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Kate Spade Took Cheap Buyout to Avoid Proxy Fight, Suit Says

May 13, 2020, 4:11 PM

Kate Spade & Co.'s former directors were hit with a Delaware lawsuit claiming they sold the handbag maker for far less than it was worth to rival fashion house Coach Inc. to escape pressure from activist investors like Barry Rosenstein’s hedge fund, Jana Partners LLC.

The heavily redacted Chancery Court suit targets Kate Spade’s board at the time of the 2017 deal, which made it a wholly owned subsidiary of Coach, now known as Tapestry Inc., for $18.50 a share.

It accuses the directors of accepting a lowball offer solely to avoid a proxy fight with the “famed” Jana and other activist investors clamoring for a sale, including its largest shareholder, Caerus Investors, and Starboard Value, a hedge fund with a record of winning high-profile proxy battles.

The deal came just a year after Kate Spade’s board rejected a $22-per-share buyout offer from Coach, opting instead to pursue a long-term strategy that left it poised for sustainable growth, according to the proposed shareholder class action. The company’s business plan allegedly valued it at $22.50 to $25.50 a share.

“In pursuing a sale, the board backtracked from its earlier positions regarding an acceptable price and disregarded the fact that the most valuable option for stockholders was to engage in no transaction at all,” the suit says.

The board was allegedly desperate to avoid a proxy battle because most of its members were “professional directors” who held lucrative positions on other boards, and losing one seat can lead to a documented ripple effect on unrelated directorships.

Deal negotiations were also marred by conflicts of interest, particularly incentives that pushed financial adviser Perella Weinberg Partners LP to favor a sale to Coach, according to the complaint.

And the merger allegedly gave departing Kate Spade CEO Craig Leavitt a golden parachute worth $25 million.

“Although initiating a sales process at that time was beneficial to defendants, the same was not true for Kate Spade stockholders,” the suit says.

It was made public Tuesday after being filed under seal May 7.

Cause of Action: Breach of fiduciary duty.

Relief: Class certification, damages, disgorgement, costs, fees, and interest.

Potential Class Size: The holders of nearly 129 million outstanding Kate Spade shares at the time of the merger.

Response: Tapestry didn’t immediately respond to a request for comment Wednesday.

Attorneys: The plaintiffs are represented by Andrews & Springer LLC, Robbins Geller Rudman & Dowd LLP, and Johnson Fistel LLP.

The case is Butler v. Leavitt, Del. Ch., No. 2020-0343, complaint unsealed 5/12/20.

To contact the reporter on this story: Mike Leonard in Washington at mleonard@bloomberglaw.com

To contact the editor responsible for this story: Rob Tricchinelli at rtricchinelli@bloomberglaw.com

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