A Manhattan Supreme Court judge refused to second-guess a business move by American fashion house Kenneth Cole Productions that took the company private, a transaction that some minority shareholders alleged was unfairly drawn.
The plaintiff shareholders filed a class action suit against the directors and officers of KCP and Kenneth Cole, the company's controlling shareholder. They alleged that the directors negotiated terms of the buyout in a way that unfairly benefited Cole and failed to make material disclosures to allow shareholders to make a fully informed vote.
The merger agreement was announced on June 6, 2012, at $15.25 a share. On Sept. 24, 99.8 percent of KCP shareholders approved the transaction.
The plaintiffs also alleged that Cole “orchestrat[ed] a self-interested transaction” and that his public statements that he would not consider any third-party transactions diminished a special committee’s bargaining power to summon a higher share price.
Cole owned 46 percent of the company’s outstanding common stock and 89 percent of the company’s voting power. At a Feb. 23, 2012 board meeting, Cole proposed taking KCP private, conditioned on the approval of a special committee of directors and approval of a majority of the public shareholders. In a letter to board members at the time, Cole cited “market challenges” that necessitated “a more entrepreneurial perspective.”
In his Sept. 3 decision, In re: Kenneth Cole Productions, Inc. Shareholder Litigation, 650571/2012, Marks stated that he found the plaintiffs’ arguments “unpersuasive.”
“Plaintiffs put forth no law which suggests that a controlling shareholder, such as Cole, was required to acquiesce to any proposed third-party transactions,” he wrote. “In fact, the ability to resist such a transaction would appear to be one of the benefits of having a controlling position in the company.”
The judge also stated that he was bound by New York’s business judgment rule to resist interfering in a committee’s business decisions.
“Importantly, absent a showing of specific unfair conduct by the special committee, the Court will not second guess the committee’s business decisions in negotiating the terms of a transaction,” the judge wrote. “Plaintiffs have not even alleged facts that, if true, would give the Court a legitimate basis for judicial inquiry.”
Tariq Mundiya, partner at Willkie Farr & Gallagher who represented the defendants, said the judge reached the "correct result.”
“The complaint was a weak complaint and it is clear that the controlling stockholder and the special committee of independent directors acted appropriately and exactly as they should in a going-private transaction,” Mundiya told Commercial Litigation Insider.
He added that the ruling was “a welcome and helpful explanation of New York law in going-private transactions.”
Plaintiffs’ attorneys from firms Kessler Topaz Meltzer & Check and Bernstein Litowitz Berger & Grossmann could not be reached for comment Thursday.