Litigation, 6043, Delaware Chancery Court (Wilmington).

To contact the reporters on this story: Jef Feeley in Wilmington, Delaware, at jfeeley@bloomberg.net and; Jason Kelly in New York at jkelly14@bloomberg.net.

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net.

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