Column: Sculptor M&A judge orders hearing on $720 mln Rithm bid, chides Och group

Sculptor Capital Management

02/11/2023 19:52

(The opinions expressed here are those of the author, a
columnist for Reuters.)
    By Alison Frankel
       Nov 2 (Reuters) - Rithm Capital’s $720 million bid for
hedge fund Sculptor Capital Management will be probed at a
preliminary injunction hearing in Delaware Chancery Court on
Nov. 14, two days before a scheduled Nov. 16 shareholder vote on
the deal.
    Sculptor  SCU.N  board members had argued against an
expedited injunction hearing after billionaire Sculptor founder
Dan Och and an Och-allied group of former Sculptor executives
agreed last week to back Rithm's  RITM.N  sweetened offer.
    The Sculptor special board committee that led deal
negotiations told a Delaware Chancery Court judge that it had
received no response from a rival bidder – a consortium of
high-profile hedge fund managers led by Boaz Weinstein of Saba
Capital – after the Och group threw its 15% voting bloc behind
Rithm’s sweetened offer of $12.70 per share.
    But at a telephone hearing on Wednesday evening, Vice
Chancellor Sam Glasscock said he was not convinced that the
Weinstein group was “out of the picture.”
    Glasscock said a Nov. 14 preliminary injunction hearing will
determine whether Sculptor’s board is improperly favoring Rithm
to the detriment of Sculptor shareholders.
    The judge opened Wednesday evening’s hearing by questioning
the need for a preliminary injunction proceeding in light of
Sculptor assertions that the Weinstein consortium had
"withdrawn" from bidding to acquire the hedge fund.
    But he was apparently swayed otherwise by arguments from
shareholder lawyer Ned Weinberger of Labaton Sucharow.
    Weinberger said Saba’s Weinstein testified at a deposition
on Wednesday afternoon that his group remained committed to its
competing offer of $13.50 per share.
    Weinberger asked Glasscock to postpone the preliminary
injunction hearing to give plaintiffs lawyers more time to
prepare arguments to block the revised Rithm deal. The judge
denied that request, assuring Sculptor and Rithm that a Nov. 14
hearing will allow him to reach a decision on enjoining the deal
before the Nov. 16 shareholder vote.
    A spokesperson for Saba Capital declined to comment, as did
plaintiffs lawyer Weinberger. Spokespeople for Sculptor, Rithm
and Och did not respond to my queries. I reached out to Sculptor
special committee counsel David Ross of Ross Aronstam & Moritz
but didn’t hear back.
    Wednesday’s hearing before Glasscock also addressed a
dispute between the Och group and the rest of the Sculptor
shareholder class, which contends that Och and his allies
breached a fiduciary duty to other shareholders by making a side
deal with Rithm.
    Labaton’s amended complaint on behalf of the Sculptor
shareholder class, which was filed on Tuesday, remains sealed.
But Weinberger confirmed during Wednesday’s hearing that the
amended complaint includes breach-of-duty claims against
erstwhile class representatives in the Och group.
    Glasscock said on Wednesday that he has “real concerns”
about the Och group’s conduct. The vice chancellor said he had
not reached any final conclusions about whether the group had
damaged other shareholders but ruled that Labaton is entitled to
depose Och and to obtain discovery from his allies.
    The judge’s comments require some explaining. The Och group
sued Sculptor and Rithm last month to block Sculptor from
accepting Rithm’s previous offer. The group filed its lawsuit as
a prospective shareholder class action. In an Oct. 23 order,
Glasscock appointed Och and his allies as interim co-lead
plaintiffs, along with a Sculptor shareholder represented by
Labaton. Glasscock also appointed the Och group’s lawyers from
Dechert and Abrams & Bayliss as interim co-lead counsel in the
class action.
    When the Och group announced last week that it had reached
an agreement with Rithm and would be dismissing its claims to
block the deal, Labaton accused the group and its lawyers of
violating Glasscock’s order and Delaware class action rules by
ditching fellow shareholders at a crucial moment in the case. 
    The Och group, as I told you earlier this week, insisted it
had done no such thing. In fact, the group argued, its
negotiations with Rithm prodded the real estate investment firm
to raise its offer by about $44 million – a bounty, it said, for
all Sculptor shareholders.
    The Och group also said the extra $44 million came at no
cost to other shareholders, since its lawyers are not seeking
fees from the class and its agreement with Rithm expressly
allows other shareholders to continue litigating class claims.
    But at Wednesday’s hearing before Glasscock, Labaton’s
Weinberger highlighted Rithm’s promise to pay Och and his allies
about $5.5 million in cost reimbursements and to honor a
longstanding, tax-related Sculptor contractual agreement with
members of the Och group.
    The tax-related guarantees, Weinberger told Glasscock, are
worth hundreds of millions of dollars – and neither those
guarantees nor the $5.5 million reimbursement will benefit the
rest of the Sculptor shareholder class.
    Weinberger told the Delaware judge that Och and his allies
had improperly “used the leverage of a class action to secure
personal benefits for themselves." As I predicted, he cited the
Delaware Supreme Court’s 1995 ruling in Alabama By-Products Corp
v. Cede & Co, which holds that a defendant “cannot buy out an
individual class member without regard to the rights of the rest
of the class.”
    Och group counsel Andrew Levander of Dechert told Glasscock
that his clients did not betray the shareholder class. The $5.5
million reimbursement, he said, was intended to compensate the
Och group for months of negotiations that took place before the
group filed its Chancery Court lawsuit and was appointed interim
co-lead plaintiff. Rithm also offered the tax-related guarantee,
Levander said, in negotiations that preceded the Och group's
lawsuit.
    Levander emphasized that his clients did not receive either
benefit by leveraging their role as co-lead plaintiffs in the
class action since Rithm had offered both concessions before the
litigation began. He also told Glasscock that remaining class
members have suffered no harm from the Och group's deal with
Rithm because they can continue litigating any remaining claims.
    Glasscock nevertheless said on Wednesday that he had never
encountered a similar scenario, in which a class representative
negotiated a settlement for itself without the involvement of a
co-lead plaintiff or co-counsel.
    “It is rather bizarre,” the judge said. “I don't want you to
think that I don't take it seriously. I do.”
    
    Read more:
    Hedgie Dan Och wants out of Sculptor M&A case. Other
shareholders say not so fast.
    Hedge fund Sculptor accepts sweetened $720 mln buyout bid
from Rithm

 (Reporting By Alison Frankel)
 ((alison.frankel@thomsonreuters.com; 646-223-6491 (o)
917-848-7493 (c);))