Companies can Limit Exposure to Shareholder Litigation in Going Private Transactions

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Shareholder lawsuits are practically inevitable in any going private transaction in today’s economic climate and under the current securities regulatory regime. Two major apparel companies, Gymboree and J. Crew, have recently gone private in very high profile transactions that have not unexpectedly spawned multiple shareholder lawsuits. In connection with the proposed sale of J. Crew to Texas Pacific Group and Leonard Green & Partners, J. Crew shareholders have filed suits against the company’s management and directors alleging breaches of fiduciary duties. Shareholders similarly sued Gymboree after its sale to Bain Capital Partners, alleging breach of fiduciary duties. All companies attempting to go private can expect to be served with complaints challenging the process of negotiating an offer and the price of the offer itself within days of announcing a transaction. However, there are several actions that companies can take when contemplating these types of transactions in order to limit exposure to this sort of costly litigation.

The first is that any serious takeover offer should be reported to the board of directors immediately to allow the board to set up an independent committee. The independent committee can properly evaluate the offer and eliminate or diminish any appearance of impropriety, especially if there are one or more interested directors involved in the negotiation process.

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Sheppard Mullin Richter & Hampton LLP on:

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