Business headlines have warned of a potential “chilling effect on buyouts” as a result of the decision recently issued by the U.S. District Court for the Southern District of New York in In re: Nine West LBO Securities Litigation (Dec. 4, 2020). Contrary to the views of some other commentators on the decision, we do not believe that the decision is likely to chill leveraged buyout activity, to upend how LBOs have been conducted, or to significantly increase the potential of liability for target company directors selling the company in an LBO. In our view, the decision is not intended to change the basic ground rules relating to LBOs, but, rather, as discussed below, the court’s result principally reflects the unusual aspects of this case.
Nine West involved the acquisition, in an LBO, of The Jones Group, Inc. (“Jones” or the “Company”) (a publicly traded fashion retail company) by an affiliate of private equity firm Sycamore Partners Management, L.P. Four years after the LBO closed, Jones (then renamed Nine West Holdings, Inc.) filed for bankruptcy. In a prior Bankruptcy Court proceeding, the court held that the LBO was not a fraudulent conveyance under the federal bankruptcy laws (because it fit within a statutory safe harbor for payments made through a financial institution). In this most recent decision, however, the court held, at the pleading stage, that the former Jones directors (none of whom, according to the court, had engaged in self-dealing or were affiliated with the buyer) may have breached their fiduciary duty to the Company by not having sufficiently evaluated whether the LBO “would lead to insolvency” post-closing. As a result, the court rejected dismissal of the claims brought by the bankruptcy trustees against the former Jones directors.