- H.S. Grace and Company, Inc.- REPRESENTATIVE LITIGATION MATTERS

REPRESENTATIVE LITIGATION MATTERS

Corporate Divesture, Valuation and Structure Issues Emanating from Spin-Off

Legal Issues:

1. Fiduciary responsibility of corporate officers.
2. Independence of public accountants.
3. 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 of Case:

1. 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 which was owned by management.
2. The outward appearance of the case was that management of the surviving corporation had taken the proper steps in preparing for the split-off, which seemed to be "fair" to all concerned parties.
3. The attorneys for the Litigation Trust advised that the defendants would never settle because the remaining business was very profitable and that the split-off transaction had all the appearances of fairness and thoroughness.

Analysis:

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

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

Result:

After the report was issued by HSG, it submitted approximately 2,500 documents in support of its findings at deposition. A Daubert challenge was defeated and, despite earlier concerns of Plaintiff’s counsel that the defendants would never settle, the case was settled and resulted in a nine-digit settlement for HSG’s client.