Insurgent Litt Challenges Saks Owner's 'White Squire'

Last month real estate-focused activist Jonathan Litt moved forward with plans to call a special shareholder meeting of Hudson's Bay Co. (HBC) shareholders. The insurgent investor hoped for a vote on removing incumbent directors or on a proposal urging the company to spin off its Saks Fifth Avenue chain.

However, the department store chain recently took in a significant investment that appears to have stopped Litt's efforts cold. The retailer received a $500 million equity interest from buyout shop Rhône Capital, which converts into an initial 21.8% voting and equity interest in a deal that Litt argues contractually obligates it to vote its shares in favor of the HBC board of directors.

The equity infusion deal appears to be the latest in a trend of activist-targeted companies finding a so-called white squire private equity investors to help them fend off insurgent hedge fund managers. But according to documents provided to The Deal, Litt is applying for a hearing and review of the transaction with the Ontario Securities Commission, Hudson Bay's primary regulator, arguing that the shareholders deserve the right to "fully understand and assess" the impact of the transaction.

Taking into account the Rhône allocation, roughly 42% of shares appear to now be in HBC-backed hands, making it almost impossible for Litt and his Land & Buildings Investment fund to win any director election battle.

"With a 42% stake for management and the incumbent board it is pretty much game over [for Litt]," said Kai Haakon Liekefett, head of the shareholder activism response team at Vinson & Elkins LLP. "There is never 100% turnout, and many retail investors don't vote."

The Litt OSC challenge suggests that the Rhone issuance was primarily motivated by wanting to defeat Land & Buildings management and board. Canadian incorporation regulations require a compelling justification for allocating a large block of shares to a private equity firm -- beyond defending the business from an activist hedge fund.

And Hudson Bay appears to have a potentially compelling justification for the Rhone investment, above and beyond its help in fending off Litt. The deal is part of a strategic partnership announced last month that will see Rhône Capital's $500 million investment take place as part of an agreement to lease space in retail stores to the investor's partner, WeWork Companies, a global network of workspaces in buildings.

Nevertheless, a Toronto attorney familiar with the situation noted that it might be hard to distinguish between pure business purposes and defensive tactics.

But Litt suggests that L&T B (Cayman) Inc. is a firm with close ties to the Hudson Bay board and senior management and one that controls about 17.37% of HBC's common shares, according to Land & Buildings OSC application, obtained by The Deal. The activist fund suggests that the Rhone deal appears to be an improper defensive tactic and argues that "the board is effectively controlled by L&T and current management."

There is some precedence that could work in Litt's favor. The OSC issued an order in April that took away the voting rights for 10.6 million shares Ecco Oro Minerals Corp. EOM issued to Trexs Investments, Amber Capital, Paulson & Co., and Anna Stylianides as the company faced a boardroom battle launched by investor Courtenay Wolfe and Harrington Global Opportunities Fund. The Toronto attorney argued that this was so obviously a defensive tactic that Ecco Oro tried to "sneak past the TSX" that the OSC considered it low-hanging fruit.

The term White Squire is a variation on another jargony Wall Street term, White Knight, which refers to a friendly buyer who offers more than what a hostile bidder is willing to pay. A White Squire, alternatively, is an investor. Usually, a private equity firm, that acquires a substantial minority investment in the company, say 20%, in a move that fends off an activist investor or a hostile bid.

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Editors' pick: Originally published Nov. 10.

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