(Filed Under Financial and General Interest News). A minority Frederick’s of Hollywood shareholder, Bruce Paul, is the lead plaintiff in a class action lawsuit filed in New York County Supreme Court opposing the proposal by a consortium of shareholders to take the company private.
When it announced the deal at the end of last year, Frederick’s said minority shareholders were to receive 27 cents per share, a price the lawsuit claims is far too low.
“The proposed buyout announced on December 19, 2013,” the lawsuit states, “is designed to allow the consortium and defendant Harley [William Harley, a company director and one of the majority shareholders] to wrongfully wrestle control of the company away from minority shareholders and into their own hands at a rock-bottom price, and through an oppressive merger process that denied minority shareholders their right to vote on the proposed buyout.”
When it announced the “definitive merger agreement” Frederick’s explained that the company would be acquired “by a group consisting of HGI Funding LLC, a wholly owned subsidiary of Harbinger Group Inc., and certain of the company’s other common and preferred shareholders (the “consortium”). The members of the consortium as a group beneficially own approximately 88.6% of the company’s common stock. The acquisition will be accomplished through FOHG Holdings, LLC ... an entity controlled by the consortium that was formed for the purpose of the transaction.”
The proposal came as the company reported a big loss for the first quarter of 2014. In all, Frederick’s lost money in each of the past five years, with the accumulated losses totaling close to $100 million. At the time of the announcement the retailer’s store count had dropped to 112. In addition, the firm was delisted from the New York Stock Exchange in early 2013.
Frederick’s argued in December that the 27 cent share price “represents a premium of 50% to the closing price of the company’s shares on September 27, 2013, the last trading day before the announcement by the consortium of its proposal, and a premium of 46% over the average closing price of the company’s common stock for the 45 trading days prior to that date.”
To evaluate the proposal to take the company private, the Frederick’s board said it “delegated to its lead independent, disinterested director [Milton J. Walters] the authority to review the initial transaction proposal from, and negotiate terms of the proposal with, the consortium, with the assistance of legal and financial advisors. The lead director completed a thorough review of the proposal, considered alternatives, negotiated improved terms of the consortium’s proposal and concluded that the transaction with the consortium was fair to and in the best interests of the company’s shareholders other than the members of the consortium. Based on the recommendation of the lead director, the merger agreement was also approved by the full board other than William Harley and Thomas Lynch, who recused themselves from the deliberations.”
Paul’s lawsuit dismisses the evaluation by Walters as “an act of window dressing” adding that he “was not positioned to effectively advocate for the best interests of the company’s minority shareholders in the face of the consortium’s overwhelming influence at Frederick’s of Hollywood.” Co-defendants in the lawsuit, in addition to Walters and Harley include FOHG Holdings LLC, Peter Cole, John Eisel and Thomas Lynch, who is the current chairman and CEO.
The lawsuit notes that “the intrinsic value of Frederick’s of Hollywood derives, in part, from its iconic name brand and impact it has had on American culture...The buyout group completely failed to incorporate this intangible value into its offer to shareholders. In short, the buyout group is attempting to shortchange the company’s minority shareholders by acquiring the company at a time in which its stock price is temporarily depressed, not because of any change in the company’s business fundamentals or future prospects, for a price that does not reflect the intrinsic value of the company.
“Moreover, the company’s board of directors ... agreed to an oppressive sales process that effectively strips away from shareholders the right to vote on the proposed buyout.”
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