Travis Knobbe
Sarah Abrams

According to the authors of the following article, Southern District of New York Judge Jed Rakoff’s December 2020 decision in the Nine West LBO Securities Litigation could have important implications for the structure of LBO deals and the due diligence conducted in connection with the transaction, particularly in light of the current economic conditions. The article was written by Travis A. Knobbe, Partner at Freeman Mathis & Gary, LLP and Sarah Abrams, Head of Professional Liability Claims at Bowhead Specialty Underwriters. I would like to thank Travis and Sarah for allowing me to publish their article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is the authors’ article.



The continued acceleration of leveraged buy-out (LBO) structures in Private Equity mergers and acquisitions presents a variety of litigation and director and officer challenges for insurers.  In fact, a relatively recent court decision should provide reason for PE firm partners to reconsider the structure of LBO deals and the due diligence conducted along the way.

In December 2020, the United States District Court for the Southern District of New York rendered an instructive decision in the Nine West bankruptcy filing, In re Nine West LBO Sec. Litig., 505 F. Supp. 3d 382 (2020).  While the factual and procedural history is complex, the 2018 Nine West bankruptcy stemmed from the Jones Company (“Jones”) and Sycamore Partners Management, L.P. (“Sycamore”) merger forming Nine West Holdings, Inc. (“Nine West” or “the Company”).

Sycamore altered the terms of the initial merger in a way that reduced equity contributions from $395 million to $120 million and increased Nine West’s debt from $1 billion to $1.55 billion. This resulted in an EBITDA debt to equity ratio between 6.6 and 7.8, even though Citigroup Global Markets (“Citigroup”) advised the board that the Company could only support a ratio of 5.1. Ultimately, this led to the Nine West bankruptcy.

In the In re Nine West case, the liquidating trustee sought to hold the Company’s directors and officers liable, pleading various claims of breach of fiduciary duties, aiding and abetting, fraudulent conveyances, and unjust enrichment. While the Court dismissed many of the direct claims plead against the officers due to lack of evidence that the officers could have prevented the transaction, the Court denied motions to dismiss the breach of fiduciary duty and aiding and abetting claims against the Company’s directors.

The ruling came as a surprise because it essentially overlooked the otherwise powerful tool in the business judgment rule and provisions in the bylaws in favor of the directors. The Court found persuasive the fact that the directors had enough information to determine that the complex series of mergers and related transactions would render Nine West insolvent.  As a result, the order held the pleadings sufficiently demonstrated that the directors were “reckless” in their approval of the transaction.

While there has not yet been a flood of decisions citing In re Nine West approvingly, as the economy begins a more tumultuous period, there is an expectation that bankruptcy trustees and plaintiff’s counsel will look to hold directors responsible for PE portfolio bankruptcies under similar theories. Directors and PE firms alike must understand the lessons from In re Nine West for its own and directors and officer insurers’ benefit.

In particular, there must be heavy reliance on due diligence obtained from third parties on the front of the LBO transaction. In the case of In re Nine West, had the parties involved simply structured the transaction as initially agreed, they would have had the full support of the Citigroup report the directors commissioned.  Direct reliance on the Citigroup report would have made it exceedingly difficult, if not impossible, to demonstrate “reckless” approval by the directors.

Additional transaction costs incurred by involving restructuring professionals early in the transaction would have further diluted the surviving claims against the Nine West officer and directors. Obtaining the blessing of a sale that essentially sheds debt from valuable assets is, after all, the primary purpose of most larger Chapter 11 bankruptcy filings.  Thus, in evaluating PE and PE portfolio risks, director and officer underwriters should consider questions surrounding use of lawyers, accountants and other professionals to conduct due diligence in LBO transactions to prevent a result similar to In Re Nine West holding in a case of resulting bankruptcy.

A perception has emerged in certain circles that Delaware Superior Court is a favorable forum for D&O insurance policyholder and unfavorable for D&O insurers. However, in a recent decision in a D&O insurance coverage dispute by the federal court in Delaware (as opposed to the state court in Delaware) not only determined that Delaware law applied but also determined that there was no coverage under the applicable policy for the underlying claim. As discussed below, the court’s ruling in the case may suggest that Delaware’s federal court may represent an alternative to Delaware’s state courts for D&O insurers. A copy of the District of Delaware’s May 23, 2022 decision in the Cocrystal case can be found here. Continue Reading Del. Federal Court Rules in Insurer’s Favor in D&O Insurance Coverage Dispute

