JAB, Coty Board Must Face Challenge to $1.7 Billion Takeover

JAB Holding Co. affiliates and Coty Inc.'s board didn’t shield themselves from a challenge to the deal that made Coty a partial JAB subsidiary just by sitting out the final director vote, a Delaware Chancery Court judge ruled Monday.

“The abstention principle” is “not absolute and often implicates factual questions that cannot be resolved on the pleadings,” Chancellor Andre G. Bouchard wrote. “Simply abstaining from a vote” doesn’t necessarily “exonerate” directors who participated in a “key board meeting before the vote,” Bouchard said.

The lawsuit, filed by a pension fund in May 2019, targets JAB affiliates, Coty directors linked to the consumer goods giant, the cosmetics company’s CEO, and the rest of its board.

The board members named as defendants include JAB’s chairman, CEO, and head of business development, as well as others who have played senior roles at other JAB controlled-companies like Anheuser-Busch, Keurig Dr. Pepper, Krispy Kreme, and Panera Bread Co.

The suit accuses them of selling out public investors by helping JAB up its stake from 40% to 60% in an underpriced $1.7 billion deal involving “an opportunistically timed, coercive, and misleading tender offer” of $11.65 a share.

The private German conglomerate allegedly used its influence over Coty’s board to overhaul its entire management team in late 2018, leaving investors in the dark about its prospects and direction.

But a special board committee submitted false answers to a pre-deal questionnaire in an effort to mislead shareholders about “pervasive conflicts of interest” affecting “every member of the board,” the suit says.

It includes class claims involving the tender itself and derivative claims that the board subsequently failed to abide by deal terms requiring them to appoint independent directors.

Giving the suit a green light Monday, Bouchard said the rule shielding conflicted directors from disloyalty claims requires more than the observance of formalities like staying off the special committee and abstaining from voting.

To take advantage of that defense, a board member must have played no role in setting up the transaction, the judge noted. For that reason, it generally requires “fact-specific” analysis later in the case, he said.

Bouchard also rejected the board’s argument that only other directors have standing to enforce the tender agreement’s independent director requirement.

The pension fund is represented by Labaton Sucharow LLP, Friedlander & Gorris PA, Friedman Oster & Tejtel PLLC, and Kaskela Law LLC.

Coty’s CEO is represented by Potter Anderson & Corroon LLP. The non-managerial directors are represented by Sidley Austin LLP. The JAB affiliates and directors are represented by Skadden, Arps, Slate, Meagher & Flom LLP. Coty is represented by Heyman Enerio Gattuso & Hirzel LLP.

The case is In re Coty Inc. Stockholder Litig., Del. Ch., No. 2019-0336, 8/17/20.