Kate Spade’s board of directors acted against the interests of shareholders when they approved the sale of the company to Coach-owner Tapestry in May 2017, a new lawsuit claims. In a proposed class action lawsuit filed this week in a Delaware Chancery court, former Kate Spade shareholder Dennis Butler asserts that while an acquisition offer from Tapestry came with an “unfair price” and “undervalued Kate Spade and its strong long-term prospects,” the company’s board ended up signing off on it anyway in order to fend off activist investors, a move that squarely put their “personal interests ahead of the interests of other Kate Spade stockholders.”
According to the complaint, Butler claims that in 2015, Kate Spade was successfully executing a plan that Chief Executive Officer Craig A. Leavitt characterized as “‘a clear path to becoming a four billion dollar business at retail’ in the near future, which represented a more than three-fold increase to Kate Spade’s top-line sales.” Such mounting success, including the company’s focus on its higher-end Kate Spade brand and winding down of lower-margin Kate Spade Saturday and its Jack Spade menswear brand, “caught the attention of Coach,” which submitted a proposal in February 2016 to acquire the publicly-traded Kate Spade for $22.00 per share in cash, a “37 percent premium” compared to the Kate Spade’s closing stock price on February 15.
While Kate Spade’s board rejected the takeover bid from Coach, “quickly recognizing that Coach’s proposed price undervalued Kate Spade,” and instead, opted to continue to focus on Leavitt’s plan and the brand’s “strong long-term prospects,” things would change within a few months, Butler asserts. In the wake of rejecting Coach’s bid, Kate Spade’s board began to face “mounting pressure from activist investors,” including Jana Partners, Starboard Value, and Caerus Investors, who “criticized [Kate Spade’s] leadership and demanded that that the board immediately pursue a sale.”
Fast forward to May 2017, and Kate Spade’s board allegedly “backtracked from its earlier positions regarding an acceptable [purchase] price and disregarded the fact that the most valuable option for stockholders was to engage in no transaction at all” when it accepted Coach’s revised bid of $18.50 per share when, in reality, “the company’s stock was worth between $22.50 and $25.80 per share.”
Ultimately, the buyout “received sufficient stockholder support, and the sale of the company to Coach closed in July 2017” in furtherance of a $2.4 billion deal.
Since then, the Kate Spade has lived under publicly-traded Tapestry’s ownership umbrella alongside the Coach brand and footwear company Stuart Weitzman, with New York-headquartered group bringing Gucci and Michael Kors veteran Nicola Glass on board in 2019 to revamp ailing Kate Spade’s handbag designs.
But now, Butler claims that in addition to acting against the previously established basis that Kate Spade would be “more valuable standalone business,” and pushing the buyout, “rather than making any reasonable effort to maximize value for all stockholders by either allowing the company to remain independent and continue executing its strategy, or by running a fair process to sell the company to the highest bidder at an appropriate time,” Kate Spade’s board allegedly, led by Leavitt, “mislead Kate Spade stockholders into approving the buyout by concealing and misleading stockholders as to material facts, including with respect to the company’s true value and its true prospects as an independent company, and with respect to his true motivations and actions.”
As for Leavitt and the board’s motivations, Butler says that they sought to quickly shut down the notoriously aggressive group of activist investors, and a potential proxy fight, which could serve to jeopardize their roles as “professional directors.” To be exact, Butler asserts that “avoiding the proxy contest was a financial benefit for the defendants given that a majority of the board were professional directors at the time of the buyout,” and point to academic literature, which states that “proxy contests are associated with significant adverse effects on the careers of incumbent directors: following a proxy contest, incumbents lose seats not only on targeted boards, but also on other unrelated boards, often corresponding to more than $1.3 million in foregone income for the average incumbent director.”
Given that “Kate Spade’s nine outside directors collectively held seventeen other directorships during the three year-period leading up to the buyout,” the stakes were high, allegedly prompting them to push for the, which “was beneficial to the defendants, [even though] the same was not true for Kate Spade stockholders.”
In light of the foregoing, Butler claims that Leavitt and the other board members deprived them and the other similarly-situated stockholders “of the true and fair value of their investments in Kate Spade,” thereby, breaching their “fiduciary duties of care, loyalty, and good faith owed to the stockholders of Kate Spade because, among other reasons, [they] failed to ensure a fair sales process and maximization of stockholder value,” while “reaping disproportionate benefits” for themselves.
Setting forth two claims – Breach of Fiduciary Duty against Leavitt, individually, “as a corporate officer” and Breach of Fiduciary Duty against the rest of Kate Spade’s board members as of the time of the buyout, Butler is seeking a declaration from the court that the defendants “breached their fiduciary duties” and an order from the court “compelling the defendants to disgorge all wrongfully obtained benefits, in an amount which may be proven at trial.” Still yet, Butler is seeking a certification of the proposed class action in order to enable others to share in the settlement.
*The case is Dennis P. Butler v. Craig A. Leavitt, Nancy J. Karch, Lawrence S. Benjamin, Raul J. Fernandez, Carsten Fischer, Kenneth B. Gilman, Kenneth P. Kopelman, Deborah J. Lloyd, Douglas Mack, Jan Singer, and Doreen A. Toben, 2020-0343-JTL (Del. Chancery).