It arguably is not news that the SEC is monitoring disclosure and related issues concerning ESG. After all, the agency’s enforcement division formed an ESG Task Force in March 2021. And as discussed here, the Task Force recently launched its first ESG disclosure-related enforcement action. Now, in the Task Force’s latest move, the agency charged an investment advisor with securities law violations related to the advisor’s claims that its fund investments had undergone ESG quality review, even though that was not always the case. BNY Mellon Investment Adviser, Inc., the investment adviser involved, agreed to pay a $1.5 million penalty to settle the charges. As discussed below, this latest Task Force action underscores the fact that the ESG cops are on the beat, and they are actively monitoring ESG-related disclosures. That could have important implications for future SEC enforcement activity. Continue Reading Attention: The ESG Cops Are On The Beat

One of the great curses on our legal system is the merger objection litigation phenomenon, pursuant to which nearly every proposed public company merger inevitably attracts at least one shareholder lawsuit in which the claimant alleges that the proxy statement disclosures regarding the proposed merger were inadequate. These lawsuits almost uniformly are settled after the defendant company voluntarily agrees to make supplemental disclosures, for which the plaintiff seeks a “mootness fee” (for supposedly obtaining the supplemental disclosures, making their lawsuit moot). When they have the chance, courts have uniformly disdained these kinds of shakedown; one prominent jurist described this recurring procedural sequence as “no better than a racket.” Yet plaintiffs’ counsel continue to file these suits and to get away with extracting fees, because the settlements and payment of attorneys’ fees so often evade judicial scrutiny. Continue Reading Court Rejects Plaintiff’s Merger Objection Lawsuit “Mootness Fee” Petition

Regular readers of this site know that one of the continuing D&O litigation trends over the last several years has been the incidence of securities class action lawsuits and other litigation arising out of cybersecurity incidents at the defendant company. While in many instances these suits have not fared particularly well, plaintiffs’ lawyers have nevertheless continued to file the suits. In the latest suit filing of this type, on May 20, 2022, a plaintiff shareholder filed a securities suit against the cybersecurity firm Octa, Inc., relating to the decline in the company’s share price following revelations of a data breach at the firm. Although in many ways this latest suit is similar to previously filed cybersecurity-related securities suits, there are certain distinct aspect of the suit that make it noteworthy, as discussed below.  A copy of the May 20, 2022 complaint in the new lawsuit can be found here. Continue Reading Cybersecurity Firm Hit with Data Breach-Related Securities Suit

Frankfurt am Main

The D&O Diary was on travel in Europe this past week, with an extended sojourn in Germany. It was delightful to be back in Germany after the long pandemic-caused travel interlude. The pleasure of the journey was substantially enhanced by the absolutely terrific weather we enjoyed during our visit. Continue Reading A Long-Awaited Return to Germany      

Regular readers of this blog know that one of the important emerging D&O liability exposures involves issues arising from privacy concerns. There have, in fact, been a number of important privacy-related D&O claims filed, including lawsuits relating to the EU’s General Data Protection Regulation (GDPR). Among the highest profile of these GDPR-related lawsuits is the securities class action lawsuit filed against U.K. based media rating firm Nielsen Holdings. The Nielsen securities suit survived a dismissal motion. Now, in the latest development, the Nielsen suit recently settled for $73 million. The settlement is subject to court approval. A copy of the parties’ stipulation of settlement can be found here. Continue Reading Nielsen Holdings Settles GDPR-Related Securities Suit

Frank Hülsberg
Burkhard Fassbach

Regular readers know that I post frequently on this site on whistleblower-related topics. However, my discussion of whistleblower-related topics is generally focused on whistleblowing in the U.S. There have been significant recent whistleblower-related developments outside the U.S. For example, and as discussed in detail in the following guest post, a draft whistleblower protection act is now circulating in Germany. If adopted the new act could have significant implications, as discussed below. This guest post was written by Frank Hülsberg, who is a Chartered Accountant and Tax Advisor in Düsseldorf, Partner Advisory and Member of the Executive Board at Grant Thornton AG Wirtschaftsprüfungsgesellschaft in Germany, and Burkhard Fassbach, a D&O-lawyer in private practice in Germany.  I would like to thank Frank and Burkhard for allowing me to publish their article on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is Frank and Burkhard’s article. Continue Reading Guest Post: What Board Members Need to Know About the New German Whistleblower Protection Act

As I have noted in prior posts (most recently here), one of the most significant recent securities litigation trends has been the number of filings against post-SPAC-merger publicly traded companies. In the latest of these SPAC-related suit filings, last week a plaintiff shareholder filed a securities class action lawsuit against Arquit Quantum, a U.K.-based cybersecurity firm that merged with a SPAC in September 2021. Though this latest lawsuit is in many ways representative of the emerging SPAC-related securities litigation, it also has some distinct features as well, as discussed further below. A copy of the May 6, 2022 complaint in the case can be found here. Continue Reading U.K-Based Cybersecurity Firm Hit with SPAC-Related Securities Suit