HSG Helps Secure $165 Million Settlement in Split-off Transaction

LEGAL ISSUES

Fiduciary responsibility of corporate officers

Independence of public accountants

Responsibilities of outside counsel to the corporation

SITUATION

Alleged Facts:

Management of a surviving corporation had “engineered” a split-off from a sister corporation to the detriment of the shareholders of the sister corporation.

Background:

H. S. Grace & Company, Inc. (HSG) was hired by a Litigation Trust set up by the creditors of a corporation that had entered into bankruptcy soon after the corporation had been “split-off” from a sister company owned by management.

Management of the surviving corporation had allegedly taken the proper steps in preparing for the split-off, which seemed to be “fair” to all concerned parties.

ANALYSIS

HSG confirmed the suspicions of the lenders and the counsel for the litigation trust. In part, they proved that:

The management team, in directing the split-off transaction, committed numerous violations of customary and ordinary business practices.
Outside counsel and the public accountants had conflicts of interest and did not appropriately disclose their roles to the board of directors.
Management manipulated the relative valuation of the entities to be split off by “rigging” the forecasts used by the independent investment bankers.
Management of the surviving corporation hid significant problems in the sister company, prior to the split-off, which ultimately led to its demise.

HSG issued a report of its findings, including approximately 2,500 supporting documents, and was deposed.

RESULT

A Daubert challenge was defeated and, despite earlier concerns of Plaintiff’s counsel that the defendants would never settle, the Defendants agreed to a $165 million settlement for HSG’s client.

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