NEW YORK — The $3 billion deal for Texas Pacific Group and Leonard Green & Partners to buy J. Crew Group Inc. is facing some legal headaches.
The proposed acquisition has set off a flurry of investigations by law firms seeking information on the sale of the retailer, with at least two lawsuits filed so far. Both allege breaches of fiduciary duty and seek class-action status.
The first lawsuit was filed in the Delaware Chancery Court on Nov. 24 by the New Orleans Employees’ Retirement System, a pension fund, against J. Crew, its nine board members individually — including Millard “Mickey” Drexler and James Coulter, who is also a founding partner of TPG — and the two private equity firms. While the company and its individual board members were charged with breaching their fiduciary duties, the two private equity firms were alleged to have “aided and abetted” the other co-defendants in their fiduciary duty violations.
TPG is on the verge of its second round as a J. Crew owner. It acquired 88 percent of the company in 1997 and divested itself of most of that stake when Crew went public in 2006. However, it didn’t sell the last of its holdings until last year.
The Delaware lawsuit charged that the $43.50 share price offer by the two funds to take J. Crew private was “unfair and inadequate” and that the offer “substantially undervalues J. Crew, particularly because J. Crew is perfectly poised for growth and windfalls as a result of its future international growth as well as its strong brand loyalty,” and new concepts such as Crewcuts and Madewell.
Shares closed Thursday at $43.87, up 1 cent. Their 52-week high of $50.96 dates back to April 26, the high point for the S&P Retail Index prior to its close above 500 Thursday.
The suit also said the deal is “tainted by impermissible conflicts” because Goldman Sachs Bank USA and Bank of America Merrill Lynch served both as merger advisers and lenders. In addition to providing financing to the two fund groups on the deal, Goldman is a J. Crew creditor, providing a $285 million line of credit under a 2006 credit agreement, and Bank of America is a syndication agent for a 2007 credit facility for revolving loans and letters of credit, court papers said.
Another alleged conflict is that it benefits company “insiders” such as Drexler, who would remain with the firm as ceo and a minority shareholder following the deal, court papers said.
A further “impermissible” conflict cited by the Delaware suit involved TPG, which said it bought the company at a low price in 1997, and then made “nearly seven times its original investment” when the retailer went public in 2006.
That suit also claims that the go-shop provision in the deal for a period of 52 days until Jan. 15, which would allow a rival bidder to come forward, is too short a time frame for potential buyers to perform meaningful due diligence and the likelihood of meaningful rival bids emerging is “remote.”
However, Noah Leichtling, an attorney at Loeb & Loeb who works on M&A deals, said the go-shop provision is typical in private equity deals. “My experience suggests that because they’re allowing the period to go into the new year, there’s the potential they could get a bump from holiday sales. Retail is still heavily weighted during the fourth quarter, and if they do better than expected, it may change the face of the deal or encourage someone else to come out of the woodwork.”
A second lawsuit was filed in a New York State court in Manhattan for similar claims, and included as defendant Chinos Holdings, the entity set up by the funds to facilitate the acquisition.
In the New York suit, plaintiff Stuart Weisenberg, a Boca Raton, Fla.-based shareholder, said that if the proposed deal goes through, Drexler, who has stated his intent to keep his 5.4 percent ownership stake, “will be entitled to total benefits of $16,938,125.” It values Drexler’s stock holdings at 11.8 percent, a number that includes his stock options. And like the Delaware complaint, it is seeking class-action status, an injunction barring the deal from occurring, compensatory damages and related costs.
All parties in the J. Crew deal declined comment on the legal actions.
However, a source close to J. Crew said the “lawsuits were anticipated. These lawsuits are fairly typical. Just because they’re filed doesn’t mean they have any merit. The company is confident that the board acted and will continue to act consistently with its fiduciary duties.”
The source said details of the deal will be in the proxy filing with the Securities and Exchange Commission scheduled to be filed next week.
Legal actions such as the ones filed so far against J. Crew — and there are at least 17 law firms investigating the deal — also are not uncommon in acquisitions these days. It was recently the scenario in the $126.5 million ZelnickMedia acquisition of Alloy Inc. The online social site and media production house revealed the acquisition in June and the deal closed Nov. 9. At least two shareholder complaints were filed, and according to a regulatory filing with the Securities and Exchange Commission, they were consolidated into a class action lawsuit.
Earlier this week, a group of Alberto Culver Co. shareholders said they’d settled a legal complaint regarding Unilever’s $3.7 billion acquisition of the beauty firm, which has yet to close.
