New York Appeals Court Decision Relied on Business Judgment Rule

A four-page opinion from an appellate court in New York suggests a way to insulate companies and their boards from lawsuits in going-private transactions.

The decision stems from the 2012 buyout of Kenneth Cole Productions Inc. by its namesake chairman and founder. The deal had been structured so that it couldn’t proceed unless it was approved by both a special committee of independent directors and a majority of the minority shareholders.

Litigation ensued, but a trial court dismissed the case, and the appellate court affirmed, before pretrial information exchanges, known as discovery, began.

“Pre-discovery dismissal based on the business judgment rule was appropriate since there are no allegations sufficient to demonstrate that the members of the board or the special committee did not act in good faith or were otherwise interested,” the court held.

The business judgment rule invoked by the court is more lenient and deferential than a fairness standard, which requires discovery.

The ruling in many ways parallels a similar Delaware case involving Ronald Perelman’s $250 million going-private buyout of his M&F Worldwide Corp. In March, the Delaware Supreme Court upheld that deal, which, like the Kenneth Cole transaction, required approval by a special committee of independent directors as well as a majority of the minority shareholders.

In that case, the court also evaluated the transaction under the business judgment rule.
The Kenneth Cole case goes further, however, because it was dismissed before any discovery had occurred.

Tariq Mundiya, a partner at Willkie Farr & Gallagher LLP and the lead lawyer for the company in the litigation, said the ruling “provides a road map for structuring a going-private transaction involving a controlling shareholder under New York law that not only provides protection for minority shareholders, but also reduces burdensome litigation.”

Not surprisingly, the lawyer representing the investors didn’t see it that way. Lee Rudy, a partner at Kessler Topaz Meltzer & Check LLP in Radnor, Pennsylvania, said in an interview yesterday that “the decision makes New York the friendliest place in the country for controlling shareholders to perpetuate abusive transactions against minority shareholders.”

Rudy said that his clients were still evaluating whether they will take the case to the New York Court of Appeals, the state’s highest court.

In addition to the team at Willkie, Andrew Stern of Sidley Austin LLP led a team representing the Kenneth Cole directors, and Catherine Schumacher of Kaye Scholer LLP represented Paul Blum, the former chief executive officer of Kenneth Cole.

The New York case is In re Kenneth Cole Productions, Inc., No. 13328, Appellate Division, First Department (New York). The Delaware case is Kahn v. M&F Worldwide Corp, 334,2013 Delaware Supreme Court (Dover).