Yes, you read the headline right: On Thursday, J. Crew and its private equity acquirers TPG Capital and Leonard Green filed a Delaware Chancery Court complaint against the New Orleans Employees’ Retirement System and several other institutional shareholders—the very shareholders, in fact, that sued J. Crew when it announced last November that it had agreed to be acquired by the private equity funds for $2.86 billion. The retailer claims the shareholders reneged on the settlement agreement the two sides reached in January, breaching their joint memorandum of understanding in an apparent bid for money damages.
Shareholder suits after merger announcements are a dime a dozen these days, which has led to quite a bit of teeth-gnashing by Delaware judges worried about rewarding plaintiffs lawyers for marginal deal improvements. But the J. Crew filing—in which the target of an M&A shareholder suit has turned around to become the accuser--is a rarity.
The complaint alleges that after J. Crew reached and announced a settlement of the shareholder suit challenging its acquisition in January, the shareholders’ lawyers (Grant & Eisenhofer; Bernstein Litowitz Grossmann & Berger; Labaton Sucharow; and Chimicles & Tikellis) suddenly attempted to change the terms of the agreement to retain claims they’d agreed to give up, then abruptly informed Vice-Chancellor Leo Strine Jr. that they did not support the settlement and planned to pursue “very significant monetary recovery” against J. Crew.
Although it’s a model of moderate language, the suit essentially claims that the plaintiffs lawyers concocted a justification for abandoning the settlement. The original shareholder suit asserted J. Crew’s board hadn’t done an adequate job of shopping the company before agreeing to an offer from Leonard Green and TPG, which had a close relationship with J. Crew CEO Mickey Drexler. Under the settlement, J. Crew agreed to extend the shopping period and reduce the breakup fee TPG and Leonard Green would receive if another acquirer emerged. (It also agreed to pay shareholders $10 million.) When the company announced the settlement, it said no other bidders had shown interest in the company.
Plaintiffs lawyers called that announcement a breach of the memo of understanding. J. Crew’s new suit says that’s nonsense. “The Defendants’ allegations of breach of the MOU are clearly wrong,” the complaint says. “The MOU did not limit the company’s, the special committee’s, or the board’s ability to make disclosures to J.Crew shareholders and the public that they determined to be appropriate.”
The suit asks Vice-Chancellor Strine to declare that J. Crew and its acquirers didn’t breach the memo of understanding and to compel the institutional shareholders to comply with the settlement. As the complaint notes, J. Crew’s shareholders approved the private equity acquisition in March. The company says it has set aside the $10 million it agreed to pay shareholders, and is prepared to distribute it if Strine approves the settlement.
J. Crew and TPG are represented by Ropes & Gray and Abrams & Bayliss. Randy Bodner of Ropes referred a request for comment to a J. Crew spokesman, who sent an e-mail comment. "J.Crew is simply protecting its rights,” the statement says. “The decision by the opposing lawyers to renege on a binding agreement after J. Crew preformed its obligation leaves J. Crew no choice but to enforce its rights under the agreement…. The other side (through their lawyers) have decided to renege on their commitment and not hold up their end of the bargain. All we are doing is asking the Court to hold the other side accountable.”
Stuart Grant of Grant & Eisenhofer, who led negotiations for the J. Crew shareholders, didn’t respond to calls and e-mails requesting comment.
(Reporting by Alison Frankel)