Dismissing complaint in its entirety, and applying the business judgment rule, New York court holds that controlling stockholder may act in its own economic interest in going-private transaction.
On September 3, a New York commercial division court ruled in favor of Willkie client Kenneth Cole in litigation in which minority shareholders challenged the iconic fashion designer’s going-private transaction involving Kenneth Cole Productions, Inc. Dismissing the complaint in its entirety, the court held that a controlling shareholder had an absolute right to act in its economic interest in such a transaction. The court also held that Mr. Cole’s announcement that he was not willing to sell his shares in a third-party transaction, and was only interested in buying shares from the minority stockholders, did not violate New York law and was "one of the benefits of having a controlling position in the company." The court further held that a controlling stockholder is not "required to subvert his own economic interest, in obtaining a low price, to the minority shareholders’ interest in obtaining a high price."
Applying the business judgment rule, Judge Lawrence K. Marks said the minority shareholders failed to show any flaws in the measures taken by Mr. Cole or a special committee of independent directors formed to negotiate the deal with Mr. Cole. Judge Marks stated, "[a]bsent 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."
Partner Tariq Mundiya, who led the Willkie litigation team, told Law360,"We're very pleased that the judge came to the correct result and got the law absolutely right. This is a case where the complaint was weak and the process followed by the controlling stockholder and the special committee was entirely appropriate."
In addition to Mr. Mundiya, the Willkie team also included partners Sameer Advani and Antonio Yanez and associate Benjamin McCallen. A multidisciplinary Willkie deal team, led by partner Adam Turteltaub, handled the underlying going-private transaction.