Pushback at Frederick's of Hollywood
(CN) - Directors of Frederick's of Hollywood conspired to sell the company for the rock-bottom price of 27 cents a share, a minority shareholder claims in a class action complaint.
Lead plaintiff Bruce H. Paul sued Frederick's of Hollywood et al. in New York County Supreme Court.
He claims the proposed buyout, by a subsidiary of Harbinger Group, a holding company founded by former President George H.W. Bush, greatly undervalues Frederick's of Hollywood's value.
"Before Victoria's Secret there was the world-renown [sic] Frederick's of Hollywood, a premier retailer of high-end woman's garments," [sic] the complaint begins. It continues, in best Hollywood fashion: "Founded by the investor of the pushup bra in 1947, Frederick's of Hollywood Group Inc. ... has for decades been associated with some of the most famous celebrities, including Ava Gardner, Bettie Page, Mae West, Judy Garland, Pamela Anderson and Madonna."
At its peak, the company had more than 100 retail outlets around the country, including its flagship store on Hollywood Boulevard.
It remained the market leader in until it was overtaken by Victoria's Secret in the late 1980s. But Frederick's of Hollywood has fallen on hard times, with larger than expected sales declines in 2012 and 2013.
It was unable to maintain shareholder equity requirements and was delisted from the New York Stock Exchange on Feb. 22, 2013.
"Now, controlling stockholder and corporate insider Defendant William F. Harley III ... leads a consortium ... that seeks to deny minority public shareholders the benefit of Frederick's of Hollywood's iconic brand name," Paul says in the complaint.
"The proposed buyout announced on December 19, 2013, is designed to allow the consortium and defendant Harley 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," Paul claims.
He says Harley and his fellow co-defendants -- FOHG Holdings LLC, Peter Cole, John Eisel, Thomas Lynch, and Milton Walters - can pull off the unfair deal because they control 88.6 percent of the company's common stock and rigged the process.
"In an act of window dressing, the board appointed Defendant Milton J. Walters ... to serve as the lead director in connection with the entire board's consideration of the proposed buyout, with approval of the proposed buyout conditioned on approval by Walters," the complaint states. "However, defendant Walters, who the company has described as its sole disinterested independent director, 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."
Paul acknowledges that investors lost confidence in Frederick's of Hollywood after its delisting, but claims this was just a "temporary depression in the stock price" that will rebound.
"Furthermore, 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 complaint states. "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."
Paul claims the buyout agreement is unfair on its face because it requires only a two-thirds vote of shareholders to be approved, and the directors supporting the deal control more shares than that.
"The coercive nature of the proposed buyout is further highlighted by the board's failure to condition approval of the proposed buyout on approval of a majority of the company's unaffiliated minority shareholders," Paul says. "Rather than protect the interests of all company shareholders, the board instead allowed the buyout group to effectively overstep the shareholder approval voting process and thereby strip the unaffiliated Frederick's of Hollywood shareholders of their right to a meaningful vote on the proposed buyout. The board's failure to require that the merger consummate only upon the affirmative vote of a majority-of-the-minority shareholders renders the proposed buyout a fait accompli, absent the intervention from this court."
Paul claims the defendants "tilted the playing field" in favor of the deal "by agreeing, in breach of their fiduciary duties to Frederick's of Hollywood shareholders, to provisions in the merger agreement that unreasonably inhibit potential third party bidders from launching toping bids."
These include an alleged agreement among members of the buyout group to vote against alternative proposals, and a no-solicitation provision that constrains the defendants' ability to communicate and negotiate with other potential buyers.
Paul seeks injunctive relief, or in the alternative, rescission of the buyout if it is consummated before the court hears the case. He also seeks a constructive trust be established on any benefits or value the defendants receive from the sale.
He is represented by Gustavo Bruckner with of Pomerantz LLP.