N.Y. Court Gives Map to Insulate Deals: Business of LawEllen Rosen
A four-page opinion from an appellate court in New York suggests a way to insulate companies and their boards from lawsuits in going-private transactions.
The decision stems from the 2012 buyout of Kenneth Cole Productions Inc. by its namesake chairman and founder. The deal had been structured so that it couldn’t proceed unless it was approved by both a special committee of independent directors and a majority of the minority shareholders.
Litigation ensued, but a trial court dismissed the case, and the appellate court affirmed, before pretrial information exchanges, known as discovery, began.
“Pre-discovery dismissal based on the business judgment rule was appropriate since there are no allegations sufficient to demonstrate that the members of the board or the special committee did not act in good faith or were otherwise interested,” the court held.
The business judgment rule invoked by the court is more lenient and deferential than a fairness standard, which requires discovery.
The ruling in many ways parallels a similar Delaware case involving Ronald Perelman’s $250 million going-private buyout of his M&F Worldwide Corp. In March, the Delaware Supreme Court upheld that deal, which, like the Kenneth Cole transaction, required approval by a special committee of independent directors as well as a majority of the minority shareholders.
In that case, the court also evaluated the transaction under the business judgment rule.
The Kenneth Cole case goes further, however, because it was dismissed before any discovery had occurred.
Tariq Mundiya, a partner at Willkie Farr & Gallagher LLP and the lead lawyer for the company in the litigation, said the ruling “provides a road map for structuring a going-private transaction involving a controlling shareholder under New York law that not only provides protection for minority shareholders, but also reduces burdensome litigation.”
Not surprisingly, the lawyer representing the investors didn’t see it that way. Lee Rudy, a partner at Kessler Topaz Meltzer & Check LLP in Radnor, Pennsylvania, said in an interview yesterday that “the decision makes New York the friendliest place in the country for controlling shareholders to perpetuate abusive transactions against minority shareholders.”
Rudy said that his clients were still evaluating whether they will take the case to the New York Court of Appeals, the state’s highest court.
In addition to the team at Willkie, Andrew Stern of Sidley Austin LLP led a team representing the Kenneth Cole directors, and Catherine Schumacher of Kaye Scholer LLP represented Paul Blum, the former chief executive officer of Kenneth Cole.
The New York case is In re Kenneth Cole Productions, Inc., No. 13328, Appellate Division, First Department (New York). The Delaware case is Kahn v. M&F Worldwide Corp, 334,2013 Delaware Supreme Court (Dover).
C&J Energy Judge Temporarily Blocks Merger With Nabors Unit
A judge temporarily blocked C&J Energy Services Inc. from proceeding with a $2.86 billion merger of the oil-services firm with a unit of Nabors Industries Ltd to lower its U.S. tax liability.
Delaware Chancery Court Judge John Noble on Nov. 24 barred Houston-based C&J from merging with the subsidiary of Bermuda-based Nabors, an oil-rig operator, for 30 days, C&J officials said in a statement.
Some C&J shareholders argued the company’s board allowed Nabors to acquire the firm as part of the stock-for-stock merger, according to court filings. Noble delayed the inversion deal so C&J officials can shop for other bids for the operator of trucks used in the hydraulic fracturing business.
“C&J shareholders will end up holding a minority interest in a controlled company if the proposed acquisition is consummated,” the disgruntled investors said in the suit.
C&J officials said they’d ask the Delaware Supreme Court to overturn Noble’s ruling and clear the way for the merger.
The oil-services company disputed Noble’s finding that it must “solicit proposals to acquire the company before executing the merger agreement,” Josh Comstock, the firm’s chief executive officer, said in an e-mailed statement.
Dennis Smith, a spokesman for Nabors, didn’t immediately respond to a call for comment.
The case is City of Miami General Employees & Sanitation Employees Retirement Trust v. C&J Energy Services, CA No. 9980, Delaware Chancery Court (Wilmington).
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Firms Can Appeal Unfinished-Business Ruling in Howrey Bankruptcy
Jones Day, Hogan Lovells LLP and six other law firms can appeal a ruling that allowed a trustee to pursue profits from so-called unfinished business after a law firm went bankrupt.
U.S. Bankruptcy Judge Dennis Montali in San Francisco ruled that lawyers who practiced at the now-defunct Howrey LLP must pay back profits from the work they took to their new firms. On Nov. 14, Montali authorized the firms to appeal directly to the San Francisco-based U.S. Court of Appeals for the Ninth Circuit.
Because there’s no guarantee that the circuit court will take the case, U.S. District Judge James Donato in San Francisco authorized them to take what’s known as an interlocutory appeal, or an appeal before the entire lawsuit is resolved.
Montali said in his Nov. 14 decision that “the matter is of significant public importance to the legal community.” It’s particularly important given the “ever-present possibility of the failure of other law firms in the future,” he said.
Two decisions this year rejected the theory that a bankruptcy trustee can claw back fees from unfinished business under both New York and California law in cases involving Heller Ehrman LLP and Thelen LLP. Howrey’s case, however, falls under Washington, D.C., law and so could have a different result.
Donato’s ruling is Hogan Lovells LLP v. Howrey LLP, 14-04882, U.S. District Court, Northern District of California (San Francisco).