In a recent decision concerning the take-private of Kenneth Cole Productions, Inc (KCP) by its founder Kenneth Cole, Justice Marks of the Commercial Division of New York State Supreme Court dismissed stockholder plaintiffs' claims regarding the propriety of that transaction and held that the business judgement rule governed such claims, in the absence of a showing of "specific unfair conduct" by the KCP special committee. Marks also held that Cole had not acted improperly because controlling stockholders can act in their own economic interest so long as their conduct does not constitute unfair self-dealing.
Before the transaction, Cole owned 46% of KCP's common stock and 89% of KCP's voting power due to his ownership of the company's super-voting Class B shares. On February 23 2012 Cole proposed to take KCP private at $15 per share, which represented a 17% premium at that time. The KCP board immediately formed a special committee to consider that proposal and negotiate with Cole. The parties negotiated until June 6 2012, when they announced a transaction at $15.25 per share (with a condition requiring approval of the transaction by a majority of the non-Cole public stockholders). Stockholders filed suit, were unable to obtain a preliminary injunction and commenced a post-closing damages action.
Because KCP is a New York corporation, Marks applied New York corporate law to the plaintiffs' claims. He first concluded that an action for breach of fiduciary duty must be pled with particularity and went on to hold that the stockholder plaintiffs had not demonstrated any particular facts to show that the KCP directors violated their fiduciary duties. To that end, the opinion states that "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". This result under New York law generally aligns with recent Delaware decisions applying the business judgement rule to challenges of majority stockholder take-private transactions when the minority stockholders are appropriately protected from coercion.
With respect to the stockholder plaintiffs' claims against Cole, Marks ruled that New York law permits controlling stockholders to act in their own economic interest, provided that their conduct does not constitute unfair self-dealing. The court took no issue with Cole's public statement that he would not support any alternative transaction, and stated that "the ability to resist such a transaction would appear to be one of the benefits of having a controlling position in the company". The opinion also state that Cole was not required to subvert his own economic interests to the minority stockholders' interests in obtaining a higher price. (In re Kenneth Cole Prods, Inc S'holder Litig, Index 650571/2012 (NY Sup Ct September 3 2013)).
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