December 7, 2010
J. Crew deal raises eyebrows for good reason
I've spent a lot of time recently looking at filings of acquisition-related litigation. And just about the time I start thinking that all these suits are useless pie-dividing exercises, along comes a set of facts like J. Crew that makes me think twice. Maybe a lawsuit here isn't such a bad idea...
Preeta Das and Gina Chon lay out some of the most important facts in their piece on this in the WSJ:
J.Crew Group Inc.'s chief executive Millard "Mickey" Drexler was negotiating a potential sale of the clothing company for nearly seven weeks before he informed the company's board of his talks, according to the latest company securities filings.
Seven weeks?! Wait a minute ... and Drexler is expected to stay on in his position as CEO and get a significant equity piece of the private J. Crew? As any regular reader will recognize ... I don't know much, but I do know this: if you are CEO of a company and you're negotiating to take the company private with you at the helm, you have to tell your board and make the structure of the negotiation resemble an arm's length transaction as much as possible. If not, you're setting yourself up for a well-deserved lawsuit.
In this case, Drexler kept the board in the dark about his negotiations with a private equity buyer for seven weeks. His private discussions weren't just talks over drinks at the country club. Apparently, he brought in executives from the company to give presentations, gave private equity buyers access to earnings estimates and the like. And then when he finally brought the board in the loop on the potential transaction, Drexler made it clear that he had already lined himself up with his preferred buyer - TPG.
Once the board was apprised of the discussions with TPG and formed a special committee on Oct. 15 to evaluate a sale, Mr. Drexler told the committee that if the company were to be sold, he "had significant reservations about the prospect of working for a new boss, but that he had a high comfort level with TPG."
This led the committee to determine that Mr. Drexler, who is credited for J.Crew's success in recent years, would be unwilling to work for any third party other than TPG.
Here's the proxy statement.
OK, sure, the deal includes what is now the standard "go-shop" provision for a going-private transaction. But, if the "go-shop" is used to simply used to paper over earlier failings, then we're going down the wrong road with this provision.
Going-private transactions where management stays on are very tricky deals. Potential conflicts abound and when CEOs fall in love with one bidder over another, they risk running afoul of their Revlon obligations. Granted, the courts are very lenient with boards who fall short of the Revlon standard but yet negotiate in good faith and at an arm's length basis. On the other hand, in MacMillan-like situations, where boards/CEO have closed their eyes to other potential opportunities and focus solely on a preferred bidder, courts give such deals - for good reason - much closer scrutiny.
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