And there has been a fair amount of criticism of the J. Crew deal since it was unveiled Nov. 23. Nathan Brown, an analyst at Waddell & Reed Financial Inc., a mutual fund firm, is one person who isn’t all that enamored with it. “Things [at J. Crew] aren’t going so great right now, but as shareholders we assume it is temporary. We’re long-term shareholders, and if everything goes right, the likelihood that the stock is going to be higher is pretty good. There’s a possibility of significant earnings potential, and we’d prefer to keep the stock and get the price premium ourselves instead of selling now,” Brown said. Although Waddell mutual funds own J. Crew stock, they are not a party to any lawsuit filed in the connection with the proposed merger deal.
Regardless of who ultimately owns J. Crew should another buyer enter the fray, Gilbert Harrison, chairman of investment banking firm Financo Inc., had some words of caution: “J. Crew is going private basically because Mickey Drexler wants to be able to grow the company internationally under the radar. Anyone countering the TPG/Leonard Green offer has to be able to create a similar atmosphere for Mickey to achieve the success he has previously achieved as he moves the company to its next stage.
“Anyone attempting to overbid would be most foolish not to make sure that Mickey Drexler continues in his role. He is one of the great merchant princes and his insight into J. Crew continues to remain critical for its success.”
“What he has done at Vuitton is really exceptional,” said @gameofthrones’ actress Gwendoline Christie on @mrkimjones’ final show for @louisvuitton. “He has rebooted luxury in terms of making it commercial, viable and contemporary. And most importantly artistic. He has never compromised his artistic vision for the sake of commodity.” (📷: @zefashioninsider)
After seeing a demand for men’s wear from its customers, British contemporary women’s wear label @ariesarise has added a men’s wear component and will launch a unisex collection with @mrporterlive. The 20-piece collection includes jackets, denim, logo T-shirts and more with deconstructed ‘90s vibes. Set to launch on January 18, you can shop the pieces on Aries’ website and on mrporter.com. #wwdfashion
“And so spending so much time with a character who thinks like that, inevitability you try and analyze yourself and go back and think about your own demons and dark chapters that you had in your life,” says @thedanielbruhl of his role in TNT’s “The Alienist.” The show, set in the Gilded Age of New York, also stars Dakota Fanning and Luke Evans. Head to WWD.com to read about how 39-year-old Brühl prepared for the role and why he thinks the show is so relevant to today #wwdeye ( 📷: @Eriktanner)
Now that Celine Dion’s collection has topped $10 million in sales, the pop superstar, fashion icon and newly-minted industry player is eyeing growth in Asia. Read the full report by @tiffanyap, link in bio. #wwdnews #celinedion
“My personal philosophy to beauty is paying attention to oneself. I love to be outdoors, lots of fresh air, trying to take care of yourself as best you can. I always notice that comes through,” says Felicity Jones, the global face of @shiseido-owned @cledepeaubeauteus, which launches today. Head to WWD.com to read more about the actress’ love for beauty and how she prepared for her new role in “The Basis of Sex,” playing the young Ruth Bader Ginsburg. #wwdbeauty (📷: @dandoperalski)
Among the familiar faces at @off____white’s show was a surprise figure: Japanese artist @takashipom, pictured here on Wednesday morning. Other show-goers included @jerrylorenzo, who spoke about his upcoming project: a @nike collaboration for back to school, with designs inspired by his childhood on the West Coast. Sitting in the front row were Future, Don Crawley, @miguel and more. See the rest of the photos on WWD.com #wwdeye (📷: Stephane Feugere)
According to @laurentsai, former “Terrace House: Aloha State” cast member, she didn’t know she was auditioning for the Japanese version of “Real World.” “I was telling a couple of my friends and someone’s like, ‘That sounds a lot like Terrace House.’ I was like, ’No it can’t be.’” Turns out, it was. But Tsai isn’t just a reality star — she’s an illustrator who has worked with Starbucks Japan and most recently, she’s dipping her toes into the fashion world. Head to WWD.com to read about her time on the show, modeling and her art. #wwdeye (📷: @danieldorsa)
More changes are coming to New York Fashion Week: Beginning with the spring 2019 collection, @alexanderwangny will move his New York show to June from September, adopting a biannual schedule with collections shown in June and December. Additionally, the @cfda is planning for an official summer/winter fashion season taking place as soon as June and December 2018. Read more about the upcoming changes on WWD.com. #wwdnews #wwdfashion (📷: @slovekinpics)