Guidance for Directors of LBO Sellers Based on the Nine West Decision

The bankruptcy of companies that previously were the subject of leveraged buyouts (LBO) often results in bankruptcy plan trustees asserting litigation claims against the companies’ directors, officers and equity holders. These litigations commonly include breach of fiduciary duty claims against the pre-sale directors and officers on the theory that the LBO transactions were not in the best interest of the companies or the theory that the companies’ insolvency resulted from the transaction. Bankruptcy plan trustees are also likely to assert fraudulent conveyance claims against the equity holders, because the purchase of their equity in the LBO transaction was funded by acquisition financing secured by liens on the assets of the acquired companies, allegedly rendering them insolvent. To limit LBO litigation risk, directors and officers rely on a variety of safeguards, including valuations, fairness and/or solvency opinions, requiring solvency representations from buyers, and careful consideration of the impact of proposed transactions on the selling entity’s relevant constituents, especially its creditors. A recent decision arising out of the bankruptcy of Nine West Holdings highlights what can happen when directors on the selling side fail to exercise appropriate care in vetting and approving an LBO.

The Nine West Holdings Case

The case is In re Nine West LBO Securities Litigation, 505 F. Supp. 3d 292 (S.D.N.Y. 2020), which was decided by U.S. District Court Judge Jed S. Rakoff for the Southern District of New York on Dec. 4, 2020. In his decision (the Nine West decision), Judge Rakoff ruled on motions filed by director and officer defendants seeking to dismiss breach of fiduciary duty, aiding and abetting, and fraudulent conveyance claims arising out of the leveraged buyout of the Jones Group, later known as Nine West Holdings (Nine West). Nine West had filed for bankruptcy in 2018, and the bankruptcy plan Litigation Trustee, together with the indenture trustee of certain notes (together the Trustees), brought the claims. Judge Rakoff determined not to dismiss certain claims against the directors. His opinion has raised concerns in many circles about the risks faced by directors of companies considering leverage buyout proposals.

Background