Column: Hedgie Dan Och wants out of Sculptor M&A case. Other shareholders say not so fast.

Sculptor Capital Management

31/10/2023 20:35

(The opinions expressed here are those of the author, a
columnist for Reuters.)
    By Alison Frankel
       Oct 31 (Reuters) - What are Sculptor Capital Management
 SCU.N  shareholders to make of billionaire Dan Och, the
erstwhile Sculptor founder and chairman who sued the hedge fund
earlier this month to block its planned acquisition by real
estate investment firm Rithm Capital  RITM.N ?
    That depends on your perspective. 
    Och and his allies, a group of former Sculptor executives
who control a combined 15.2% of the hedge fund’s shares, threw
their considerable support last Friday behind a sweetened offer
from Rithm, which boosted its bid in the face of competition
from a consortium of high-profile fund managers including Boaz
Weinstein and Bill Ackman. Och and his group agreed as part of
that deal to dismiss their Delaware Chancery Court suit to
enjoin the acquisition.
    Och and his group are the reason Rithm upped its offer by
nearly $44 million, at least according to their lawyers at
Dechert and Abrams & Bayliss in an Oct. 30 letter to Delaware
Vice Chancellor Sam Glasscock. Thanks to Och and his allies,
they said, all Sculptor shareholders will benefit from that $44
million price boost.
    And shareholders are getting the extra $44 million for free,
according to the Och group's lawyers. Och and his allies filed
their suit to enjoin a previous iteration of the Rithm deal as a
prospective class action, but the group's lawyers said in the
Oct. 30 letter that they will not seek fees from the shareholder
class.
    Moreover, they said, Och's group is asking Glasscock only to
dismiss its own claims against Sculptor and Rithm — not
classwide claims. The Och group was litigating in tandem with
another Sculptor shareholder on the M&A litigation. Its
agreement to back the sweetened Rithm offer explicitly says that
the shareholder can continue litigating class claims.
    So, by the account of their lawyers, Och and his allies are
heroes, delivering a $44 million gift to their fellow Sculptor
shareholders, with no strings attached.
    That is not how lawyers for Och’s co-lead plaintiff, Gilles
Beauchemin, see it.
    In their view, according to letters that the plaintiffs'
firm Labaton Sucharow sent to Glasscock on Oct. 27 and Oct. 29,
the Och group and its counsel blindsided the shareholder class,
ditching their duties to other Sculptor investors at the very
moment that Labaton and other plaintiffs' lawyers were
feverishly drafting an amended complaint and prepping for a Nov.
9 preliminary injunction hearing.
     Labaton accused Och and his group's lawyers of violating
Glasscock’s Oct. 23 order appointing them as co-leaders of the
shareholder class, as well as breaching Chancery Court class
action rules. The plaintiffs firm urged Glasscock to deny the
Och group’s motion to dismiss its claims, insisting that the
group is required to provide formal notice of the dismissal to
the class, which must be allowed an opportunity to object.
    Labaton suggested a motive other than altruism for Och and
his allies: As part of their deal to back Rithm’s sweetened bid,
they will receive $5.5 million in reimbursed expenses and a
guarantee that Rithm will honor a tax-related contractual
agreement Och and others entered with Sculptor several years
ago.
    Intriguingly, Labaton also told Glasscock on Monday that it
wants to depose Och and to subpoena documents from his group.
    The plaintiffs' firm filed an amended complaint in the
Sculptor case on Monday but it’s sealed. Labaton’s discovery
demands suggest that Och and his group may be named as
defendants in the amended complaint, perhaps for allegedly
breaching their duty to shareholders in a side deal with Rithm.
    Labaton declined to comment on the dispute. A Rithm
spokesperson also declined to comment. I reached out to a
spokesperson for Och and to Och counsel from Abrams & Bayliss
but did not hear back. Sculptor counsel from Quinn Emanuel
Urquhart & Sullivan also did not respond to a query.
    As of Tuesday afternoon, Glasscock had not docketed a
hearing on the Och group’s disputed bid to toss its claims.
    The fight between Labaton and Och’s lawyers is juicy in its
particulars — the two sides' letters to Glasscock attached
emails that reflect increasingly heated communications about
whether the Och group had deliberately left other shareholders
in the lurch at a crucial point in the litigation — but raises a
broader question about a co-lead plaintiff’s obligation to class
members.
    Och’s lawyers maintain that under Delaware rules, a
plaintiff is entitled to dismiss individual claims when a
prospective class action is in its early stages. Here, they
argued, the defendants have not answered or sought to dismiss
the complaint, so the Och group is free to walk away, leaving
the shareholder class to continue litigating if it chooses to do
so. (Rithm suggested in its own Oct. 30 letter to Glasscock that
there's no need for continued litigation because of “changed
circumstances.” It pointed to a filing from Sculptor’s special
deal committee, but that filing is sealed so it’s not clear what
the changed circumstances are.) 
    Labaton, meanwhile, contends that the interim lead plaintiff
in a prospective class action cannot simply abandon its claims
after receiving benefits that were not offered to the rest of
the class. (In response, the Och group told Glasscock that it
did not obtain the $5.5 million reimbursement and tax contract
promise as a result of the litigation, since Rithm had promised
both benefits before Och and his allies filed suit.)
    The two sides haven’t fully briefed their dispute, but I
expect Labaton to point to 1995’s Alabama By-Products Corp v.
Cede & Co, in which the Delaware Supreme Court cautioned that “a
corporation cannot buy out an individual class member without
regard to the rights of the rest of the class.” The Och group
will surely counter that the rights of the rest of the class
will not affected by the dismissal of its claims.
    The bidding war for Sculptor appears to be over, since the
Weinstein consortium has not responded to Rithm’s latest offer.
The litigation lives on.
    
    Read more:
    Hedge fund Sculptor accepts sweetened $720 mln buyout bid
from Rithm    
    Investor Och and others sue Sculptor to halt planned deal
with Rithm
    

 (Reporting By Alison Frankel)