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.

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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.

Read the full article on The D&O Diary.